Developing a Successful Long-Term Company Growth Strategy in the Face of Increasing Resource Scarcity
By Stephen Bailey
15 Mar 2007 at 01:16 PM GMT-04:00
resourceinvestor.com
CAMBRIDGE, Mass. (ResourceInvestor.com) -- Despite enjoying strong profits buoyed by high mineral prices, the mining industry is increasingly characterized by rising costs and shrinking global mineral reserves. As worldwide reserves continue to decline, companies will face fierce industry competition to gain access to an ever-dwindling number of world-class mineral deposits.
The “Growth Challenge” Facing Mining Companies
Up to this point, most companies have responded to the challenge posed by declining mineral reserves by devoting large amounts of capital to expanding reserves through acquisitions, rather than exploration and development of new assets. Once the current wave of acquisitions cools as the most attractive acquisition targets are gobbled up, companies will need to replace reserves the old-fashioned way: through exploration and development of new assets.
Ultimately, the long-term winners and losers in the mining industry will be determined by which companies are able to develop aggressive and successful strategies for long-term reserve replacement and growth and which companies fail to do so. Mining companies looking to grow their current reserves must recognize that it is no longer possible to achieve success through a singular focus on stable mining countries such as Canada, South Africa and Chile. Increasingly, companies must be willing to venture outside of their comfort zones and invest in under-explored frontier regions such as Sub-Saharan Africa, Central Asia and the Middle East.
Crafting a Successful Long-Term Growth Strategy
Developing a successful growth strategy through expansion into frontier countries does not mean that companies should role the dice and blindly subject themselves to geopolitical risk. Rather, success will require companies to be more organized and systematic than ever when it comes to constructing their investment portfolios. Companies must establish processes and standards for developing balanced and well-diversified portfolios of exploration and capital investments. We advise companies to adopt the following key principles when developing a long-term company growth strategy:
1.
Objectively and explicitly identify your company’s growth objectives, risk tolerance and core competencies to develop a portfolio of investments that compliments company objectives, competencies and appetite for risk. Firms should seek out countries where they will be well-positioned to compete against potential competitors, whether they’re other Western companies or newer Chinese, Russian and Indian players. For example, companies that are located in countries with significant levels of geopolitical influence in a given region might be well-positioned to fend off competition from new entrants.
2.
Define key criteria - i.e. geological potential, political stability, regulatory environment - for comparing different geographies that are on your firm’s radar screen to accurately assess risk levels and craft a portfolio that is well-diversified from both a geopolitical and geographical perspective. In Africa, AngloGold Ashanti [NYSE:AU] has successfully diversified its asset portfolio by investing in countries such as South Africa, Tanzania, Ghana and Guinea, which are both geographically dispersed and politically disparate.
3.
Forge creative joint venture partnerships that position your company to succeed in risky geographies while also limiting upfront financial exposure. For example, Rio Tinto [NYSE:RTP] has been able to successfully position the company for success in both Russia and Mongolia by entering into creative partnerships with Norilsk [OTCPK:NILSY] and Ivanhoe [NYSE:IVN; TSX:IVN] that defer large financial obligations until after substantive progress is made with the respective partners.
4.
Identify countries in transition or close to tipping points before the broader market by monitoring important drivers and signposts of political and economic transition. While drivers and signposts of political change will vary on a country-by-country basis, some common examples include: the level of involvement of international institutions, disarmament of rebel groups in conflict-prone states, progress toward democratic elections and shifting relations with key powers such as the United States, Russia and China. Despite the current wave of industry consolidation, firms should continue to expand and deploy exploration budgets to gain a foothold in geologically prospective areas that have the potential to become hotbeds for mining investment in the future based on the evaluation of key signposts.
In the DRC, forward-looking companies such as BHP Billiton [NYSE:BHP] and De Beers staked out attractive land positions and began prospecting before it looked as though the country would turn the corner politically. This foresight has given both companies the opportunity to succeed in the DRC if the country continues along its current political trajectory in the aftermath of relatively successful national elections. On the other hand, companies that are just beginning to explore in the DRC are likely to find that many of the best land positions and assets have already been snatched up.
Conclusion
Companies that commit the resources to developing a systematic growth strategy consistent with their firm’s long-term objectives will be in the best position to compete in an industry that will be increasingly defined by scarcity and intense competition. Those companies that fail to develop such a strategy are unlikely to survive over the long-term. The stakes are high: the last companies standing are likely to enjoy outsized profits and strong valuations as industry competitors fall by the wayside and mineral prices escalate due to limited supply.
© Frontier Strategy Group 2007
Stephen Bailey is a Senior Vice President at the Frontier Strategy Group, a global research and advisory firm headquartered in Cambridge, Massachusetts that specializes in analyzing above-ground risks in natural resources industries. |
