More than one mining executive has
questioned me directly on the importance of strategy in the
resources industry. Rocks in the box is how one
executive explained their company«s approach: we dig a
hole and we move tonnes. We produce and that is our
But strategy does matter. Strategy
is about setting the direction for the company and deciding up
front many rocks we really need given their potential worth.
Ensuring access to the rocks depends on the local political
environment and the cost of extraction, and logistics depend on
how well a company manages all of the external and internal
variables affecting its value chain.
In fact, we regularly see four
critical strategic issues that all resources companies must
consider: access to resources; decisions on building, acquiring
or otherwise expanding production; where on the value chain to
operate; and the price to charge for product.
There are myriad other company and
industry-specific issues that must be drawn out, but these are
always present and are a good starting point for strategic
discussion. This article explores these strategic elements and
The strategic discussion must also
lead to an actionable strategy addressing these and other
company specific dimensions. The commonly accepted approach is
apparently a 200-slide PowerPoint pack summarised with five
point plans and strategic pillars: We will invest in top
tier assets, or Create value through a focus on
cost control tend to constitute strategic initiatives,
while the printed slide deck is an excellent desktop tombstone
of the work done to develop these.
While strategic pillars are fine
and useful communication tools, a strategy must be more than
that. Strategy must be a plan of action. Of course we also know
that no plan survives first-contact with the enemy, and in this
case the enemy is a very unpredictable real life.
So a strategy should not just be a rigid document or an
unassailable plan, but rather a way of thinking that helps
management weave through the changing landscape and make
quality decisions that add value to their businesses.
We use scenario planning to help
executives think through their options as well as guide
decision-making in the future. The second half of this article
will describe that process and the tools we use to create
Lithium Americas Cauchari-Olaroz brine project,
Argentina. The company has an agreement
in place with the aboriginal community to develop the local
Key strategic issues: access to
The first of the four main issues is ensuring access to the
resources that a company mines. The challenge varies
substantially by legal jurisdiction, is made more complicated
by working in multiple jurisdictions and regardless of where a
company is operating it is always present. The challenge itself
can also vary considerably ranging from true permission to mine
to permission to export to just permission to keep stock on the
We faced an extreme example in
Africa: one client had thousands of artisanal miners digging
with spades and pick axes into their ore body to mine and sell
small quantities of ore. Creating a safe, efficient mine meant
removing the artisanal miners and bringing in trucks. The
company involved faced convincing the government to grant
mining licenses while keeping the people calm, engaged and, in
the end, fed until the long-term substantial benefits began to
surface. This was only achieved with a clear, flexile strategy
and consistent, continuous messaging.
These issues are not unique to
Africa; a Canadian ignores First Nation concerns at his or her
peril, and everybody is very happy with economic development as
long as it is not in my backyard. Regulators,
environmental groups and concerned citizens may substitute for
artisanal miners, but the challenges exist everywhere.
A flexible strategy for managing
stakeholders must help to ensure access to resources. The
strategy should address who the relevant people and
institutions are and provide an integrated approach at working
with these stakeholders. But it also must be flexible enough to
allow for unpredictable responses or changing situations.
Building, acquiring & expanding
At issue here is the cost and value of expanding - either
current production or into new markets. This necessitates
thinking about long-term price trends, but also managing risk
and considering market effects.
Thinking about price is an
important part of strategy. But instead of focusing only on
straight-line price predictions, the strategy also needs to
consider a company«s options. Looking at various price
scenarios and creating options to deal with each is a valuable
exercise for increasing value and decreasing risk.
There may be options to stage
investment in order to avoid spending too much at one time or
too early. Even building too much capacity may be a good way to
discourage others from investing while keeping control of the
excess capacity in the market.
New markets and new technology can
drive disproportionate returns but also require careful
assessment. The potential of technology is often undervalued
while the promise of new markets is often overvalued.
Many concerns come in to play in
increasing production, and the critical strategic question is
how to manage these investments over time; avoiding exposure
while maximising the opportunity. Any company strategy should
provide guidelines for thinking through these decisions.
Value chain considerations
While a lot of time is dedicated to predicting future prices,
often little time is spent thinking through the value chain.
Yet examples of value chain issues are everywhere. Alcoa and
Alcan (now Rio Tinto) strategically invested heavily in the
value chain even to the extent that Alcan was (is) one of the
worlds largest hydro-electricity generators.
Alcan owned everything from bauxite
mines to packaging materials because that is where the company
saw the value in the aluminium market. Rio Tinto, after the
acquisition of Alcan, has a different strategy and has sold off
the packaging arm to focus more on aluminium production. This
is one aspect of value chain strategy.
Value chain considerations should
also include logistics to the customer. An operator of a
landlocked potash mine counting on sea-borne sales needs to
carefully consider how it will move material from the mine to
the port and who is going to extract what value along the
The US is famous for railroads with
monopoly power that are able to extract nearly all of the value
from landlocked operations. Not considering these issues up
front allows other players in the chain to extract a
disproportionate share of the value.
Deciding where and how to
participate in the value chain is an important strategic
decision. It is also a topic that must be managed over time to
avoid being held hostage by other parties.
Price is almost always a challenging concept. Many industrial
minerals companies tend to discount the importance of price
thinking. But industrial mineral markets in particular tend to
face opportunities where ignoring price can lead to leaving
large amounts of money on the table.
In one instance, we worked with a
company selling a chemical-type product into an industrial
market. Our client knew that they were selling at a higher
price than the competition yet customers would continue to buy
from our client, even while continuing to purchase from the
competition. This baffled the management team until they
realised that customers were purchasing reliability - our
clients reliability ensured that their customers never
ran out of product even when the competition could not
Such a situation can have a huge
effect on pricing policy. Our client was able to increase
prices and sell value-adding logistics services. They settled
for lower tonnage but at a higher margin and with reduced
production costs. This can also lead to developing specialised
products and pricing them according to the value added rather
than any sort of external price.
Strategy should not just be about
predicting future prices but also about understanding how to
manage price. It should serve as a guide in identifying
opportunities to push prices up as well as accepting situations
where lower prices are acceptable.
Using scenarios for strategy
These strategic issues do not represent an exhaustive list, but
in our experience these are the common elements that almost
always play a role. The critical point is to identify these
issues and develop a strategic plan that addresses these
Of course today«s world
changes far too quickly for a rigidly set out plan, so
management teams need a flexible approach to strategy. They
need to think through how their environment can change and how
well positioned they will be to act as it does change. And this
is where scenario planning comes in to play.
Scenario planning is not a process
of predicting the future though it does involve a great deal of
future thinking. Scenarios impart a dynamic element to
strategy, one that gives companies insight into a number of
different future directions that their market may take and how
they want to manage in each market. It is the dynamic element
rather than the future predictions that make scenarios
The process of creating scenarios
is straightforward; the trick is to ensure a lot of
conversation and robust debate at the highest levels in the
company. Often this can involve external participants who bring
new and different perspectives to the discussion and external
facilitators who ask questions and push in directions that
internal participants would not. The debate and discussions can
be as important as the final scenario product itself, both in
surfacing ideas and concerns as well as ensuring that everyone
is working from the same base.
The first step in the process is to
identify the narrative of the business - creating one truth for
the management team. This is often more difficult that it
sounds with different executives having views ranging anything
from slightly to structurally different views of the market -
and a companys place in this market. But a common
understanding of a companys position in the market and
the issues it faces is critical to developing meaningful
A good place to start with this one
truth exercise is to ask questions around the four main issues
above. What concerns does the management team have around
gaining or retaining access to resource? What are the price
trends, what is the market balance and what are current
Once this narrative has been
established, the next step is to brainstorm and capture major
trends and uncertainties in the market - what is happening now
in the market and how is this likely to continue?
A trend may be something like an
increasing or decreasing dependence on a product, a move
towards substitution or a drive towards efficiency. Trends will
tend to have an observable time component. Uncertainties are
question marks facing the company, such as whether a carbon tax
will come in to effect or a jurisdiction will grant the
Trends and uncertainties are
related: a trend towards more environmental awareness could
lead to a decision on the uncertainty of a carbon tax, for
The next step is to cluster and
rephrase the trends into higher order or more relevant topics.
A number of crazy ideas will come from the brainstorming and
some of these will be irrelevant, but some can be brought
together within a broader concept.
Usually important themes will
emerge in this conversation and the team can easily pick two to
become the axes of the scenario set. Other important trends and
uncertainties can serve as wildcards or events to build into
the scenario stories later.
Plotting the trends as axes on a
Cartesian plane helps provide a visual reference, with each
quadrant a scenario.
Considering scenarios for energy,
for example, could lead to a Y axis on global stability and an
X axis on the trade-off between nuclear energy and renewables.
The quadrants of the Cartesian plane give us the potential
scenarios such as the first quadrant where nuclear energy wins
out over renewables in a stable world.
Four scenarios can feel a bit
limiting, but is enough to create a variety of outcomes and
create the dynamism we are looking for. Adding more scenarios
makes working them unwieldy with little additional benefit, but
the four scenarios must also be different enough to create very
What if solar continues to become
rapidly more efficient and less costly? What would a new
nuclear reactor type do? How would nuclear meltdown (like in
Fukushima, Japan) affect the scenarios? All of these should
feature in the scenario stories and in thinking through how the
scenarios will develop.
Creating scenario stories
An important part of scenario creation is to create vivid
scenario stories and descriptive names that participants can
relate to and use for strategic planning. All of the
uncertainties and wildcards come in to create the scenario
stories and they will be resolved in different ways within each
The storytelling itself is an
important step in moving from abstract ideas on a white board
to a world that people can effectively imagine. Once the
management team can put themselves in to the scenario they can
start to think about how the business would change and how they
would manage it differently.
In this case the Nuclear
Wins scenario would be the most attractive for businesses
involved with nuclear energy generation, but the fragmentation
issue will lead to very different market conditions.
Nuclear Renaissance would see more,
large centres of power generation, well controlled by
Energy Inequality would be a more
distributed approach with perhaps containerised nuclear
reactors, or smaller installations focused on local needs.
The Solar Belt would be an
opportunity for renewable energy companies and their suppliers.
Global stability in this case could mean a solar belt around
the equator, capable of even providing base load power to the
globe, around the clock. Whether or not such a belt is the
actual manifestation of stability (or even feasible) is
irrelevant, the key theme is cooperation and green energy.
Finally, Energy for the Village
implies a fragmented world perhaps with pockets of strong
nuclear demand especially for base load generation, but also a
strong renewables component, which keeps nuclear growth in
check. These could each represent different opportunities for
These scenarios need to be more
than a point in time or a one-line observation. To be useful
the scenario stories need to develop over time and present a
view of how the world could develop over the next five to
twenty years - with all of its twists and turns that such a
long term implies. Incorporating Black Swans and scenario
economics allows us to capture these changes.
Black swans and scenario economics
Individual black swans may be rare, but their impact on global
markets is continuous. From storms to discoveries,
technological marvels to disasters, black swans drive change.
So scenarios need to consider the effect of these random
Once the scenario stories are
sketched out, the team should think about what random events
could occur to change things dramatically. These could be
wildcards identified earlier in the process or wars, discovery
of substitutes, or even the collapse of the economy.
During the height of the most
recent boom we included economic collapse as a black swan in
some of our scenarios. We didnt know when or how this
would happen, but we knew something along those lines was
possible so there was value in thinking about how this would
affect the scenarios and what direction a company would take if
it were to happen.
Today a Chinese slowdown is always
in our commodity scenarios. China may not have a major
slowdown, but on the other hand no economy has ever continued
to grow at over 10% indefinitely - so a change in direction is
worth thinking about.
We also create an economic story
around the scenarios and the black swans. To do this think
about the impact of events on economic drivers important to
your business; how would exchange rate change? Or price? Or
The end product is a series of
scenarios with meaningful economic drivers. The management team
can then think about the options available to them and how
these will change within each of the scenarios. The options can
be valued based on the economics and the management team can
develop different approaches and risk mitigations that would
apply within each of the scenarios.
Creating a dynamic strategy
The scenarios and scenario stories are the first step in the
strategy process. Once these are created the team considers its
options and how they fare within each scenario. Doing this
helps identify the major risks and conditions for success and
allows the team to both plot the strategic direction for the
company as well as start to consider tactics for getting it
The scenarios will be as inaccurate
about the future as any other prediction. But the value comes
from thinking through the various economic drivers, how they
play out and where a company wants to be. Regardless of what
happens management will be more prepared to confront future
As time goes on and the future
develops the team should track the development of reality and
match it to scenario signposts to assess whether the market is
moving in one direction or the other. As they see developments,
managers can think about what actions to take, what effect
their actions will have on other players and where that will
Resource companies can often get by with rocks in the
box strategies for a time. As long as a team keeps
producing and there is a buyer on the other side of the
equation many companies can stay afloat. But without a useful
strategy that can act as a constant guide in decision-making, a
company will end up with lower returns and potentially even
lose its ability to operate.
Scenario planning is one way to
creatively think through the strategic challenges that any
company faces. The value of scenario planning is in the
flexible strategies it supports and the creative thinking it
requires. Scenario planning can lead to a 200 page slide deck,
but rather than a desktop tombstone these slides become a
reference manual for setting a companys direction and
keeping it successful despite the twists and turns of
Contributor: Jeff Loehr, managing director Americas,
Virtual Consulting International, a leading resources strategy
consulting firm. Loehr joined VCI from a leading global mining
company where he headed business development efforts for the
company and acted as a transaction/investment advisor.