Mining Strategy: Decision Making Models – Part II

Last week, we explored the first steps of the five decision making models for strategic mine management. To refresh your memory, those five models are:Forecast Planning

  1. Intuition
  2. Financial planning
  3. Forecast-based planning
  4. Shareholder value focus
  5. Organizational learning

Intuition and financial planning are the foundation for a strong and comprehensive strategy. A deep intuitive understanding of the industry and its susceptibility to risk and fluctuations is necessary. While most of the time intuition and experience feed each other, education and training can be a great boost.  

We’ve covered the first two steps. This blog post will cover the next steps in strategic mine management: forecast-based planning and shareholder value focus. The fifth step, organizational learning, will be covered in its own blog post next week.

Step 3: Forecast-based planning

In the 1970, mining had a lot of stability in market performance. Today, given the increased technology and communications worldwide, that stability is all but annihilated. Increases in world trade have pushed the industry right to the forefront of competition. With that comes a necessary ability to change, and change fast. Forecast-based planning addresses this rapidly changing environment by recognizing that the future is not just a simple linear extrapolation of the past. It focuses management attention on the elements of the future that are least predictable, as well as on establishing concepts of possible alternative futures.

Luckily, with increased mining technology come enhanced analytical tools for exactly those purposes. One of these tools, market research, can produce very useful inputs that can be easily incorporated in discounted cash flow models or other decision making tools. In the mining industry, this phase of strategic management is home to some of the greatest advances through the development of “scenario planning”.

A scenario is not a prediction. It is best thought of as a vehicle for helping people learn. A good manager will act with a knowledgeable sense of risk and reward. This requires that managers recognize, and are not frightened by, a changing environment in their mine production. Take, for example, the increase in development and efficiency caused by our ever growing technology advances. With increased technology for mining, an intuitive manager would primarily be concerned with managing costs so that they don’t increase at a faster rate than the industry rate of reserve depletion. A manager who also incorporates scenario planning would take into account the declining real prices of mine product caused by the same technological changes… if new technology increases efficiency, the demand for some minerals may decrease across the board.

Step 4: Shareholder value focus

So, we’ve addressed the issue of a changing global environment, which can be compensated for through scenario planning. However the issues of efficiency versus effectiveness still remains largely unaddressed. Likewise, scenario planning does not explicitly consider risk beyond technical risk. These are addressed in step four in a roundabout way by focusing on shareholder value.
This concept treats the environment of mining business not as one of passivity and neutrality, but one where other participants – employees, customers, competitors, suppliers – are intelligent and purposeful people whose goals, actions, and reactions have to be taken into account in arriving at decisions. In one technique of shareholder incorporation, decisions by managers start from the cost-of-capital benchmark. Shareholder value grows only when expected or real returns exceed the cost of capital. Better projects are the ones that achieve the highest return on the risk component of the capital.

The recognition of counter intuitive trends for scenario planning and the inclusion of shareholders will add a broader spectrum of depth and understanding to your mining business. It is only with the completion of all steps that a truly robust and exhaustive business model can be produced.

 

Feel free to comment/discuss/share. If I missed anything, Tweet to DrFranzC or leave a comment. Thanks for your feedback!

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