Mining Strategy: Decision Making Models
Throughout the history of mining, the challenges facing the industry have always been in flux. Likewise, the guidelines governing mining project development decision making, have needed to adjust as well. However, there are five basic Decision Making Models in strategic management that have remained the same:
- Financial planning
- Forecast-based planning
- Shareholder value focus
- Organizational learning
Each of the above stages involves a set of analytical tools to help a company make good decisions. Additionally, each stage has its own unique organizational culture that goes along with it. This series of blog posts will explore two stages per post, with a last post dedicated solely to step five. Through this, we hope to shed some light on what can be a rather murky and complicated subject.
Step 1: Mining Management by Intuition
Mining has always been treated as a unique type of business, held separate from other businesses. Whereas most jobs have a direct line to their customer base, mining has always been isolated from the public eye. Added to this, the unique set of skills required in a mining environment makes for a very isolated business system. Though mining management through intuition is becoming less and less used, it is still an important aspect in the process – due in large part to its aspect of intuition brought by experience.
Historically, this method performed by mine managers has been quite effective, and in many cases it is still useful today. For example, many ore bodies have been discovered by their visible outcrop, and when mining begins, immediate fiscal results are seen. Sophisticated mining and financial techniques are not needed in this scenario, when all development can be funded from cash flow.
This idea of management through intuition can even be extrapolated to bigger projects. They can simply be funded from the proceeds of earlier mining. Risk in this environment primarily means technical risk – and this is something that after some years of experience mine managers intuitively understand.
So, how is this model relevant? It has to do with constant learning and observation. Intuition is something that comes a bit with education, a bit with intelligence, but overwhelmingly mostly comes from experience. If a person is constantly paying attention to mining projects, to market trends and geologic patterns and the general natural ebb and flow of economic interest in minerals, intuition and understanding will be an accurate and useful guide in the world of mining.
Step 2: Financial Planning and Control
In the case of large, complex mines, or organizations with multiple mines operating at the same time, additional management tools are called for. The most common financial planning aids in this stage of management strategy include sales, cost and profit projections, the annual budgeting process, and discounted cash flow analysis of new capital spending proposals.
Large enterprises can be subdivided from a financial planning perspective into profit centers and cost centers, and the performance of each part can be evaluated and understood according to those definitions. This is a traditional method for creating value for stockholders, but for the mining industry it possesses several limitations.
Firstly, the tools assume an unchanging environment, or an environment that can be accurately predicted based on past performance. For mining, these projections are dangerous if relied upon too heavily. Secondly, while these tools are very efficient, they are not always effective in this volatile industry. Finally, the tools provide little or no assistance for decisions subject to risk. The very fact that the ore body mined this year may not be the same one mined next year makes these factors unsustainable and risky in mining.
It all comes down to risk. Most industries have risk, but in most industries this risk is easy to quantify and treat ahead of time, or easy to reinforce against. Risk in mining is unavoidable, due to the volatile nature of supply and demand in the minerals industry as well as the unpredictability of the minerals you are mining. This risk is where the adequate decision making model comes to play. An intuitive understanding of the mining industry can greatly improve your results. Technical risks may not be precisely quantifiable, but as long as the experience and intuition leads the board-level decisions, this should not be an issue in terms of a decision’s reliability.
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