Graham Arvidson_CET Presentation Feb 2015_FINAL_PDF-3.PDF

EMERGING RESOURCE COMPANIES:

THE CASE FOR EXPLORATION AS STRATEGY

An ASX Top80 Mining and Metals

Case Study

Graham Arvidson

Curtin University – Mineral Economics Masters Program

CET Discovery Day Fremantle, Australia: 24th Feb 2015

CET Discovery Day 2015 24 Feb 2015

Emerging Resource Companies: The Case for Exploration as Strategy, An ASX “Top 80” Case Study

Which strategy creates this kind of value?

2

Aver

age

Annu

alis

ed R

etur

n by

Stra

tegy

Em

ploy

ed 2

010

- 201

5, N

=80

-30%

-23%

-15%

-8%

0%

8%

15%

23%

30%

6%

3%

12%

20% 59%

% of Total Value Add by Strategy Employed,

2010-2015, N=20


Emerging Resource Companies: The Case for Exploration as Strategy, An ASX “Top 80” Case Study3

Overview• An ASX Top80 Mining and Metals Case Study

Separating the Best (Top 20) from the Rest (Top 80): To set the scene:

– What did they invest in? – Where did they invest? – What financing method was preferred?

The gritty stuff: – Horizons of Growth: What growth strategies were

utilised? Hint: Exploration Success as a driver of superior shareholder returns?

• “The Best” (Top 20) – What makes them distinctive?

CET Discovery Day 2015


AN ASX TOP 80 MINING AND METALS

CASE STUDY

24 Feb 20154

January 2010 to January 2015



Top 80 Selection Criteria

• Filtered ASX Metals and Mining focused resource companies $50M< Market Cap <$1.1B (Source: S&P Capital IQ)

• Companies exceeding $1.1B market cap removed from study: considered to be ‘established’

• Minimum market cap of $50M chosen to indicate nascent/emerging success creating a data set of 80 companies

• Top 80 ranked by Total Shareholder Return (TSR) across 5 years (Jan 2010 - Jan 2015) (Source: Bloomberg Total Return)

5



Critical Limitations of the Top 80 Study

• Does not take into account the failure rates by strategy category – inherent positive bias

• Research data was compiled by trawling trends, ASX announcements, and company presentations – not a perfect science

• Only one timeline looked at: 5 years

• ASX players only – Australian market centric

• Misses ASX companies acquired during the period (e.g. Papillon Resources)

6



Top80 TSR Distribution - “The Rest”

7

Lots of losers… a few winners.

Median CAGR -12% (Loss) !

Only 27 of 80 companies make a return



In stark contrast, Top 20 - “The Best”

8

CAGR TSR above 15% for 17 Companies!

Annualised TSR - Top 20: An impressive line-up



Why are we interested in good strategy? Top20 buck the trend

9

Returns linked to commodity price - swings/roundabouts - Except in the Top 20? Good luck or good business?

Source: S&P Capital IQ

Study Period

Mining/metals

Everyone else



Fe, Cu, Au popular with “The Rest”, Gold the standout for “The Best” and…

10

Platinum

ZincTungstenPotashPhosphate

Rare EarthsManganese

Tin

Diamonds

Nickel

LithiumCoal - Metallurgical

Iron Ore9 Copper

15

Gold26

Mineral Sands

Graphite

Top 80: Primary Commodity

Rare Earths1

Manganese1Tin

1Diamonds

1Nickel

1Lithium

1Coal - Metallurgical

1Iron Ore

1Copper

3

Gold6

Mineral Sands2

Graphite1

Top 20: Primary Commodity



gold generated high returns most frequently…

11

Who’s Who in the Top 20 - TSR by Commodity



Location - does not determine magnitude or likelihood of success

12

Australia is the easy choice?Africa -

sovereign risk not a deterrent?

Asia2

Europe1

Central Africa4

East Africa1

West Africa7

Southern Africa6

South Pacific3

South America6

Canada1

South East Asia10

Australia39

Top 80: Location

East Africa1West Africa

2

Southern Africa1

South Pacific2

South America2

Canada1South East Asia

1

Australia10

Top 20: Location



Finance - Does not get you in the Top 20

13

Top 80 Primary Financing Methods

Equity66

Debt14

Top 20 Primary Financing Method

Equity16

Debt4



Debt finance: higher returns a self-fulfilling prophecy?

14

Top 80 Average Annualised TSR Debt V Equity

Aver

age

Annu

alis

ed T

SR

-7%

-5%

-4%

-2%

0%

Debt Equity

-6%-2%

Top 20 Average Annualised TSR Debt V Equity

Aver

age

Annu

alis

ed T

SR

0%

9%

18%

26%

35%

Debt Equity

30%35%

Suggestion: Better project is required to attain debt finance?

May inherently bias debt to higher returns



Location, commodity, and finance mostly inconclusive… the real story: Strategy

15

Horizons of Growth - Top80 Strategy Framework (Adapted from: Baghai, Coley, and White 2000 Alchemy of Growth)

Time (Years)

Prof

it

Horizon 1 – Extend and Defend Core Business

Horizon 2 – Build Emerging Businesses

Horizon 3 – Create Viable Options



Top80 Strategy Categories Strategy analysis was retrospective

16

COMMON STRATEGIES AMONG EMERGING RESOURCE COMPANIES

Exploration Discovery Significant mineral exploration discovery leading to substantial shareholder returns

Purchase and Produce Growth is realised by acquiring an existing resource asset (either operational or previously operational) and rapidly moving the asset into full production (typically less than 12 months and less than $50M).

Project Development Growth is realised by developing a green fields asset (typically a new-build) targeting production from a previously defined resource. This strategy seeks to add shareholder value by taking a well defined resource through the entire development cycle and into production (typically greater than 12 months and greater than $100M).

Mergers and Acquisitions Significant merger or acquisition leading to shareholder return

Strategic Investor / Strategic Alliance

Attraction of a strategic investor leading to shareholder return

Unclear No clear evidence of successfully executed growth strategies during the study period



Strategy: Exploration Discovery Example: Sirius Resources

17

Nova discovery




Strategy: Purchase and Produce Example: Northern Star Resources

18

Purchase and Produce Paulsens

Paulsens debt paid off

Horizon 1: Purchase and

Produce

Horizon 2: Exploration Discovery

Paulsens significant exploration results

Horizon 3: M&A

Acquire Plutonic

Acquire Jundee




Strategy: Project Development Example: Orocobre

19

Olaroz scoping study released

DFS Complete

Project approvals

Patience required!

First lithium production




Strategy: M&A… success? Example: Evolution Mining

20

Cracow and Mt Rawdon

M&AASX:CAH

ASX: EVN




Strategy: Strategic Investor / Alliance Example: Western Mining Network

21


Strategic Alliance formed with Borneo Brothers Ltd to attain option on Manganese Tenement

Strategic Investor

“Milestone” for Tamboli

Prospective Graphite

Tenement

Strategic Alliance/Investor can generate significant (speculative?) near term investor returns with minimal capital commitment

Both strategic investors incentivised based on WMN market cap



Top 80 - Unsure what their strategy is or which strategy to pursue

22

Unclear19

Strategic Investor2

Project Development22

M&A5

Purchase and Produce8

Exploration Discovery24

No clear preference in

strategy

Top 80: 1st Horizon Strategy



How to add value? Exploration!

23

1st Horizon Growth Strategy by TSR -Top 80Exploration and Purchase/Produce are the Winners

Aver

age

Annu

alis

ed T

SR fo

r Top

80

Emer

ging

Res

ourc

e Co

mpa

nies

-30%

-23%

-15%

-8%

0%

8%

15%

23%

30%

Explorat

ion Discove

ry

Purchas

e and Produce

Project D

evelo

pment

Strateg

ic Inve

stor

M&A

Note: Inherent positive bias: study does not

take into account failure rates!



“The Best” use Exploration as a Strategy for Success…..

24

12 of the Top20 realised high returns because of

Exploration Success!

Strategic Investor1

Project Development3

M&A3

Purchase and Produce1

Exploration Discovery12

Top 20: 1st Horizon Strategy



And they reap the rewards….

25

Strategic Investor3%

Project Development12%

M&A6%

Purchase and Produce20%

Exploration Discovery59%

Exploration Discovery is the dominant driver

of shareholder return in the Top 20.

59% of all value added in the Top 20 was a

result of Exploration as a primary strategy

Top 20: % of Total Value Added



Want to maximise TSR? Exploration delivers high returns most frequently

26

1st Horizon Growth Strategy by Average Annualised TSR - Top 20

Aver

age

Annu

alis

ed T

SR fo

r Top

20

Em

ergi

ng R

esou

rce

Com

pani

es

0%

35%

70%

105%

140%

Purc

hase

and

Pro

duce

Expl

orat

ion

Disc

over

y

Proj

ect D

evel

opm

ent

Stra

tegi

c In

vest

or

M&A

12 C

ompa

nies

3 C

ompa

nies

3 C

ompa

nies

1 C

ompa

ny

1 C

ompa

ny

(Nor

ther

n St

ar B

ias)

Of which Exploration

contributed…..



Multi-horizon more common among top performers

27

Top 80

Unclear or No Horizons19

Three Horizons7

Two Horizons14

One Horizon40

Three Horizons3

Two Horizons7

One Horizon10

Top 20Note: Horizon review was retrospective – ‘Unclear’ does not mean that companies do not have a strategy. It means no clear strategy execution was evidenced across the study period.

Of the 21 “multi-horizon” companies

14 included exploration as a

strategy.



The Case for Multiple Horizons

28

Average Top 20 Value Added - Annualised TSR BasisNumber of Horizons

Annu

alis

ed 5

Yea

r TSR

- Av

erag

e Ac

ross

Top

20

0%

15%

30%

45%

60%

One Horizon Two Horizons Three Horizons

53%

33%

23%

CET Discovery Day 2015


DISTINCTIVE CAPABILITIES OF THE “TOP 20”

WHAT THE BEST APPEAR TO DO BETTER THAN THE REST

24 Feb 201529

(Top20 Interviews from April 2013)



Want to be in the Top 20? Focus on People and Strategy

30

Asset5%

Technology5%

Finance9%

Strategy45%

People36%

Note: Cited by leaders within the 2013 Top20 - interview results.

When asked what distinctive

capabilities their organisations possess, their

responses were in these categories.

Scientific methodology? No…. but of some interest

nonetheless? Top 20: Leadership Cited Distinctive Capabilities



Strategy: Examples of Distinctive Capabilities Cited by Top20 Leadership

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• Asset Economics - Turn an idea on its head to see value that others can't

• Synergy Insights - Combine multiple assets where together their value far exceeds their value apart

• Make tough decisions - Don't fall in love with crappy assets. Move on and recognise mistakes early

• Sector Insight – predict fundamental industry structure changes and act early to create strategic advantage



People: Examples of Distinctive Capabilities Cited by Top20 Leadership

32

• Well Connected - Its who you know - Gaining insight into an asset’s potential through word of mouth

• Geological Insights – Expertise in exploration regions

• Smart incentives - E.g. ensure directors are incentivised by share price increases and not market cap increases

• Value Chain – Distinctive capability to resource the right people from exploration to production at the right time



Conclusion: A great emerging company will most likely look like this…

33

• Commodity – Gold most commonly delivered high returns across the Top 80…

• Location – Agnostic no clear evidence that location determines success. Africa and Australia popular.

• Finance - Debt (may inherently indicate better projects) • 1st Horizon Strategy - Exploration Discovery!

• Also look for Purchase and Produce – second place but has short time horizons and may open exploration opportunities (e.g. Northern Star doubled down with Paulsens)

• Multi Horizon - The Top20 were more likely to execute multiple strategies successfully and were rewarded by the market

• Distinctive Capabilities - People and Strategy - Clear and credible advantage over competitors

THANK YOU

Contact information: Graham Arvidson

Email: [email protected]

Special thanks to Professor Allan Trench for his support and guidance.

Special thanks to Darren Martin of PCF for for assisting with data.

“We demand rigidly defined areas of doubt and uncertainty!”

-DOUGLAS ADAMS

Graham Arvidson_CET Presentation Feb 2015_FINAL_PDF-3.PDF

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