For many mining executives and boards, step-change innovation is an increasingly hot topic. Whether its seeking long-term cost advantage or operational flexibility, innovation has become part of the strategy discussion. Yet many mining companies have experimented with different innovation programs, often at high cost and with results not always meeting expectations.
Chrysalix Venture Capital’s Managing Director, Charlie Haythornthwaite suggests that experiences from other industries, with deeper innovation history, point to a successful formula that leverages technology startups.
Innovation Born Out of Necessity
The mining industry is reversing a long period of declining productivity where the focus is on getting more out of existing assets, with fewer inputs. With fresh memories of low commodity prices and escalating unit production costs, miners are targeting higher margins and greater profitability across the whole business cycle. The objective is to create long-term cost advantage over the marginal producer.
However, that is a difficult challenge when so many industry fundamentals are trending in the wrong direction. Most mining companies will recognize the following issues:
- Fewer high quality discoveries and declining ore grades. More material must be moved and processed for the same metal output, driving up cost along with energy and water intensity.
- Mines that are deeper, more remote and with more complex mineralogy.
- Increasing importance of sustainability and resource productivity. This includes renewable energy generation along with energy and water efficiency.
- Increasing community activism. Leading to added project risk, delays and cost.
- Changing skillset. Unlocking the value of digital transformation requires new skills to interpret data and apply information within intelligent systems.
- Long-term skills shortage. Aging workforce that is due to retire and the challenge of attracting a new generation of engineers to work in remote locations.
With this context, the industry is waking up to the fact that step-change innovation has become one of the few cards left to play. For instance, in Deloitte’s “Tracking the Trends 2018” mining report, the two top themes noted were Overcoming Innovation Barriers and Bringing Digital to Life.
Where Transformational Breakthroughs are Found
Continuous incremental improvements are often seen as the best place to start an innovation program. Undoubtedly valuable, it’s the low hanging fruit that internal operations are best placed to tackle. However, these opportunities alone are insufficient to create the scale of productivity gains required.
Building an innovation portfolio also needs to include big wins with greater upside. If you are not even looking out for the step changes, you will certainly miss them and leave money on the table. Naturally, that leads to the question, where can the step-change opportunities be found?
First, let’s highlight where transformational innovation is rarely sourced:
- Internal corporate R&D – while internal innovation generates intellectual property and defensible advantage, large companies typically struggle to develop the disruptive breakthroughs. Obstacles include lack of individual incentives to take risks, corporate antibodies challenging counter-conventional thinking, vested interest protecting today’s solutions and short-term priorities competing with long-term objectives.
Most industries recognize the role of external solutions that can be both quicker and lower risk than in-house development. Larger diversified innovation portfolios can be created much more cheaply.
- Large established suppliers – are primarily concerned with harvesting and sustaining their business models and are not motivated to disrupt themselves.
- University research groups, industry consortia and hackathons – although these may source promising ideas, the critical element is frequently missing. Unless there is a vehicle to commercialize a robust scalable solution and deliver it to market, there can be no implementable end-product.
Conversely, everyday experience from almost all other industries suggests technology startups are the most likely source of transformational breakthroughs. Entrepreneurs think differently and startups are more agile and capital efficient to explore new solutions. Small, focused, passionate teams with different incentives to take risks can frequently achieve more than anyone thought possible, with less than anyone thought possible.
If mining companies seek step-change gains, they should welcome startups’ appetite to accept technology development risk and work with them to evaluate new approaches. Of course, there can be piloting risk but often that can be thoughtfully mitigated.
How Mining Can Learn from Other Industries: Capitalize on the Venture Capital Model
As mining seeks to build its innovation muscle and find a path to best practice, it’s worth observing other resource-intensive industries, such as oil and gas, electric utilities and chemicals who have been evolving their innovation programs for longer. How have they identified and accessed startup innovation?
Outside mining, the venture capital (VC) model is extremely common where large corporates routinely leverage startups as an innovation source. In contrast, mining is a rare exception where corporate venturing is almost unknown. According to CB Insights, 71 of Fortune 100 companies are active in corporate venturing and there are over 1000 active corporate VC funds globally. In recent times, over $25B is invested each year into startup financing rounds including corporate investors.
For instance, virtually every oil and gas major possesses its own corporate VC fund or has invested in independent VC funds to achieve similar results. Acting through self-interest, the intent is to nurture a healthy ecosystem of risk capital and entrepreneurs tackling the problems that matter to them. Capital is heavily leveraged by other financial and corporate investors. Most importantly, the venture model attracts the best ideas to them, enabling them to scan for best-in-class solutions.
It’s notable that sophisticated industrial players use venturing to create competitive advantage quite differently from the traditional closed model of internal R&D. The strategy typically comprises:
- Prioritizing and openly publicizing pain points and opportunity areas
- Positioning their company as startup-friendly and a partner of choice to attract the best ideas to them
- Leveraging others’ expertise and capital to support early stage startups
- Building core competency in evaluating and piloting the most attractive solutions while managing risk
- Rolling out the successes across their operation
The new mantra is: “Think big, test small, scale fast!” It’s about defining big wins while managing uncertainty along the way. Mining is already very familiar with this portfolio approach to creating optionality and staged risk reduction – it’s the mirror image of exploration.
Step-Change Mining Technology: MineSense Example
An exciting example of how metal mining can apply step-change technology with intelligent systems is MineSense. Our fund, Chrysalix Venture Capital, was the first investor and helped get this startup off the ground. It directly tackles the challenge of declining ore grades by upgrading material in the upstream production process.
MineSense integrates new sensors into shovels, enabling a high value dataset previously unavailable. Using real-time analytics, the solution characterizes ore grades and accurately directs material according to its inherent value. It recaptures revenue from ore that would have been designated waste. Moreover, it avoids the cost, energy and water in processing waste unnecessarily.
The now well-proven technology moves the needle for both the top and bottom line. For the right mines, this solution can create $20-200M of value per year per mine. Equally important, the technology has the characteristic that it can be evaluated at low risk, initially offline, and then in small modular pilots later.
A Call to Action: Nurture a Vibrant Innovation Ecosystem
History tells us that the great breakthroughs typically come from agile, creative startups. MineSense is just one example where resource productivity solutions and intelligent systems can be applied to solve some of mining’s most significant problems. There is a tremendous opportunity to seize productivity gains and competitive advantage if the mining industry can identify the right step-change startups, evaluate solutions while managing risk, and then implement them at scale.
Nevertheless, the startup and risk capital ecosystem needs to be encouraged and nurtured, otherwise good ideas get stranded in early R&D and never make it to market. Moreover, entrepreneurs will spend time on other industries’ problems.
Understandably, most mining companies are not going all in, creating their own corporate venture funds. However, they should consider partnering with well-aligned independent funds to gain similar benefits but at about one-tenth the investment. It will bring insights into fast evolving fields of technology and enable them to scan for solutions that might otherwise be missed.
Above all, the industry needs the confidence to deliberately avoid a reflexive “first to be second” customer mentality. Inevitably, that leads to wasted opportunities when good startups then die on the vine. Evaluate each opportunity on its merits – understand the upside potential in the context of well-managed risk.