Why mining should rethink innovation, not reinvent it
April 26, 2018
For many mining executives and boards, step-change innovation is an increasingly hot topic. Whether it’s 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.
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.
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. 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 interests protecting today’s solutions and short-term priorities competing with long-term objectives.
Most industries recognise 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 commercialise 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 start-ups are the most likely source of transformational breakthroughs. Entrepreneurs think differently and start-ups are more agile and capital efficient to explore new solutions.
If mining companies seek step-change gains, they should welcome start-ups’ 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.
Capitalising on the venture capital model
Outside mining, the venture capital model is extremely common where large corporates routinely leverage start-ups 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 1,000 active corporate VC funds globally. In recent times, more than US$25 billion is invested each year into start-up financing rounds including corporate investors.
For instance, virtually every oil and gas major possesses its own corporate venture capital 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:
• Prioritising and openly publicising pain points and opportunity areas.
• Positioning their company as start-up-friendly and a partner of choice to attract the best ideas to them.
• Leveraging others’ expertise and capital to support early stage start-ups.
• 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. 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 characterises 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 can create $20-200 million 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.
Call to action: nurture a vibrant innovation ecosystem
History tells us that the great breakthroughs typically come from agile, creative start-ups. 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 cost advantage if the mining industry can identify the right step-change start-ups, evaluate solutions while managing risk, and then implement them at scale.
Nevertheless, the start-up 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 to go 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 start-ups then die on the vine.
Evaluate each opportunity on its merits – understand the upside potential in the context of well-managed risk.
*Charlie Haythornthwaite (firstname.lastname@example.org) is a managing director at Chrysalix Venture Capital, a technology focused VC firm with a long history of building and commercialising innovations for resource intensive industries.
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