Corporate excellence in exploration

THIS week Allan Trench attempts to understand how companies get really great at exploration.
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Staff Reporter

This week Strictly Boardroom attempts a textbook answer as to the corporate elements that give a company a realistic chance of achieving exploration excellence. The success factors are similar for small, mid-tier and for large companies: Achieving and sustaining all of them is clearly a major challenge in practice however.

1. Exploration as a clear company aspiration

Companies that aim to be good explorers set a clear focus on exploration as a preferred means by which the company will create value. So ask yourself whether exploration is part of your company’s clear aspiration? Put simply, does exploration success form part of the company’s vision and mission? If the answer is yes then this will energise all involved to that end and inspire day-to-day activity: Everyone just ‘gets it’. If the answer at your organisation is more cryptic in that the company “aims to deliver shareholder value by doing A, B, & C plus X, Y and Z” – none of which are expressly exploration – then the task is all the harder for such goal ambiguity. Most companies fall into the latter group.

2. Exploration at the boardroom table.

The best mineral explorers will be attracted to those companies where exploration clearly matters and where explorers are valued. The same goes for any key function in an organisation. So if a mining company aspires to become the ‘Toyota of Mining’ then such a vision will help it to attract the best engineers. If in contrast a company is dedicated to great merger and acquisition then it should say so – and will attract excellent commercial and financial people as a result. How does one signal that exploration matters in terms of organisational structure? Easy: The board should have a director of exploration. Additionally there should be at least one influential non-executive director with an exploration background in the boardroom. It is not hard to measure either of these things. Many larger companies fail the test. The challenge here is having a board and management that actually believes that exploration adds value. While most acknowledge that a new discovery is the cheapest path to growth, few mining companies follow through in adopting exploration as a core strategy

3. Swinging for the fences: greenfields eExploration

The best mineral deposits create disproportionally greater value than do lesser orebodies. The 80:20 Rule applies – and may actually be closer to 90:10. Brownfields discoveries are usually (but not always) incremental in their value addition. Greenfields exploration on the other hand can change the game – even for large companies when significant high quality mineral discoveries are made. Newcrest once had the distinction of mining only orebodies that it had discovered; a rare case study indeed. The short-run incentive of incremental resource growth will drive a focus towards brownfield work. Sometimes this is appropriate – but often not. Don’t forget greenfields to be a great explorer: Most of the industry has done so, unfortunately, in recent years.

4. Continuous drilling and funding

It takes drillholes to discover and delineate mineral deposits – so keep on drilling. That means staying funded – or in larger companies continually winning a suitable exploration budget to advance the exploration portfolio. Good communication skills as to the potential exploration upside in value terms are critical. Such communication needs to involve serious analysis of the potential value creation – and of the return on investment from exploration. So concepts such as expected monetary value (EMV) do matter. If your company has never mentioned EMV in the boardroom it is certainly not a best practice explorer. Staying funded can sometimes pull you to short term thinking whereas true swinging for the fences (as described above) involves a serious timeline.

5. Exploration is both commercial and technical

The science of exploration is critical – but companies targeting exploration excellence also need strong commercial exploration skills. Forming exploration joint ventures is a critical skill-set for an explorer. Win-win deals take considerable skill to craft. Once the right target area is selected, the commercial aspects of exploration become as critical as the scientific side. Does your company value the exploration commercial skill-set and resource it appropriately.

That’s it, simple really. How did your company score? Did it ace the test?

Good hunting.

Allan Trench is professor (value and risk) at the Centre for Exploration Targeting, University of Western Australia, professor of energy and mineral economics at Curtin University Graduate School of Business, a non-executive director to several resources sector companies – and the Perth representative for CRU Strategies, a division of independent metals and mining advisory CRU Group (allan.trench@crugroup.com).

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