‘Competitive advantage’ for the minerals industry has changed

I read earlier today of the celebration of the start of production at Rio Tinto’s underground mine in Oyu Tolgoi (OT), Mongolia. That’s a big milestone for a world-class resource.

Oyu Tolgoi mine shafts - the nature of critical minerals strategy has changed

Picture by Kelapstick. License https://www.wikidata.org/wiki/Q14946043

It seems only recently (2004-5?) that I lobbied hard to place Oyu Tolgoi atop Rio's internal list of copper 'investment opportunities'. Plans to develop the deep underground porphyry copper mine at Resolution in Arizona were coming together. And we also determined to retain the North Parkes operation not for economic reasons but to ensure continued opportunity to retain and develop skills and capabilities in hard rock underground mining. With Resolution in view and Oyu Tolgoi on the horizon, this was not a capability to allow to ‘lapse’.

OT has seen ups and downs since then but, from the early intersections on, resource quality has always held up. Size, grade, amenability to processing, contiguity - there is a whole bunch of factors that go into defining a world class resource - but OT was definitely it.

Years earlier, while I was at BCG (back in the Ice Age I think), we developed the whole world class/bottom of cost curve strategy for Rio's portfolio. Today, that sounds blindingly obvious. Back then, it helped Rio make big portfolio decisions and add rigour to continual appraisal of each component of the portfolio.

…the old wisdom said ‘if your resource is large enough to matter, and low enough on the cost curve, you will always be able to make money’

The premise was simple - the modelling of NPVs is a complex thing and can produce highly precise results, but they are founded on key assumptions on various unknowable factors - notably price forecasts, inflation, discount rates, exchange rates - many years out (up to 100 in some cases). Yet the old wisdom said ‘if your resource is large enough to matter, and low enough on the cost curve, you will always be able to make money’. And if you can’t, nor can anyone else. Basic economics you might say, but it is amazing that the more that engineers and experts pore over their pet project (and the one their career is tied to in the short term) the more ways they find to construct ‘NPV-positive’ investment cases. We’ve all been there.

[Incidentally, we also suggested that for downstream investments, where all sorts of other factors (technology, market, government) were outside of your control and future advantage could not be assured in the same way that a world class resource does. So Rio set about divesting a bunch of non-core and downstream assets, and channelled exploration, acquisition and development into the things that really mattered.]

Through the intricate modelling and engineering that feed NPV models, the investigation of adjacent and downstream opportunities, changes to technology on mining and processing, the strategic truth of resource quality still holds.

In the new world, where your resource is, with whom you’ve partnered, and who has significant control over it are potentially as or more important as its inherent quality

How long will this continue? Watch this space. The short answer is: the magnitude and speed of the #EnergyTransition and the #deglobalisation unleashed by geopolitical events and changing patterns of national opinion-formation are driving a change in the nature of strategic advantage - In the new world, where your resource is, with whom you’ve partnered, and who has significant control over it are potentially as or more important as its inherent quality.