Presentation for UWA Business School MBA.

1. COMPETENCE, COMPETITION &
THE CONTEXTUAL ENVIRONMENT:
Strategies & scenarios for rare
earths miners & explorers
John P. Sykes
Email: johnpaul.sykes@postgrad.curtin.edu.au
Director, Greenfields Research
PhD Candidate, Department of Mineral & Energy Economics, Curtin University
Adjunct Research Fellow, Centre for Exploration Targeting, Curtin University &
The University of Western Australia
Strategic Management of Resources’ Companies,
The University of Western Australia Business School,
Perth, Australia: 27th October 2014

2. Strategic Management of Resources’ Companies, UWA Business School, Perth, Australia
Your business and the world
Actor
Macroeconomics
TRANSACTIONAL ENVIRONMENT
(e.g. competition)
CONTEXTUAL ENVIRONMENT
(e.g. external events)
International
Finance
International Commerce
Energy
Values
Demography
Legislation
Geo-Political Trends
Technology
EcologyCLIENTS
SUPPLIERS
COMPETITORS
REGULATORS
INVESTORS
EMPLOYEES
NGO’sLOBBIES
ACTOR
(e.g. you & your business)
Based on: Ramirez & Selsky, 2010, Business Planning for Turbulent Times
Ramirez et al., 2014, Oxford Scenarios Programme
27 Oct 2014
Competence, Competition and the Contextual Environment: Strategies and scenarios for rare earths miners and explorers
Slide 2 of 57

3. Strategic Management of Resources’ Companies, UWA Business School, Perth, Australia
Your business & the TURBULENT world
Actor
Macroeconomics
TRANSACTIONAL ENVIRONMENT
(e.g. competition)
CONTEXTUAL ENVIRONMENT
(e.g. external events)
International
Finance
International Commerce
Energy
Values
Demography
Legislation
Geo-Political Trends
Technology
EcologyCLIENTS
SUPPLIERS
COMPETITORS
REGULATORS
INVESTORS
EMPLOYEES
NGO’sLOBBIES
ACTOR
(e.g. you & your business)
Based on: Ramirez & Selsky, 2010, Business Planning for Turbulent Times
Ramirez et al., 2014, Oxford Scenarios Programme
27 Oct 2014
Competence, Competition and the Contextual Environment: Strategies and scenarios for rare earths miners and explorers
Slide 3 of 57

4. Strategic Management of Resources’ Companies, UWA Business School, Perth, Australia
Rare earths is a turbulent industry
0
20,000
40,000
60,000
80,000
100,000
120,000
140,000
160,000
180,000
200,000
Metal Pages La Oxide 99% min FOB
China (CN) / tonne
“Arrest in Disputed Seas Riles China
and Japan”
The New York Times, 19th Sept 2010
“Japan-China row escalates over
fishing boat collision”
The Guardian, 9th Sept 2010
Data: Metal Pages
Image:BBC
27 Oct 2014
Competence, Competition and the Contextual Environment: Strategies and scenarios for rare earths miners and explorers
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5. Strategic Management of Resources’ Companies, UWA Business School, Perth, Australia
Rare earths is a difficult industry
Frequency of delays at Australian rare
earth projects 1999-2012
0 2 4 6 8
Mt Weld
Dubbo
Nolans
Delay (years)
Length of delays at Australian rare
earth projects 1999-2012
0
2
4
6
8
10
12
14
16
Frequency
Source: Sykes & Trench (2012)
27 Oct 2014
Competence, Competition and the Contextual Environment: Strategies and scenarios for rare earths miners and explorers
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6. Strategic Management of Resources’ Companies, UWA Business School, Perth, Australia
Dealing with turbulence in rare earths
Your
environment
Transactional
environment
Contextual
environment
Your assets and
competencies
Your competitors
and resources
available
Things beyond
your control
Based on: Ramirez & Selsky, 2010, Business Planning for Turbulent Times
Ramirez et al., 2014, Oxford Scenarios Programme
27 Oct 2014
Competence, Competition and the Contextual Environment: Strategies and scenarios for rare earths miners and explorers
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7. Strategic Management of Resources’ Companies, UWA Business School, Perth, Australia
ASSET ORIENTATED
STRATEGY IN RARE EARTHS
Competence, competition & the contextual environment:
Strategies & scenarios for rare earths miners & explorers
27 Oct 2014
Competence, Competition and the Contextual Environment: Strategies and scenarios for rare earths miners and explorers
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8. Strategic Management of Resources’ Companies, UWA Business School, Perth, Australia
Mine costs 101
Cost of mining = Cost of moving rock
Ore throughput x REO grade x recovery
= REO production
(Ore throughput x cost per tonne of ore)
/ REO production
= Cost per tonne REO
27 Oct 2014
Competence, Competition and the Contextual Environment: Strategies and scenarios for rare earths miners and explorers
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9. Strategic Management of Resources’ Companies, UWA Business School, Perth, Australia
Cost examples in rare earths
Avalon Rare Metals – Thor Lake/Nechalacho
Pre-Feasibility Study (June 2010)
Deposit Resource: 175.93 Mt @ 1.43% TREO
Proposed Mine Type: Underground
Annual Ore Throughput: 720 Kt of ore
Annual REO Production: 10,000 tonnes
Proposed Mine Life: 18 years
Operating Cost (ore): US$ 240 / tonne ore
Operating Cost (REO): US$ 17,280 / tonne REO
Start-up Capital Cost: US$ 810 million
Rare Element Resources – Bear Lodge
Preliminary Economic Assessment (Sept 2010)
Deposit Resource: 17.5 Mt @ 3.46% TREO
Proposed Mine Type: Open pit
Annual Ore Throughput: 360 Kt of ore
Annual REO Production: 10,400 tonnes
Proposed Mine Life: 15 years
Operating Cost (ore): US$ 245 / tonne ore
Operating Cost (REO): US$ 8,480 / tonne REO
Start-up Capital Cost: US$ 87 million
($240 x 720,000 t = $172,800,000) / 10,000 t = $17,280
($245 x 360,000 t = $88,200,000) / 14,000 t = $8,480
Data: Avalon Rare Metals & Rare Element Resources
27 Oct 2014
Competence, Competition and the Contextual Environment: Strategies and scenarios for rare earths miners and explorers
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10. Strategic Management of Resources’ Companies, UWA Business School, Perth, Australia
Low costs: “grade is king”?
0.000
2.000
4.000
6.000
8.000
10.000
12.000
14.000
16.000
18.000
TotalRareEarthOxideGrade(%)
Advanced light rare earth deposits
Early stage light rare earth deposits
Most advanced rare earth
projects are the highest
grade – early mover
advantage
NB: Beware equating grades with
costs – orebody geometry,
homogeneity, host rock etc all have
an affect too (Kanakis, 2014)
Data: Technology Metals Research
27 Oct 2014
Competence, Competition and the Contextual Environment: Strategies and scenarios for rare earths miners and explorers
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11. Strategic Management of Resources’ Companies, UWA Business School, Perth, Australia
The problem with $/REO costs
Cummins Range Resource Composition
Metal
Sept 2011 oxide
price (US$/kg)
Proportion in
resource (%)
Value of
resource oxide
blend (US$/kg)
Lanthanum 110.00 27.3 30.03
Cerium 110.00 47.7 52.47
Praseodymium 248.50 4.8 11.93
Neodymium 309.17 15.2 46.99
Samarium 128.50 1.6 2.06
Europium 4,810.00 0.4 19.24
Gadolinium 192.50 1.0 1.93
Terbium 3,710.00 0.1 3.71
Dysprosium 2,290.00 0.5 11.45
Others - 1.4 -
Total 100.0 US$179.80/kg
100 150 200 250 300 350 400
Thor Lake
Dubbo
Lake Hoidas
Nolans
Kvanefjeld
Cummins Range
Mt Weld
Steenkampskraal
Bayan Obo
Bear Lodge
Mountain Pass
Resource oxide blend
(US$/kg)
Not all REO oxides are created equal !!!
© Greenfields Research Ltd; Data: Metal Pages
(prices), Technology Metals Research
Data: Anova Metals & Technology Metals Research
27 Oct 2014
Competence, Competition and the Contextual Environment: Strategies and scenarios for rare earths miners and explorers
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12. Strategic Management of Resources’ Companies, UWA Business School, Perth, Australia
Two forms of rare earths: light & heavy
“Heavy” REE
• Europium
• Gadolinium
• Terbium
• Dysprosium
• Holmium
• Erbium
• Thulium
• Ytterbium
• Lutetium
“Light” REE
• Lanthanum
• Cerium
• Praseodymium
• Neodymium
• Promethium
• Samarium
Other REE • Scandium • Yttrium
Sc
21
Y
39
La
57
Ce
58
Pr
59
Nd
60
Sm
62
Eu
63
Gd
64
Tb
65
Dy
66
Ho
67
Er
68
Tm
69
Yb
70
Lu
71
27 Oct 2014
Competence, Competition and the Contextual Environment: Strategies and scenarios for rare earths miners and explorers
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13. Strategic Management of Resources’ Companies, UWA Business School, Perth, Australia
Some rare earths are “critical”
“Non-Critical”
REE
• Scandium
• Lanthanum
• Cerium
• Praseodymium
• Promethium
• Samarium
• Gadolinium
• Holmium
• Erbium
• Thulium
• Ytterbium
• Lutetium
“Critical” REE
• Yttrium
• Neodymium
• Europium
• Terbium
• Dysprosium
Sc
21
Y
39
La
57
Ce
58
Pr
59
Nd
60
Sm
62
Eu
63
Gd
64
Tb
65
Dy
66
Ho
67
Er
68
Tm
69
Yb
70
Lu
71
27 Oct 2014
Competence, Competition and the Contextual Environment: Strategies and scenarios for rare earths miners and explorers
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14. Strategic Management of Resources’ Companies, UWA Business School, Perth, Australia
Rare earths have different end uses
“Catalyst” REE
• Lanthanum • Cerium
“Magnet” REE
• Praseodymium
• Neodymium
• Samarium
• Gadolinium
• Dysprosium
Sc
21
Y
39
La
57
Ce
58
Pr
59
Nd
60
Sm
62
Eu
63
Gd
64
Tb
65
Dy
66
Ho
67
Er
68
Tm
69
Yb
70
Lu
71
“Specialist” REE
• Scandium
• Promethium
• Holmium
• Erbium
• Thulium
• Ytterbium
• Lutetium
“Phosphor” REE
• Yttrium • Europium • Terbium
27 Oct 2014
Competence, Competition and the Contextual Environment: Strategies and scenarios for rare earths miners and explorers
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15. Strategic Management of Resources’ Companies, UWA Business School, Perth, Australia
Targeting higher quality rare earths
Avalon Rare Metals – Thor Lake/Nechalacho
Pre-Feasibility Study (June 2010)
Deposit Resource: 175.93 Mt @ 1.43% TREO
Proposed Mine Type: Underground
Annual Ore Throughput: 720 Kt of ore
Annual REO Production: 10,000 tonnes
Proposed Mine Life: 18 years
Operating Cost (ore): US$ 240 / tonne ore
Operating Cost (REO): US$ 17,280 / tonne REO
Basket value (REO): US$ 353,190 / tonne REO
Profit Margin (REO): US$ 335,910 / tonne REO
Start-up Capital Cost: US$ 810 million
Rare Element Resources – Bear Lodge
Preliminary Economic Assessment (Sept 2010)
Deposit Resource: 17.5 Mt @ 3.46% TREO
Proposed Mine Type: Open pit
Annual Ore Throughput: 360 Kt of ore
Annual REO Production: 10,400 tonnes
Proposed Mine Life: 15 years
Operating Cost (ore): US$ 245 / tonne ore
Operating Cost (REO): US$ 8,480 / tonne REO
Basket value (REO): US$ 147,920 / tonne REO
Profit Margin (REO): US$ 139,440 / tonne REO
Start-up Capital Cost: US$ 87 million
Greater margin
© Greenfields Research Ltd; Source: Avalon Rare
Metals, Rare Element Resources
Data: Avalon Rare Metals & Rare Element Resources
27 Oct 2014
Competence, Competition and the Contextual Environment: Strategies and scenarios for rare earths miners and explorers
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16. Strategic Management of Resources’ Companies, UWA Business School, Perth, Australia
High grade vs high quality mining
20.00
30.00
40.00
50.00
60.00
70.00
80.00
90.00
0.00 0.50 1.00 1.50 2.00 2.50 3.00 3.50 4.00 4.50 5.00
TREOBasketValue(US$/kg)
TREO Ore Value (US$/kg)
High grade ‘low cost’
light rare earth
projects
Heavy rare earth
‘high quality’ rare
earth projects
Data: Technology Metals Research
27 Oct 2014
Competence, Competition and the Contextual Environment: Strategies and scenarios for rare earths miners and explorers
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17. Strategic Management of Resources’ Companies, UWA Business School, Perth, Australia
The BCG “growth-share matrix”
Based on: Boston Consulting Group
MarketGrowth(targetingnewmarkets)
Market Share (beating the competition)
QUESTIONS
Also known as “problem
children”. High growth
sector but large capital
investment required.
STARS
Leading
assets/products
dominating fast
growing markets, still
requiring investment.
DOGS/PETS
Not profitable. Usually
“pet projects” that
provide a non-financial
benefit i.e. synergies,
labour retention etc
CASH COWS
High market share in
slow growth industry –
“milked” to fund other
investments
27 Oct 2014
Competence, Competition and the Contextual Environment: Strategies and scenarios for rare earths miners and explorers
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18. Strategic Management of Resources’ Companies, UWA Business School, Perth, Australia
The BCG Box for mine projects
Based on: Boston Consulting Group
MarketGrowth(targetingnewmarkets)
Market Share (beating the competition)
PROBLEM CHILD
Challenging projects with
scale, that could be stars
in a high growth industry,
assuming some
structural changes.
STARS
World class assets with
high grades and large
scale. Will dominate
future sector and be
hugely profitable.
PET PROJECTS
Not profitable. Usually
“pet projects” that
provide a non-financial
benefit i.e. synergies,
labour retention etc
CASH COWS
High grade, small scale
projects, which are quickly
cash generative, allowing
access to an industry and
providing cash for
investment elsewhere.
27 Oct 2014
Competence, Competition and the Contextual Environment: Strategies and scenarios for rare earths miners and explorers
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19. Strategic Management of Resources’ Companies, UWA Business School, Perth, Australia
Asset orientated rare earth strategies
20.00
30.00
40.00
50.00
60.00
70.00
80.00
90.00
0.00 0.50 1.00 1.50 2.00 2.50 3.00 3.50 4.00 4.50 5.00
TREOBasketValue(US$/kg)
TREO Ore Value (US$/kg) Data: Technology Metals Research
Based on: Boston Consulting Group
PROBLEM
CHILD
STARS
PET
PROJECTS
CASH COWS
27 Oct 2014
Competence, Competition and the Contextual Environment: Strategies and scenarios for rare earths miners and explorers
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20. Strategic Management of Resources’ Companies, UWA Business School, Perth, Australia
Strategy 1: The Cash Cow
Advantages
• Assets very competitive
• Most already very advanced
• Geology and technology already
known
• First mover advantage in geology
as best assets picked first
Disadvantages
• Financial markets currently very
tricky
• First mover disadvantage – all
R&D had to be done “in-house”
• Currently not a viable strategy for
non-first movers
Gain market share via
a low cost, high grade
asset
Examples: Molycorp, Lynas
Based on: Boston Consulting Group
27 Oct 2014
Competence, Competition and the Contextual Environment: Strategies and scenarios for rare earths miners and explorers
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21. Strategic Management of Resources’ Companies, UWA Business School, Perth, Australia
Strategy 2: The “Heavy” Problem Child
Advantages
• Attractive to the equity market
• Seems to be a high growth market
• No major incumbent competitors
Disadvantages
• Projects currently low grade
• Process routes unknown – R&D
intensive
• Capital costs will be high
• Development timeframe very
lengthy
• Debt financing will be very tricky
Discover and develop
a “heavy rare earth
deposit”
Examples: Northern Minerals, Hastings
Rare Metals, Stans Energy, Tasman
Metals, Quest Rare Minerals
Based on: Boston Consulting Group
27 Oct 2014
Competence, Competition and the Contextual Environment: Strategies and scenarios for rare earths miners and explorers
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22. Strategic Management of Resources’ Companies, UWA Business School, Perth, Australia
SITUATION ORIENTATED
STRATEGY IN RARE EARTHS
Competence, competition & the contextual environment:
Strategies & scenarios for rare earths miners & explorers
27 Oct 2014
Competence, Competition and the Contextual Environment: Strategies and scenarios for rare earths miners and explorers
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23. Strategic Management of Resources’ Companies, UWA Business School, Perth, Australia
Targeting niche markets is difficult
Likely to be > 10 years for a new material
Construction
Finance
PFS
Off-take
Permitting
Metallurgy
(Separation)
Metallurgy
(Extraction)
BFS
Metallurgy
(Benification)
Scoping
Resources
Exploration
Likely to be > 10 years for a new mine
Based on: Boston Consulting Group
27 Oct 2014
Competence, Competition and the Contextual Environment: Strategies and scenarios for rare earths miners and explorers
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24. Strategic Management of Resources’ Companies, UWA Business School, Perth, Australia
Recovering low grades problematic
RARE EARTHS 101
Resources x reserve recovery x mining recovery
x grade x processing recovery x cracking
recovery (x separation recovery) = LOM
production
90% recoveries: 90% x 90% x 90% x 90% x 90% = 59%
75% recoveries: 75% x 75% x 75% x 75% x 75% = 24%
50% recoveries: 50% x 50% x 50% x 50% x 50% = 3%
27 Oct 2014
Competence, Competition and the Contextual Environment: Strategies and scenarios for rare earths miners and explorers
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25. Strategic Management of Resources’ Companies, UWA Business School, Perth, Australia
Making low grades saleable is tricky
0
5
10
15
20
25
30
0.00 1.00 2.00 3.00 4.00 5.00 6.00 7.00 8.00 9.00 10.00
ConcentratingFactor(multiple)
Ore Grade (%)
96.7%
93.3%
90.0%
86.7%
83.3%
80.0% 76.7% 73.3% 70.0% 66.7%
Percentages indicate equivalent mass
loss to take ore to a 30% concentrate
High grade
light rare earth
projects
Low grade light
rare earth
projects
Heavy rare
earth projects
27 Oct 2014
Competence, Competition and the Contextual Environment: Strategies and scenarios for rare earths miners and explorers
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26. Strategic Management of Resources’ Companies, UWA Business School, Perth, Australia
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
LYNAS: Mt Weld (Forecast 12 years from purchase to production)
Project
Farm In
Resource
Drilling
Scoping Study
Feasibility
Study
Peer Review
Project
Funding
GFC Refinancing Construction PRODUCTION >>>
ALKANE: Dubbo (Forecast 15 years from purchase to production)
Project
Purchase
Feasibility Study Financing Definitive Feasibility Study GFC
Definitive Feasibility
Study
Expanded
FS
Financing /
Construction
PRODUCTION >>>
ARAFURA: Nolans (Forecast 12 years from purchase to production)
Project
Purchase
Scoping Study
Prefeasibility
Study
Feasibility
Study
GFC Feasibility Study
Expanded
Feasibility
Study
Financing /
Construction
PRODUCTION
>>>
Rare earths mines difficult to develop
Second mover rare earth projects
Shorter development time, and lower development cost
Maturing new market outside of China
Targeting 5-10 years from purchase to production?
COMPARISON OF AUSTRALIAN RARE EARTH PROJECTS
First mover rare earth projects
Delays due to technical problems at feasibility stage
Faced funding problems throughout due to lack of investor awareness
Typical development timeframe will be 12-15 years
Sources: Lynas Corporation; Alkane Resources; Arafura Resources
27 Oct 2014
Competence, Competition and the Contextual Environment: Strategies and scenarios for rare earths miners and explorers
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27. Strategic Management of Resources’ Companies, UWA Business School, Perth, Australia
Where are the “fast followers”?
0.00
2.00
4.00
6.00
8.00
10.00
0.0 200.0 400.0 600.0 800.0 1000.0 1200.0
TREOGrade(%)
Ore (Mt)
Major early stage light
rare earth projects
Major late stage light
rare earth projects
Heavy rare
earth projects
Early stage light
rare earth projects
27 Oct 2014
Competence, Competition and the Contextual Environment: Strategies and scenarios for rare earths miners and explorers
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28. Strategic Management of Resources’ Companies, UWA Business School, Perth, Australia
A situation based rare earths strategy
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2.00
4.00
6.00
8.00
10.00
1.0 10.0 100.0 1000.0
TREOGrade(%)
Ore (Mt)
PROBLEM CHILDREN
CASH COWS
PET PROJECTS
STARS
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Competence, Competition and the Contextual Environment: Strategies and scenarios for rare earths miners and explorers
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29. Strategic Management of Resources’ Companies, UWA Business School, Perth, Australia
Strategy 3: The “Light” Problem Child
Advantages
• Metallurgy / processing better known
• Possibilities to leverage scale
• Second mover advantage in
development timeframe
• First movers success may make
these projects more attractive for
debt financing
Disadvantages
• Unattractive to the equity market
• Capital costs still likely to be high
• Light rare earths market has less
attractive fundamentals
Develop a large, good
grade light rare earth
deposit
Examples: Rare Element Resources,
Arafura Resources, Peak Resources,
Frontier Rare Earths
Based on: Boston Consulting Group
27 Oct 2014
Competence, Competition and the Contextual Environment: Strategies and scenarios for rare earths miners and explorers
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30. Strategic Management of Resources’ Companies, UWA Business School, Perth, Australia
DISRUPTIVE STRATEGY IN
RARE EARTHS
Competence, competition & the contextual environment:
Strategies & scenarios for rare earths miners & explorers
27 Oct 2014
Competence, Competition and the Contextual Environment: Strategies and scenarios for rare earths miners and explorers
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31. Strategic Management of Resources’ Companies, UWA Business School, Perth, Australia
Where are all the stars?
0.00
2.00
4.00
6.00
8.00
10.00
1.0 10.0 100.0 1000.0
TREOGrade(%)
Ore (Mt)
PROBLEM CHILDREN
CASH COWS
PET PROJECTS
STARS
27 Oct 2014
Competence, Competition and the Contextual Environment: Strategies and scenarios for rare earths miners and explorers
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32. Strategic Management of Resources’ Companies, UWA Business School, Perth, Australia
Where are all the stars?
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40.00
50.00
60.00
70.00
80.00
90.00
0.00 0.50 1.00 1.50 2.00 2.50 3.00 3.50 4.00 4.50 5.00
TREOBasketValue(US$/kg)
TREO Ore Value (US$/kg) Data: Technology Metals Research
Based on: Boston Consulting Group
PROBLEM
CHILD
STARS
PET
PROJECTS
CASH COWS
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Competence, Competition and the Contextual Environment: Strategies and scenarios for rare earths miners and explorers
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33. Strategic Management of Resources’ Companies, UWA Business School, Perth, Australia
Strategy 4: Aiming for the Stars
Advantages
• Potential to a new Bayan Obo or
Ionic Clay?
• Lower short term cash burn
• First movers may provide an exit
strategy
• Examples of exploration success
in rare earths exist
Disadvantages
• Won’t provide cash flow
• May miss the best years of the
market
• Exploration generally unattractive
for equity investors currently
Find a world class
rare earth deposit
Examples: Tantalus Rare Metals, TUC
Resources, Namibia Rare Earths, Vale
Based on: Boston Consulting Group
27 Oct 2014
Competence, Competition and the Contextual Environment: Strategies and scenarios for rare earths miners and explorers
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34. Strategic Management of Resources’ Companies, UWA Business School, Perth, Australia
UNCERTAINTY & RISK BASED
STRATEGY IN RARE EARTHS
Competence, competition & the contextual environment:
Strategies & scenarios for rare earths miners & explorers
27 Oct 2014
Competence, Competition and the Contextual Environment: Strategies and scenarios for rare earths miners and explorers
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35. Strategic Management of Resources’ Companies, UWA Business School, Perth, Australia
Uncertainty kills projects
Expected
Monetary
Value
(EMV)
$ Net Present
Value (NPV)
$ Costs
Probability of
Success (Ps)
Probability of
Failure (Pf)
EMV = ( Ps x [ NPV – Cost ] ) – ( Pf x Cost )
Based on: Centre for Exploration Targeting
27 Oct 2014
Competence, Competition and the Contextual Environment: Strategies and scenarios for rare earths miners and explorers
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36. Strategic Management of Resources’ Companies, UWA Business School, Perth, Australia
Uncertainty in rare earths development
Producers
(2)
Development
(2)
Feasibility (2)
Prefeasibility (10)
Advanced Exploration (43)
Early Exploration (164)26%
23%
20%
100%
100%
26%
6%
1%
1%
1%
Data: Infomine
27 Oct 2014
Competence, Competition and the Contextual Environment: Strategies and scenarios for rare earths miners and explorers
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37. Strategic Management of Resources’ Companies, UWA Business School, Perth, Australia
Rare earth value accretion is concave
Exploration Scoping Feasibility Development Mining
ValueRecognition
Convex minerals:
• Gold
• Tin
• Copper
• Nickel sulphide
Concave minerals:
• Lead & Zinc
• Nickel laterite
• Vanadium
• Rare earths
Based on: Trench & Packey (2012)
27 Oct 2014
Competence, Competition and the Contextual Environment: Strategies and scenarios for rare earths miners and explorers
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38. Strategic Management of Resources’ Companies, UWA Business School, Perth, Australia
Value accretion at Lynas was ‘concave’
-15.00
-12.50
-10.00
-7.50
-5.00
-2.50
0.00
2.50
5.00
7.50
10.00
12.50
15.00
Apr01
Jul01
Oct01
Jan02
Apr02
Jul02
Oct02
Jan03
Apr03
Jul03
Oct03
Jan04
Apr04
Jul04
Oct04
Jan05
Apr05
Jul05
Oct05
Jan06
Apr06
Jul06
Oct06
Jan07
Apr07
Jul07
Oct07
Jan08
Apr08
Jul08
Oct08
Jan09
Apr09
Jul09
Oct09
Jan10
Apr10
Jul10
Oct10
Jan11
Apr11
Jul11
Oct11
Lynas vs ASX vs Cerium
Rare earth
resource
announced
HofA with
Gansu Rare
Earths for
downstream
plant
Purchase
of Mt Weld
completed
Pilot plant
work
completed
successfully
Scoping
Study
completed
Feasibility
Study
completed
Downstream
agreement
with Rhodia
Downstream
plant moved
to Malaysia
Mining approved
by WA govt &
mine contract
awarded
GFC:
financing
problems
China Non-
Ferrous
deal
announced
More permit
approvals
China Non-
Ferrous deal
cancelled
Rare earth
prices soar
– not
reflected in
share price
Off-take contracts
awarded
Permit
approvals
in Malaysia
Based on: Sykes & Trench (2012)
27 Oct 2014
Competence, Competition and the Contextual Environment: Strategies and scenarios for rare earths miners and explorers
Slide 38 of 57

39. Strategic Management of Resources’ Companies, UWA Business School, Perth, Australia
Uncertainty kills projects
Expected
Monetary
Value
(EMV)
$ Net Present
Value (NPV)
$ Costs
Probability of
Success (Ps)
Probability of
Failure (Pf)
EMV = ( 0.2 x [ 500 – 5 ] ) – ( 0.8 x 5 ) = 95
Based on: Centre for Exploration Targeting
20%
80%
$500 million
$5 million
$99
million
$4 million
Should I proceed with the Feasibility Study?
NB: The numbers are fake,
but realistic for a rare earths
project at the decision point
for undertaking a Feasibility
Study.
YES: EMV is positive, thus you should proceed, but the ‘uncertainty ‘ is currently costing
around $400 million. Strategic focus should be on increasing the chance of success,
rather than optimising the final project.
27 Oct 2014
Competence, Competition and the Contextual Environment: Strategies and scenarios for rare earths miners and explorers
Slide 39 of 57

40. Strategic Management of Resources’ Companies, UWA Business School, Perth, Australia
Rare earths as a by-product?
0.000
2.000
4.000
6.000
8.000
10.000
12.000
14.000
16.000
18.000
TotalRareEarthOxideGrade(%)
By-Product TREO Equivalent Grade
Total Rare Earth Oxide (TREO) Grade
Data: Technology Metals Research
27 Oct 2014
Competence, Competition and the Contextual Environment: Strategies and scenarios for rare earths miners and explorers
Slide 40 of 57

41. Strategic Management of Resources’ Companies, UWA Business School, Perth, Australia
Making concave commodities convex
Exploration Scoping Feasibility Development Mining
ValueRecognition
Convex minerals:
• Gold
• Tin
• Copper
• Nickel sulphide
Concave minerals:
• Lead & Zinc
• Nickel laterite
• Vanadium
• Rare earths
Based on: Trench & Packey (2012)
27 Oct 2014
Competence, Competition and the Contextual Environment: Strategies and scenarios for rare earths miners and explorers
Slide 41 of 57

42. Strategic Management of Resources’ Companies, UWA Business School, Perth, Australia
Strategy 5: the by-product cash cow
Advantages
• Primary commodity provides hedge
against rare earth uncertainty
• Potentially easier to finance
• Potential earlier cash flow
• Rare earths extraction remains an
“option”
Disadvantages
• Metallurgy likely to be complicated
• Won’t work as a co-product or rare
earth “as a by-product” operation
• Difficult to achieve scale
• May be unattractive to equity markets
Extract rare earths as a
by-product
Examples: Greenland Minerals, Pele
Mountain Resources, Alkane Resources,
CBMM
Based on: Boston Consulting Group
27 Oct 2014
Competence, Competition and the Contextual Environment: Strategies and scenarios for rare earths miners and explorers
Slide 42 of 57

43. Strategic Management of Resources’ Companies, UWA Business School, Perth, Australia
Neutral risk to preferred risk
Typical risk profile
of an investor or a
firm: potential
losses seem much
worse than the
potential gain as
you approach
“ruin”
Source: Maxwell & Guj, 2013, AusIMM Mineral Economics Monograph
27 Oct 2014
Competence, Competition and the Contextual Environment: Strategies and scenarios for rare earths miners and explorers
Slide 43 of 57

44. Strategic Management of Resources’ Companies, UWA Business School, Perth, Australia
Life cycle of a mine project
Concept Exploration Discovery Economics Development Mining
Value
Time
EXPLORATION MINING
High Risk –
High Potential
Lowered risk Full Value
Speculation Orphan Period
Speculators
Leave
Institutional
Investment
Based on: Marketoracle
27 Oct 2014
Competence, Competition and the Contextual Environment: Strategies and scenarios for rare earths miners and explorers
Slide 44 of 57

45. Strategic Management of Resources’ Companies, UWA Business School, Perth, Australia
‘Convex’ risk progression:
Project vs Corporate
Project/Technical risk versus Corporate Risk in the Minerals Sector
Project Risk
Corporate Risk
Increasingrisk
Exploration Feasibility Development Production De-commissioning
A high chance of
project related
problems at this
stage, but little at
stake so not of
concern to the overall
company
A lower chance of
project related
problems at this
stage, but if they do
occur they could be
life-threatening to the
company
Based on: Trench & Packey (2012)
27 Oct 2014
Competence, Competition and the Contextual Environment: Strategies and scenarios for rare earths miners and explorers
Slide 45 of 57

46. Strategic Management of Resources’ Companies, UWA Business School, Perth, Australia
Capital costs: What is affordable?
Kvanefjeld
(Greenland Minerals & Energy)
Mt Weld
(Lynas)
Mountain Pass
(Molycorp)
Zandkopsdrift
(Frontier Rare Earths)
Nolans Bore
(Arafura Resources)
Dubbo
(Alkane Resources)
Strange Lake
(Quest Rare Minerals)
Eco Ridge
(Pele Mountain Resources)
Hastings
(Hastings Rare Metals)
Bear Lodge
(Rare Element Resources)
Sarfartoq
(Hudson Resources)
Thor Lake
(Avalon Rare Metals)
Kipawa-Zeus
(Matamec Explorations)
Market Capitalisation
(equiv. US$10 million)
Project Capital Cost
(equiv. US$100 million)
Data: Company websites & Google Finance
NB: Values are for
2012, not current!
27 Oct 2014
Competence, Competition and the Contextual Environment: Strategies and scenarios for rare earths miners and explorers
Slide 46 of 57

47. Strategic Management of Resources’ Companies, UWA Business School, Perth, Australia
Make the ‘concave’ problem a ‘convex’
solution
Increasingrisk
Exploration Feasibility Development Production De-commissioning
Source: Trench & Sykes 2013
‘Concave’ Project Risk
‘Convex’
Project
Risk
Corporate Risk
Solve concave problems early:
• Experienced management?
• Technological (not geological) focus?
• Inform the investing public?
27 Oct 2014
Competence, Competition and the Contextual Environment: Strategies and scenarios for rare earths miners and explorers
Slide 47 of 57

48. Strategic Management of Resources’ Companies, UWA Business School, Perth, Australia
DELAYS risk peak
REDUCES
risk
Input of extra capital:
• Strategic investor?
• Take advantage of
fashions?
Exploration Development Production
Extra funding delays risk accrual
Based on: Trench & Sykes (2013)
27 Oct 2014
Competence, Competition and the Contextual Environment: Strategies and scenarios for rare earths miners and explorers
Slide 48 of 57

49. Strategic Management of Resources’ Companies, UWA Business School, Perth, Australia
Convex to concave sequencing
Value ‘Staircase’ becomes:
• ‘Convex’ project first i.e. gold
then rare earths
• Raise money from a fashionable
commodity
Based on: Trench & Sykes (2013)
27 Oct 2014
Competence, Competition and the Contextual Environment: Strategies and scenarios for rare earths miners and explorers
Slide 49 of 57

50. Strategic Management of Resources’ Companies, UWA Business School, Perth, Australia
Strategy 6: Pet Project (The “Cash Dog”)
Advantages
• Quick to implement, whilst market
still attractive
• Cash generative
• Simple & cost effective
• Lower risk
Disadvantages
• Not a long term solution
• May be more trouble than it’s worth
• Not many obvious opportunities
• Rare earths not conducive to “quick
& easy” development
• May not be attractive to equity
markets
Do something quick and
easy, then move on
Examples: India Rare Earths? Tin
smelter slags?
Based on: Boston Consulting Group
27 Oct 2014
Competence, Competition and the Contextual Environment: Strategies and scenarios for rare earths miners and explorers
Slide 50 of 57

51. Strategic Management of Resources’ Companies, UWA Business School, Perth, Australia
Strategy 7: do something else!
Advantages
• Hedge against rare earth market risk
• Potential for faster development &
cash flow
• Maybe cheaper / easier / lower risk
• Wider range of opportunities available
Disadvantages
• May be unattractive to “rare earth”
focused investors
• Skills may not transfer as planned
• Loss of focus
• Spreading resources too thinly
Get involved in a
different commodity
Examples: Alkane Resources, Kimberley
Rare Earths, Avalon Rare Metals
Based on: Boston Consulting Group
27 Oct 2014
Competence, Competition and the Contextual Environment: Strategies and scenarios for rare earths miners and explorers
Slide 51 of 57

52. Strategic Management of Resources’ Companies, UWA Business School, Perth, Australia
STRATEGY IN CONTEXT FOR
RARE EARTHS
Competence, competition & the contextual environment:
Strategies & scenarios for rare earths miners & explorers
27 Oct 2014
Competence, Competition and the Contextual Environment: Strategies and scenarios for rare earths miners and explorers
Slide 52 of 57

53. Strategic Management of Resources’ Companies, UWA Business School, Perth, Australia
Rare earths growth-share matrix
Market Share (beating the competition)
MarketGrowth(addingtothecompetition)
6) CASH DOG 1) CASH COW
4) FIND A STAR!
2) HEAVY
PROBLEM CHILD
3) LIGHT
PROBLEM CHILD
5) BY-PRODUCT
CASH COW
7) DO
SOMETHING
ELSE!
Based on: Boston Consulting Group
27 Oct 2014
Competence, Competition and the Contextual Environment: Strategies and scenarios for rare earths miners and explorers
Slide 53 of 57

54. Strategic Management of Resources’ Companies, UWA Business School, Perth, Australia
Rare earths scenarios matrix
Increasing shortage of light rare earths
Increasingshortageofheavyrareearths
SURPLUS
Negative for all rest of
world (ROW) rare earth
mine developers
Positive for all ROW
rare earth consumers
LIGHT
SHORTAGE
Positive for “light” rare
earth mine projects.
Negative for “heavy” rare
earth mine projects.
SHORTAGE
Positive for all rest of
world (ROW) rare earth
mine developers
Negative for all ROW rare
earth consumers
HEAVY
SHORTAGE
Positive for “heavy” rare
earth mine projects.
Negative for “light” rare
earth mine projects.
Based on: Boston Consulting Group;
Oxford Scenarios Programme
27 Oct 2014
Competence, Competition and the Contextual Environment: Strategies and scenarios for rare earths miners and explorers
Slide 54 of 57

55. Strategic Management of Resources’ Companies, UWA Business School, Perth, Australia
The rare earth project scenarios matrix
CASH COW
BY-
PRODUCT
CASH COW
HEAVY
PROBLEM
CHILD
LIGHT
PROBLEM
CHILD
FIND A
STAR
CASH DOG
DO
SOMETHING
ELSE!
SHORTAGE
      
HEAVY
SHORTAGE       
LIGHT
SHORTAGE       
SURPLUS
      
Based on: Oxford Scenarios Programme
27 Oct 2014
Competence, Competition and the Contextual Environment: Strategies and scenarios for rare earths miners and explorers
Slide 55 of 57

56. Strategic Management of Resources’ Companies, UWA Business School, Perth, Australia
Coursework: putting strategy into action
Now implement the strategy-
scenario grid:
• Assign probabilities to each of the
scenarios
• Define the parameters of the
target asset for each scenario
• Determine where your assets fit
into these strategies
• Determine the entrance &
implementation cost of each
strategy
• Select a blend of strategies that
cover as many scenarios as
possible for the resources & time
available
27 Oct 2014
Competence, Competition and the Contextual Environment: Strategies and scenarios for rare earths miners and explorers
Slide 56 of 57

57. THANK YOU
For more information:
Centre for Exploration Targeting: www.cet.edu.au
Greenfields Research: www.greenfieldsresearch.com
Contact information:
John P. Sykes: johnpaul.sykes@postgrad.curtin.edu.au