002 - JCamus Presentation - 2010 CRU Copper Conference

Value Creation in Mining – More Upstream
or More Downstream?
9th World Copper Conference, 6-8 April, Santiago, Chile
Juan Camus
Industry Fellow
The University of Queensland
Australia
Presentation outline
Purpose 1”
Model and methodology 6”
Validating the proposition 6”
Illustration 5”
Concluding remarks 2”
Total ≈ 20”
Purpose
Validate the proposition that value creation in mining
is mainly associated with the capacity of companies
to manage their mineral reserve growth
This challenges the deep-rooted notion that value is

primarily driven by production and costs
For a layperson, a mineral reserve is the economic,

mineable part of a mineral resource, which indicates
the company’s future production stream
Model and methodology
To analyse how firms can create value and gain
competitive advantage Porter(1) proposes modelling
the business as a chain of value-creating activities
He suggests grouping these under two headings:

– Primary activities; which are directly concerned with the
company’s outputs, and
– Support activities; which provide the common services

and resources for the business to operate
(1) Porter, Michael (1985) Competitive Advantage: Creating and Sustaining Superior Performance, Simon & Schuster, New York
Primary activities in mining
Upstream, resource-related activities Downstream, industrial-type activities
Planning & Engineering & Operations & Sales &

Exploration
Evaluation Construction Logistics Marketing
Mineral Resource Project Operations Marketing

Management Management Management Management
Find mineral Conceptualise their Design and build the Manage the Commercialise the
resources exploitation productive capacity operations company’s products
Mineral discovery Business/Mine Plan Project delivery Production delivery Revenue realisation
Setting the focus
Splitting mining in this way has become widespread

after Porter’s seminal contribution in the mid 1980s
But measuring the value contribution throughout the

value chain to then set the course and organise the
mining business accordingly still remain a challenge
This is because mineral resources and their market

value is usually overlooked at the time of measuring
financial returns and valuing mining companies
A couple of illustrative remarks in this respect…

Standard & Poor’s white paper
One of the world’s largest providers of investment

ratings and research data, commented about this
problem in a White Paper: Mining Industry-Specific
Data, dated on Feb 2008:
Analysing a mining company is a bit different than analysing
most companies… Mining companies are valued not
according to earnings so much as assets, and so factors
such as material reserves and production must be taken into
account.
Stern Stewart’s corporate website
When the consultancy that pioneered the Economic

Value Added concept presents its history, it says:
In the 1980s and 1990s our work was primarily with manufacturing,
retail, and service companies. However, two types of organizations
provided challenges: financial institutions and natural resource
firms, including oil & gas, mining, and forest products…
In mining firms, we discovered that the greatest value in the firm

was the reserves in the ground that only trickled slowly through the
profit and loss statement over a long period of time… Because of
the trickle process, their focus was necessarily on short-term
results, which is certainly not in the interest of shareholders who
are interested in maximizing the long-term value of the firm.
Validating the proposition
For the lack of a direct method, the proposition is
validated indirectly by analysing public information
on company technical and financial performance
The idea is to relate variations in company’s share

price plus dividends against variations in company’s
mineral reserves plus production over a period
The former variable is known as total shareholder

return (TSR) whereas the latter is defined as total
reserves increment (TRI)
Total Shareholder Return, TSR
This is the most accepted benchmark for assessing

a company’s overall financial performance
Where:
Pe: Share price at end of period
Pb: Share price at beginning of period
Div: Dividends paid in the period
Total Reserves Increment, TRI
This indicator mirrors TSR and accounts for the

increase in reserves plus production over time
Where:
Re: Recoverable reserves at end of period
Rb: Recoverable reserves at beginning of period
Prod: Production over the period
TSR and TRI in the period 2000-2008
TSR
Kinross
Inmet
10.00
Newcrest
Goldcorp
Vale
Antofagasta
Average TSR = 4.13
BHP
Gold Fields Freeport
Newmont Barrick
1.00
Anglo American
Rio Tinto
Average TRI = 3.43

Teck
0.10
0.10 1.00 10.00 TRI
Illustration: Morro do Ouro (Paracatú) mine
BRAZIL
STATE OF MINAS GERAIS
Brasilia
Paracatu
SOUTH AMERICA
Minas State
Rio de Janeiro
Morro do Ouro case (cont’)
Rio Tinto acquired a controlling stake in this deposit in 1984;

at the time, exploration works identified a mineral reserve of
100 Mt at 0.6 g/t Au (1.9 Moz contained gold)
Mining initiated in 1988 at 6.2 Mt/a (115,000 oz Au); throughput
expanded gradually up to 20 Mt/a (230,000 oz Au) in 2000
In 2004, Rio Tinto completed a FS to increase throughput
from 20 to 30 Mt/a; instead of executing this expansion Rio
Tinto sold its 51% stake to its partner Kinross, which gained
full ownership in the mine, at the end of 2004
By then, using the JORC code, Rio Tinto reported reserves
were 361 Mt at 0.42 g/t Au (4.9 Moz contained gold)
Kinross switched to Canada’s CIM Standards and in the
2004 Annual Report, reserves were 604 Mt at 0.44 g/t Au
(8.5 Moz contained gold)
In 2005, Kinross radically changed the business concept:
Drilled 267 DDH (48,660 m), the single largest in-fill drilling campaign in the mine
history
Reviewed the 2004 Feasibility Study that increased throughput from 20 to 30 Mt/a
Challenged many criteria used by Rio Tinto for resource modeling and estimation
This enabled Kinross to increase reserves to 1,187 Mt at

0.40 g/t Au (15 Moz contained gold), as per Kinross 2005
Annual Report
Kinross’ review of FS concluded it would be better to build a

new 40-Mt/a plant to reach a total plant capacity of 60 Mt/a
This project now in operation boosted gold production from
188,000 oz in 2008 to around 354,000 oz in 2009, targeting
over 400,000 for 2010
The company is also considering options to further increase
throughput and production at Paracatu
With hindsight, the US$260 million received by Rio Tinto for
its stake in Paracatu could have been much higher had the
company put more attention to its potential mineral reserves
Concluding remarks
Results confirms that the most effective levers for
value creation in mining are located upstream
The widespread perception, however, is that value
in mining is associated with downstream activities,
production and costs being the focus of attention
In fact, innovation in mining typically focus on hard
technology that seeks to increase productivity and
reduce operating costs
Cont’
This type of innovation hardly helps mining firms to

encourage mineral resources discoveries and their
rapid transformation into mineral reserves
This goal is best served by soft technology aimed at
increasing overall performance – e.g. organisational
issues such as structures, processes, and systems
This is indeed the kind of innovations that enabled
Wal-Mart, Toyota, and Dell, for instance, to develop
and become leaders in their respective industries
Thank you!

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Value Creation in Mining – More Upstream

Model and methodology 6”

Validating the proposition 6”

This challenges the deep-rooted notion that value is

For a layperson, a mineral reserve is the economic,

He suggests grouping these under two headings:

– Support activities; which provide the common services

Upstream, resource-related activities Downstream, industrial-type activities

Planning & Engineering & Operations & Sales &

Mineral Resource Project Operations Marketing

Splitting mining in this way has become widespread

But measuring the value contribution throughout the

This is because mineral resources and their market

A couple of illustrative remarks in this respect…

One of the world’s largest providers of investment

When the consultancy that pioneered the Economic

In mining firms, we discovered that the greatest value in the firm

The idea is to relate variations in company’s share

The former variable is known as total shareholder

This is the most accepted benchmark for assessing

This indicator mirrors TSR and accounts for the

Average TRI = 3.43

STATE OF MINAS GERAIS

Rio Tinto acquired a controlling stake in this deposit in 1984;

This enabled Kinross to increase reserves to 1,187 Mt at

Kinross’ review of FS concluded it would be better to build a

This type of innovation hardly helps mining firms to

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