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Juan Camus1

This paper challenges the deep-rooted notion that value creation in mining is all about
production and costs. Instead, it puts forward that it mainly refers to the capacity of
companies to continually increase the prospective mineral resources and transform them into
economically mineable mineral reserves in the most effective and efficient way.

To support this proposition, this study seeks to demonstrate that mining companies that excel
in total shareholder return (TSR) over an entire economic cycle are those that also excel in
expanding their reserves and production, here referred to as total reserves increment (TRI).
The relationship between both variables is simple and revealing – company share price is to
mineral reserves as dividends are to production. This match gives economic sense to the term
‘deposit’, which is used in mining parlance to refer to an ore body.
Results obtained from a diverse group of 14 mining companies over the period 2000-2009
evince the previous hypothesis. There are two doubtful cases, but as the paper suggests these
are transitional companies in the process of converting promising mineral resources into
mineral reserves, which the market anticipates.

To understand why some companies excel in creating value, Jim Collins (2001) and a group
of postgraduate business students engaged in a comprehensive research project. This took
them nearly 5 years to complete. They examined 1,435 US companies for over 40 years,
seeking those that made significant improvements in their financial performance over time.
The distinctive pattern sought was:

"Fifteen-year cumulative stock returns at or below the general stock market,

punctuated by a transition point, then cumulative returns at least three times the market
over the next fifteen years."

The search identified 11 outperforming companies, all in different industries, that were called
the “good to great” companies. To contrast these companies with similar peers within the
same industry, the search also selected a group of comparison companies that failed to make
the leap from good to great. Then Collins sets out to examine the transition point. What
distinguishing features did the good-to-great companies have that their industry counterparts
did not?

A reformatted version of this paper has been published in Mining Engineering Magazine, March 2011 issue
Former Mining Industry Fellow at The University of Queensland, Australia and currently Managing Partner at
InnovaMine, Chile – E-mail:
At the heart of the findings about these outstanding companies is what Collins’s refers to as
the “hedgehog concept”2 – how to find the one big thing that the company must focus on.
According to Collins, those who built the good-to-great companies were, to one degree or
another, hedgehogs. Those who led the comparison companies tended to be foxes, never
gaining the clarifying advantage of a hedgehog concept, being instead scattered, diffused, and

This insight is complemented by Peter Drucker (2004), an influential management guru, who
asserts that the first practice an effective executive should ask is: "what needs to be done?"
Asking this question and taking it seriously, he asserts, is crucial for managerial success; and
that the answer almost always has more than one urgent task, but the effective leader only
concentrates on one task. In this last respect, Drucker emphasizes:

“If they [executives] are among the sizeable minority who work best with a change of
pace in the working day, they pick two tasks. I have never encountered an executive who
is effective while tackling more than two tasks at a time.”

This paper sets out to prove that the ‘one big thing’ in the mining business is mineral reserves
growth. Additionally, that the crucial task in this regard is to continually increase mineral
resources, via explorations and/or acquisitions, and convert these into mineral reserves in the
most effective and efficient way. This is a fundamental, core process that needs to be run in a
disciplined and focussed way to create shareholder value.

Mineral resources and mineral reserves are widespread terms in the mining industry. Their
relevance in the functioning of markets has led some mining jurisdictions to adopt specific
guidelines to report them – the JORC code in Australia, the SAMREC code in South Africa,
and the CIM standards (NI 43-101) in Canada, among others. In any case, for the non-
specialist, a mineral resource is an occurrence of minerals that has reasonable prospects for
eventual economic extraction whereas a mineral reserve is the mineable part of a mineral
resource that has demonstrated its economic viability.

At first sight the preceding proposition may seem obvious, but reality suggests otherwise. A
case in point, the proper information to measure the contribution of mineral resources in the
companies’ bottom line, and eventually in their market value, is neither easily available nor
consistent. Likewise, integrated mining companies rarely measure financial performance
incrementally throughout the value chain. This is usually gauged in aggregate – e.g. from
exploration to market, which may include intermediate activities such as planning and
development, engineering and construction, operations, and logistics. This practice, in turn,
tends to conceal the complementary proposition that the downstream, industrial-type
activities beyond planning and development generally yield, at most, the discount rate.

This concept is taken from a verse fragment by the ancient Greek poet Archilochus that goes “The fox knows
many things, but the hedgehog knows one big thing”
Another drawback in mining is that performance indices to measure capital efficiency rarely
consider the market value of mineral resources as another form of invested capital. This is in
fact what Nobel Laureate Robert Solow (1974) highlights in a seminal paper when he says:

“A pool of oil or vein of iron ore or deposit of copper in the ground is a capital asset to
society and to its owner (in the kind of society in which such things have private
owners) much like a printing press or a building or any other reproducible capital
asset...A resource deposit draws its market value, ultimately, from the prospect of
extraction and sale.”

The practice of not treating resource deposits as capital assets – embedded in most accounting
standards, including the newly International Financial Reporting Standards (IFRS) – tends to
mislead the economic analysis that reveals how value actually flows throughout the business
and where it really comes from.

All of this does not mean that mining companies are not aware of the importance of mineral
reserves growth. However, when this aspect makes a difference, the argument is that it is
rarely, if ever, the outcome of a systematic approach. Instead, it seems to be the result of
astute, entrepreneurial executives who happen to understand the importance of this subject
and drive the company’s focus accordingly.

To support the claim that what matters most in the mining business is mineral reserves
growth the following section describes the model and methodology used in this study. The
subsequent section examines the results of a survey conducted to assess this claim and briefly
discusses the relative position of distinct mining companies included in the study. The final
section discusses some ideas for mining companies to deal more effectively with mineral
reserves growth. This, in turn, lays the ground for future discussions and research in the area.


To assess which activities are more influential in driving mining business value, this study
used the value chain framework proposed by Michael Porter (1985). Porter’s model groups
the business activities under two main headings: (1) the primary activities, which are directly
concerned with the company’s outputs and make up the value chain, and (2) the support
activities, which provide the common services and shared resources for the business to
operate and as such overarch the value chain.

An application of Porter’s model to the mining business is depicted in Figure 1.

General management, human resources, technology and procurement
Upstream, resource-related activities Downstream, industrial-type activities

Planning & Engineering & Operations & Sales &

Development Construction Logistics Marketing

Mineral Resource Project Operations Marketing

Management Management Management Management

Figure 1: Porter’s value chain framework in the mining business

Upstream are the resource-related activities, generically known in mining as mineral resource
management. This function covers exploration as well as planning and development whose
respective goals are to discover mineral resources and transform them creatively into mineral
reserves in the most effective and efficient way. The outcome is a business plan that defines
the methods and rate at which the ore body is mined (life-of-mine production plan) together
with the onsite and offsite infrastructure needed to deliver the mineral products to market.

Downstream are the industrial-type activities whose aim is to execute the business plan
previously conceived upstream. These begin with the project management function
accountable for engineering and building the development component of the plan. After
project commissioning, the operations management function takes responsibility for using the
productive capacity by executing the ongoing operational component of the plan. The
outcome, in this case, is production delivery. This typically encompasses mining and
processing activities, including the logistics and transportation to deliver the final products on
the port of embarkment. At the end of the value chain is the marketing function whose aims is
to develop markets and determine the time and place at which to sell mineral products to
optimise revenue. In fact, its outcome is revenue realisation.

Splitting the mining business in this way has become widespread after Porter’s seminal
contribution. But as already discussed, measuring the value added of each activity along the
value chain to then set the company’s course on the right activities remains a challenge. As a
matter of fact, in the mining industry there is still a deep-rooted belief that value creation
primarily rests on the downstream, industrial-type activities that focus on earnings, which in
turn are driven by production and costs. Instead, the proposition here is that value creation in
mining is mainly the result of managing effectively the upstream, resource-related activities
that should focus on disciplined reserves growth.

This is exactly the point raised not long ago by Standard & Poor’s (2008), one of the world’s
leading providers of investment ratings and research data. In a white paper, it commented:

“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.”
The main proposition of this study is not simple to validate. This is because mining firms
rarely measure financial performance incrementally throughout the value chain, let alone air
that information openly. To overcome this problem, the proposition is supported by inference
from analysis of public domain information on company financial and technical performance.

The hypothesis is that mining companies that excel in Total Shareholder Return (TSR) over
an entire economic cycle are those that also excel in increasing their reserves and production,
hereafter referred to as Total Reserves Increment (TRI). Put it more precisely, the necessary
condition for a mining company to exceed its peer group’s average TSR over a business cycle
is its capacity to increase its reserves and production above the group’s average. This is a
necessary condition since sufficiency is given by the way mining companies actually achieve
this growth. If this is done through debt-financed acquisitions at the peak of a cycle, for
instance, this may cause financial distress if followed by an abrupt downturn.

The dependent variable, TSR, is an index that measures the overall company financial
performance over time. It takes into account the share price variation and dividends paid to
shareholders in a period. Hence, it provides the total return obtained by shareholders over that
period. Dividends can be simply added to the share price difference although the most
accepted assumption is to reinvest them in additional shares.

A key feature of this index is that while its absolute value is contingent to market conditions,
companies’ relative position within a peer group reflects the market perception of both
individual and overall performance. This characteristic is useful to isolate the effect of non-
controllable market variables (e.g. commodity and consumable prices) and focus attention on
the controllable variables that also affect TSR.

TSR is calculated as:

− + ∑


Pi: Share price at end of period i

Pi-1: Share price at beginning of period i
Div: Dividends paid in the period i

The independent variable, TRI, is an index that measures variation in mineral reserves and
production in a period of time.

TRI is computed as:

− + ∑


Ri: Attributable, recoverable reserves at end of period i

Ri-1: Attributable, recoverable reserves at beginning of period i
Prod: Attributable production during the period i

As previously defined, mineral reserves are the economically mineable part of mineral
resources. As such, they represent future production that companies expect to extract from
their mines. If this work is done properly, no mineral reserve addition or subtraction would be
feasible without diminishing the value of the business or augmenting the risk associated. This
work – which involves the formulation and optimisation of a business plan, including a mine
plan – is actually the outcome of the planning and development function depicted in Figure 1.
This is perhaps the most critical job of the mining business. At such, it requires people with
imagination allied to a deep understanding of the mineral deposit, it emplacement and the
way in which value can be maximised. It also involves knowledge and dexterity of mining
techniques together with sensible assumptions about the downstream activities spanning from
project engineering and construction, through operations and logistics, to sales and

In the model under analysis, the counterpart of the company share price is mineral reserves.
For operating mining companies, dividends are frequently the matching part of production.
This correspondence in model variables is in fact what gives economic sense to the term
‘deposit’, which is usually used in mining parlance to refer to an orebody.

To prove the previous hypothesis, this study compares TSR and TRI for a selected group of
fourteen mining companies over the period 2000-2009. This 9-year period covers adequately
an entire economic cycle. In effect, at the onset, in 2001, the mining sector was leaving
behind the so-called dot-com bubble burst. The market then experienced a spectacular turn
around that spanned from 2003 to mid-2008. At this point unfolds the global financial crisis,
which caused a sharp fall in commodity prices. These later recovered to a great extent,
toward the end of 2009. However, during the whole period, the valuation of mining
companies went through the typical ups and downs of the mining sector, although
exacerbated by what was named the super cycle. On the whole, almost all firms grew in the
period – some more than others, though.

The companies included in this study represent adequately the worldwide mining industry as
they cover a wide spectrum; from global, diversified mining groups, through mid-size, more
focussed players, to large and mid-tier international gold producers. Nevertheless, a few
important mining companies are missing, Xstrata Plc being a case in point. This is because
their information for the whole period, particularly on mineral reserves and production, was
not readily available. Table 1 lists the companies included in the research and their trading

Company Incorporated in Listed on3 Ticker symbol Currency
Anglo American Plc South Africa/UK LSE AAL £
Antofagasta Plc Chile/UK LSE ANTO £
Barrick Gold Corp Canada NYSE ABX US$
BHP Billiton Ltd Australia/UK NYSE BHP US$
Freeport-McMoRan Inc USA NYSE FCX US$
Gold Fields Ltd South Africa NYSE GFI US$
Goldcorp Inc Canada NYSE GG US$
Inmet Mining Corp Canada TSE IMN C$
Kinross Gold Corp Canada NYSE KGC US$
Newcrest Mining Ltd Australia ASX NCM A$
Newmont Mining Corp USA NYSE NEM US$
Rio Tinto Plc UK/Australia NYSE RTP4 US$
Teck Resources Ltd Canada TSE TCK-B C$
Vale S.A. Brazil NYSE VALE US$

Table 1. Mining companies included in the study

Measurement of TSR

To make figures comparable, TSR was calculated using US dollars as the base currency.
Share price data as well as dividends were taken from databases available in various open
financial web sites. These include Yahoo, Google, and Bloomberg to name the most well
known. Some inconsistencies were checked against companies’ annual reports as well as
information available in companies’ web sites.

The daily share price series used in the calculation of TSR were adjusted considering the
reinvestment of dividends and stock splits. The latter refers to management decision to
increase or decrease the number of shares without affecting the company’s market
capitalisation – to make them more tradeable, for instance.

Table 2 displays a summary of the share market information collected and processed in the
case of Antofagasta Plc. Share prices displayed in Table 2 correspond to close price of the
last business day in the respective year. Likewise, dividends are all those paid in the
respective calendar year.

NYSE is the New York Stock Exchange in the United States of America; LSE is the London Stock Exchange
in the United Kingdom; TSE is the Toronto Stock Exchange in Canada; and ASX is the Australian Securities
Exchange in Australia
On 12 October 2010, Rio Tinto changed the ticker symbol of its ADR trading on the NYSE from RTP to RIO.
The aim was to align it with Rio Tinto's symbols on the LSE and ASX where the company has primary listings.
Price Dividends Adjusted price
Year Split
(£/Sh) (£/Sh) (£/Sh) (US$/Sh)
2000 3.52 n/a - 0.88 1.32
2001 4.20 0.28 - 1.12 1.63
2002 4.44 0.24 - 1.24 1.92
2003 8.44 0.18 - 2.59 4.61
2004 8.97 0.21 - 2.81 5.42
2005 14.95 0.42 - 4.85 8.37
2006 5.09 0.53 4:1 6.77 13.29
2007 7.17 0.25 - 9.61 19.20
2008 4.26 0.26 - 5.75 8.31
2009 9.92 0.33 - 13.54 21.76

Table 2. Share price information for Antofagasta Plc

Measurement of TRI
Information on mineral reserves and production was obtained from the companies’ annual
reports. Complementary information was also taken from databases supported by securities
regulatory agencies in the United States, Australia and Canada.

As all companies in the survey produce more than one commodity, variations in reserves and
production were measured in terms of an equivalent commodity. It means all minor products
were expressed in terms of the major commodity, using an average price and metallurgical
recovery for each product.

In the case of global, diversified mining companies, running various product groups, TRI was
calculated in two steps: first, an estimate of the reserves and production variation for each
product group using the above equivalent concept; and second, an estimate of the weighted
average whole variation, using an average of the underlying product group’s earnings in the
period as the weighted factor.

It is worth mentioning that public information on mineral resources, mineral reserves, and
production is intricate and therefore difficult to compare, particularly in the case of mineral
reserves. The main problem is consistency and lack of relevant information. To add reserves
and production, for instance, the former have to be recoverable; that is, net of metallurgical
loses. However, only a small number of companies report reserves in this way. They usually
report in situ reserves but recoveries are not always provided. Another source of confusion is
ownership. Some companies report full consolidated figures of their controlling operations
but from the point of view of the company share price what matters is the attributable share.

Because of these difficulties and to make figures comparable, the collected information had
to be carefully reviewed and cleansed. When some critical data was not readily available, the
best professional judgement was used to replace the missing data. Therefore, TRI indices
provided here are a good approximation of the variation in reserves and production for the 14
companies in the period. Table 3 illustrates the way the information was finally compiled and
displayed in the case of Goldcorp Inc.

Gold Silver Copper Gold Eq.
Year Reserves Production Reserves Production Reserves Production Reserves Production
(MOz Au) (MOz Au) (MOz Ag) (MOz Ag) (Mt Cu) (Mt Cu) (MOz AuEq) (MOz AuEq)
2000 3.41 n/a - - - - 3.41 n/a
2001 3.85 0.61 - - - - 3.85 0.61
2002 4.47 0.61 - - - - 4.47 0.61
2003 4.23 0.60 - - - - 4.23 0.60
2004 4.15 0.63 - - - - 4.15 0.63
2005 11.70 1.14 36.32 10.43 0.58 0.07 15.78 1.70
2006 27.69 1.69 606.00 14.88 0.60 0.07 39.00 2.30
2007 30.12 2.29 836.54 17.07 0.23 0.07 42.00 2.92
2008 31.59 2.32 972.64 9.63 0.21 0.06 45.05 2.81
2009 33.25 2.42 1010.80 11.85 0.19 0.05 47.06 2.90

Table 3. Attributable reserves and production for Goldcorp Inc

Figure 2 displays both indices, TSR and TRI, for the fourteen companies. The graph axes are
in logarithmic scale to allow a better display of the whole set of data. These results indicate
that the proposition under analysis is robust. In effect, Figure 2 shows two distinct categories
of mining companies – the leading companies where TSR and TRI are above the group’s
average and the lagging companies where both indices are below the group’s average. This is
in fact what the preceding hypothesis is all about.

Inmet Inmet*

Antofagasta Newcrest
Average TSR = 11.3
10.00 Freeport

Gold Fields
Rio Tinto

Newmont Barrick

(*) Include important reserves reported on 31 Mar 2010 Average TRI = 3.8
0.10 1.00 10.00 TRI

Figure 2: Total shareholder return (TSR) versus total reserves increment (TRI)

Figure 2 also shows a third category where there are two companies that have a higher than
average TSR but a lower than average TRI. For the lay person this may cast doubts on the
proposition robustness; for the more inquisitive, though, this is precisely the place to be for
thriving mining companies developing promising mineral resources. In effect, under existing
reporting codes, mineral resources can only be reported as mineral reserves after complete
studies and authorisations. However, the market often tends to price these activities well in
advance and this may be a more plausible explanation for the observed phenomenon. In order
to confirm this rationale, both cases are examined in more detail.

The transitional companies

The first company in this category is Inmet Mining, a base metals corporation that produces
copper, zinc, and gold. In the period 2000-2009, the TRI of this company only reached about
1.45 (145%) whereas the TSR almost reached 50 (5,000%). The explanation for this gap
seems to be the company’s development plan that considers the Cobre Panama project (ex-
Petaquilla), a wholly-owned large porphyry copper deposit located in Panama. A front-end
engineering and design study completed early 2010 revealed significant mineral reserves
from this project. These were announced on 31 March 2010, about the same time the
company delivered its 2009 annual report. If the likely attributable share of these extra
reserves is considered into the calculation (80 percent), the TRI index would jump from 1.45
to 8.54. This would place Inmet in the selected group of leading mining companies, such as
illustrated in Figure 2 (Inmet*).

In the case of Antofagasta, a Chilean-based copper corporation, its reserves plus production
grew about 1.2 times (120%), in the period whereas the TSR reached almost 16 (1600%). The
reason for this difference seems to be the exciting company’s exploration and evaluation
program, which cover North America, Latin America, Africa, Europe, and Asia. If it
succeeds in seizing the various opportunities highlighted in its 2009 annual report, it will
surely leap to the leading group as well. Among these opportunities, perhaps the most
relevant are the Reko Diq project in Pakistan and the Los Pelambres district in Chile.
According to the Antofagasta 2009 annual report, the feasibility study and environmental
impact study of Reko Diq are in their final stage. The mineral resource estimate is 5.9 billion
tonnes grading 0.41% Cu and 0.22 g Au/t. Reko Diq controlling firm is Tethyan Copper
Company, a 50-50 joint-venture between Antofagasta and Barrick. This company, which
owns a 75% of the project, continues negotiating with relevant Pakistani authorities for a
mineral agreement and mining lease.

Concerning the attractive prospect at the Los Pelambres district, the report says:

“Los Pelambres has total mineral resources of 6.2 billion tonnes with an average
copper grade of 0.52%. This includes mineral resources at the existing open pit, and
neighbouring deposits..., which were identified following an exploration programme
between 2006 and 2008... These mineral resources are significantly greater than the 1.5
billion tonnes of ore reserves currently incorporated in Los Pelambres’ mine plan... [I]t
presents opportunities for longer term planning either by providing additional material
in future years to extend the existing mine life, or by enabling Los Pelambres in the
longer term to consider possibilities for future growth.”

The lagging companies

This group is quite diverse and therefore it is worth analysing the relative position of some
conspicuous mining companies in Figure 2. One interesting case is the contradictory position
of companies such as Barrick and Anglo American compared to Freeport, BHP Billiton, and
Teck. In effect, the former have a relative higher TRI that is not accompanied by a relative
higher TSR.

In the case of Barrick, a likely explanation seems to be its unpredictable hedging activities5,
which the market tends to penalise. In fact, for the very same reason, by mid last decade the
company decided to start de-hedging its gold positions, although at a low pace. Towards the
end of 2009, as the gold price continued its unrelenting upward trend, Barrick completely
eliminated its fixed-price hedge book. The benefit of this decision has not been fully captured
here as this occurred near to the survey closing date (31 Dec 2009). Perhaps another reason
for the market lack of enthusiasm for Barrick’s shares is that it continued using hedging
activities to secure copper prices from an operation in Chile as well as some input costs for its
main operations – crude oil prices, interest rates and foreign exchange rates, for instance.

Anglo American seems to be a different case. In the first half of the decade, at the onset of
the so-called mining super cycle, it acquired various good-quality mining assets at attractive
prices – the Disputada copper operations in Chile and Kumba Iron Ore operations in South
Africa. In the second half of the decade, at the peak of the mineral resources boom, the
company continued executing its growth strategy. This time, though, the major acquisitions
made in Brazil, US, Australia and Peru were more expensive and increased substantially the
outstanding debt of Anglo American. This put the company in a very difficult position when
the global financial crisis unfolded, by mid-2008. Among other corporate actions, this led to
the suspension of the 2009 dividend payments, a reduction of the 2009 capital expenditures
by more than 50%, and the dismissal of about a tenth of the work force.

With hindsight, the strategy to increase mineral reserves through debt-funded acquisition just
before the market crash proved to be lethal. In fact, at the midst of turmoil, toward the end of
2008, the debt-laden mining companies were the most beaten within the mining industry.

Rio Tinto is a special case as it obtained the group’s lowest TRI and a relative modest TSR
compared to its peers. During 2009, as metal prices recovered from a sharp drop occurred by
mid-2008, the company struggled to reduce a hefty debt taken on in 2007 to acquire Canada-
based aluminium company Alcan. Unlike typical mining acquisitions, it hardly added any
mineral reserves to Rio Tinto. Ironically, to reduce debt and strengthen its balance sheet, Rio
Tinto had to sell part of its mining assets thereby reducing reserves; it even mulled over a bid

Hedging is when companies contractually lock the price to be paid in the future for their production or supplies
from its biggest shareholder, China’s state-owned Chinalco, for a larger stake in the company
and a share of its best mining assets. As markets improved, towards mid-2009, shareholders
opted instead for a rights issue together with a production joint-venture with BHP Billiton to
jointly exploit and develop their Pilbara iron ore operations in Western Australia. Later, the
parties mutually agreed to abandon this alliance because regulators did not get the nod to the
proposal in its original form.


The previous results and subsequent discussion evince that the disciplined increase of mineral
resources and their effective conversion into mineral reserves play a pivotal role in the
creation of value in the mining business. However, the model gives no details as to why some
mining companies perform this task better than others or how companies can do this job more
effectively. The following sub-sections, therefore, examine certain critical aspects of the
mining business and provide some insights to advance in that direction.

Refocussing mining
The preparation of this study required the careful examination of more than one hundred
annual reports of various mining companies. This work allowed a comparison of different
corporate strategies and emphasis, which led to some interesting general observations.

First, despite almost all mining companies recognise the importance of mineral resources and
mineral reserves growth, only a few highlight this information in the initial pages of their
annual reports. In effect, the most common information highlighted by mining companies
usually refers to financial data as well as production and cost statistics – production and sales,
underlying earnings, earning per share, dividends, capital expenditures, cash flows, total debt,
cash costs, and return on capital, among various other similar yardsticks. Out of the fourteen
mining companies surveyed, only one highlighted information on mineral resources and ore
reserves growth in the first pages of its annual report. This company is Newcrest, the
Australian gold producer, which has done this consistently since 2005. And its announcement
refers not only to the stock of mineral resources and ore reserves for the respective year but
also their variation with respect to the previous year, net of mining depletion. Interestingly,
Newcrest happens to be one of the leading companies in this survey.

Second, in one way or another, almost all mining companies use the value chain framework
in the definition of their business scope and/or strategy. However, it appears that none of
them organises their business accordingly, let alone measure value incrementally along the
value chain. These two claims are important so they deserve some elaboration.

Concerning the misalignment in the organisational structure of mining companies, this claim
cannot be categorical because neither companies’ annual reports nor their websites provide
detailed information on the structure and accountabilities of corporate executive positions.
Even though many mining companies have visible positions in the upper echelons for the
downstream activities, none of them considers a position accountable to execute the upstream
function of mineral resource management as described here. Although quite often there is a
senior executive position accountable for explorations, there is rarely one for the planning
and development function as envisaged here. In fact, in the traditional mining organisation
this is often executed downstream – either within the project management function or under
the operations management function. Sometimes the mineral resource planning function is
split in two and performed separately – a strategic planning unit inserted in a project group
and a tactical planning unit within an operational group.

In short, the only individual fully responsible for mineral reserves growth and the whole
value of mineral resources, in almost all mining companies, is ultimately the top executive.

The claim about a deficient value measurement in mining seems to be more categorical since
annual reports of mining companies never segregate financial information for each step of the
value chain. In the case of big mining houses, segregation is performed for business units,
product groups, or sometimes geographical zones, but as already noticed, in aggregate, from
exploration to market. Moreover, the concept of value, as formally employed in the field of
economics, is not something that can be calculated from information available on mining
companies’ annual reports. The reason is that the market value of mineral resources does not
appear on either the income statement or balance sheet. This means that the ongoing
economic value created in mining – that is, the residual value after deducting the opportunity
cost of the underlying mineral resource assets – cannot be measured for the upstream segment
of the business let alone the whole business.

In summary, mining ambiguous value measurements and accountabilities affect value

creation not only of the mineral resource management function but also of the downstream
functions. This is not always perceived by companies’ management, or even by the market,
because these effects are often masked by the overlooked intrinsic value of mineral resources.
In fact, because of this, the opportunity cost the mineral resources captive in the business is
rarely covered by mining companies’ ongoing earnings.

McCarthy (2003) clearly illustrates this deficiency when asserting the poor record of mining
project in the previous decade. His analysis of 105 mining projects at the feasibility level
concluded that the main sources of risks and failures in mining projects come from geological
inputs and interpretations. In fact, he found that the poor record of mine feasibility studies
and project development are 66 percent of the time associated to issues directly linked to
geology inputs across all areas – geologic model, resource and reserve estimation, mine
planning and design, metallurgical test work, sampling and scale-up, among the most
important. What function of the value chain is responsible for this is not clear as in the
traditional mining organisation no one under the chief executive is accountable for mineral
resource management. Actually, in the typical mining company many people are responsible
for a bit of it, but none for the whole mineral resource and its intrinsic economic value.

Refocussing a mining company requires vision and determination. The evidence provided
here may be useful to understand the importance of mineral resource growth. Setting the
company’s compass on this new course, however, is always challenging in mature industries
like mining. This appears to be less difficult in small and medium-sized organisations as
change does not need to go through a heavy bureaucracy. Conversely, in large, global
corporations, with more complex and well-established fiefdoms, this type of change is
extremely difficult. Success, in this case, not only requires top management support but also
influential champions in senior and middle management as it deeply affects the company’s
structures, processes, systems and people.

A comparative illustration
A brief analysis of the oil industry could be useful to illustrate the main points raised here.
This is because it shares many commonalities with the mining industry, its dependence upon
an exhaustible resource being perhaps the most relevant.

The first distinction is the awareness of oil companies about the importance of the upstream
activities in the bottom line. These are usually referred to as “exploration and production”.
Accordingly, oil companies have the appropriate structures, processes and systems. In effect,
in the oil business it is common to find a senior position responsible for the upstream
segment, which quite often is the second in command after the chief executive.

Their processes and systems are also apt to report key financial information separately. This
is usually done along the value chain, which typically divides the business in upstream and
downstream activities, adding at times a midstream segment. For integrated multinationals,
the upstream segment usually represents a significant proportion of the company’s underlying
earnings. In fact, the ratio of upstream earnings to total earnings for Exxon, Shell and British
Petroleum (BP) is 0.89, 0.66, and 0.94, respectively, according to their 2009 annual reports.
This reality has led most of the integrated players to dispose of in recent years several of the
downstream less profitable businesses, service stations being one of them.

The rules to report oil reserves are highly standardised although these are more restrictive
than in mining. US authorities, for instance, only allow the disclosure of proved reserves,
whereas in mining it is proved and probable. Lately, though, US authorities opened the
possibility for oil & gas companies to report probable and possible reserves, which should
give investors a richer insight into a company's long-term value potential. Because of its
relevance, oil companies often highlight this information in their annual reports. Moreover,
they use a performance index that measures the extent to which production is continuously
replaced with proved reserves.

This analogy does not intend to diminish the practices used in the mining industry nor does it
imply that the oil industry is better. It only aims to highlight that the focus on the upstream
activities is far more explicit in the oil industry than in the mining industry.

The previous model and results provide compelling evidence to support the claim that the
most effective levers of value creation in the mining business are often in the upper part of
the value chain. This function, here referred to as mineral resource management, is aimed at
increasing the companies’ mineral resources and transform them into mineral reserves in the
most effective and efficient way.

In practice, the typical drivers to increase reserves are either explorations or acquisitions.
What ensures success, if anything, is usually the creativity put into the planning and
development of both existing and potential mineral resources. This function has not been
fully exploited by mining companies as they tend to focus more on the downstream,
industrial-type activities. In fact, in the traditional mining organisation this function is rarely
executed in the upper part of the value chain as a core, stand-alone activity. This is often
performed downstream – in the form of studies and plans – under either project management
or operations management functions, or even both.

The previous practice, together with the current way of assessing value in mining, are aspects
crying for innovation. But for a long time organisational innovation in the mining industry
has been elusive. This was noticed by Alfred Chandler (1962), who at the time portrayed
mining as the industry less responsive to organisational change:

“Among the more than seventy companies studied, those that were not administering
their resources through the new multidivisional structure by 1960 were concentrated in
the metals and materials industries. Of these, copper and nickel companies had paid the
least attention to structure.”

The multidivisional structure is a decentralised form of corporate organisation that emerged

in the 1920s and became the dominant corporate model in the post-War years. According to
Nobel Laureate Oliver Williamson (1971), it may well have been the “American capitalism’s
most important innovation of the twenty century”. Interestingly, all mining firms analysed by
Chandler in his seminal study no longer exist today as publicly traded, independent entities.
As The Economist (2009) highlighted in Chandler’s obituary “You can’t do today’s job with
yesterday’s methods and still be in business tomorrow.”

More recent quantitative studies on innovation and productivity advance continue supporting
the previous claim, labelling the mining industry as conservative, traditional, and resistant to
change – Paul Bartos (2007). To overcome this negative reputation and tackle the previous
challenge, more research work in the area is needed. But beyond technical innovations – that
Bartos relates more to equipment manufacturers, suppliers and service providers – this
research should put more emphasis on organisational design issues and encompass the study
of better structures, processes, systems, and people. 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.

The author expresses his gratitude to the University of Queensland’s mining engineering
department for supporting this study. These thanks are also extended to various people and
organisations around the world that were keen to share public information of their companies
for the completion of this study. Silvia Tapia’s collaboration in data collection and index
calculation is also recognised and appreciated.

Bartos, Paul (2007) Is mining a high-tech industry? Investigations into innovation and
productivity advance, Resources Policy 32 (2007) 149–158

Camus, Juan, Peter Knights and Silvia Tapia (2009) Value Generation in Mining: A New
Model, 2009Australian Mining Technology Conference – Brisbane, Queensland

Chandler, Alfred (1962) Strategy and Structure: Chapters in the History of the Industrial
Enterprise, Cambridge, Massachusetts: MIT Press

Collins, Jim (2001) Good to Great, Collins Business, New York

Drucker, Peter (2004) What Makes an Effective Executive, Harvard Business Review, 82 (6)

Porter, Michael (1985) Competitive Advantage: Creating and Sustaining Superior

Performance, Simon & Schuster, New York

Solow, Robert (1974) The Economics of Resources or the Resources of Economics, American
Economic Review, Vol 64 (May): 1-14

Standards & Poor’s (2008) White Paper: Mining Industry-Specific Data, Compustat Data
Navigator (

The Economist Magazine, Alfred Chandler’s obituary, Apr 9th 2009

Williamson, Oliver (1971) Managerial discretion, organisational form, and the multi-
division hypothesis, in R. Marris and A. Wood (Eds.), The Corporate Economy, Cambridge,
Mass.: Harvard University Press