Abstract in terms of urgency, uncertainty and features

Abstract

The
target of this article is to identify the strategy that benefits the MinCo’s
share price in long term. As a junior mining company, MinCo faces the
challenges from limited resources and the uncertainties in external
environment. Possible strategic options are compared and alliance stands out.
The nature of future is also considered using PESTEL, Scenario Planning and
SWOT analysis, whose implications point out the favorable commodities and
countries to go for. The current projects are too evaluated with The Suns and
Clouds Chart. And lastly, the suggested strategy is justified to be suitable,
acceptable, feasible and robust.

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Table of Contents

Abstract 1

Table of Contents. 1

Executive Summary. 2

Background. 2

Data Sources. 2

Methodology. 3

Data Analysis & Explanation of
the Business Logic underlying the strategic thinking. 3

1.    How might
MinCo create a sustainable increase in share price. 3

2.    Possible
strategic options that present themselves. 3

3.    MinCo’s
current strategy and how to proceed. 4

3.1      Urgency. 4

3.2      Uncertainty. 5

3.3      Type of
capabilities. 5

3.4      Modularity
of capabilities. 5

4.    The
long-term future and scenarios. 6

4.1      PESTEL analysis. 6

4.2      Scenario Planning. 8

4.3      Implications. 9

4.4      Evaluation on current countries of
projects. 11

5.    Justification
of suggested strategy. 14

Interpretation
of Results. 16

Conclusions
and Recommendations. 16

References. 16

 

Executive Summary

This
report aims to create a strategy for MinCo’s long-term future to maximize the
shareholders’ wealth, namely to increase its share price in a sustainable way.

Three
possible options are discussed under MinCo’s current state and the mining
market, and strategic alliance is more favorable for MinCo in terms of urgency,
uncertainty and features of capabilities required.

The
nature of long-term future is then taken into account. The author draws four
scenarios based on PESTEL analysis and makes implications on attractive
commodities and countries for MinCo to pursue.

Lastly,
the alliance strategy is evaluated under the nature of long-term future and
shows reasonable suitability, acceptability, feasibility and robustness.
Therefore, the author suggests that alliances with larger mining companies are
a positive way to increase MinCo’s share price in the long run.

Background

The
mining industry had experienced a sluggish downturn in past few years, with
frustrating decrease in commodity prices, investment and divestment in major
mining companies. In the middle of 2016, the market started to cautiously rebound
marked by noticeable increase in commodity price and increasing exploration
budget (Ferguson, 2017). If this continues, MinCo, as a surviving junior
company, will face more opportunities in a healthier environment.

However,
the mining sector is greatly shaped by political, economic and other factors in
the outside world. During the process of strategic decision making, MinCo need
to carefully plan the growth in the directions that meet the demands of
changing future.  

Data Sources

Basic
knowledge of mining business comes from academic articles. The future trends of
mining industry are mainly learned from reports and white papers of major
consulting firms, such as McKinsey, BCG, PwC and EY, while specialized mining
journals provide insight too. The author acquires useful information on metal
and minerals sector of various countries from the serial reports of Euromonitor
database. Furthermore, the official website of Australian Government offers
knowledge too.

Methodology

This
report mainly adopts an inductive approach. With abundant secondary data, the
author cautiously applies relevant information into proper analytical
frameworks under the nature of mining industry. The analysis and choosing
criteria is largely qualitative. Based on key information and the
interpretation of analysis results, some implications and recommendations for
MinCo are proposed.

Data Analysis &
Explanation of the Business Logic underlying the strategic thinking

1.    
How might MinCo create
a sustainable increase in share price

Share
price in mining sector is affected by the metals and minerals market and the
company’s competences for achieving growth. The uncontrollable market has its
own cycles, so MinCo should focus more on constant growth within the sector, as
a result, better resisting the changes in the market.

To
achieve constant growth, MinCo should create more value in its projects. In
other words, MinCo can either create more value by completing the value chain
of mine, or make its projects more valuable in exploration and development
phases.

The
next section presents the possible options to create more value in the two
ways.

Graph
1: The general mining value chain (NGRI, 2015)

2.    
Possible strategic
options that present themselves

The
first option is organic development, where MinCo develops its internal
capabilities complete the value chain of mining. This requires MinCo to build
essential skills in other stages of the commodity life cycle, such as
production, management and sale. Also, MinCo need to build strong ability to
attract new investors and long-term financing in different stages (Mining
Journal, 2014). Therefore, MinCo will be stronger in the mining sector and benefit
from growth in stock market.

The
second and third option can add value to MinCo’s projects via collaboration
with other companies.

The
second option is M&A. MinCo might form a new company with similar
peers to enhance exploration activities. Besides, MinCo might otherwise welcome
the acquisition offer from larger mining companies, which is achieved by the senior
company acquiring the dominant share of MinCo. MinCo can benefit from the
parent company’s brand name and multilateral support in operation and capital,
bringing more opportunities to further grow and thrive.

The
third strategy is alliance which, unlike M, includes little or no
change in the share structure and ownership of two companies. Strategic
alliances aim to share resources and activities to achieve collective
strategies (Gerry, 2014). It is possible for MinCo build complementary
alliances with larger production organizations, so that MinCo is able to get
considerable funds to support exploration and development work, and in turn the
partner take advantage of MinCo’s expertise. Alliances often provide capital in
exchange for a share in the value of potential property or the projects’ future
revenue (Mining Journal, 2014).

3.    
MinCo’s current
strategy and how to proceed

As
a junior mining company, MinCo undertakes exploration and development work of
polymetallic deposits and now has three projects in Western Australia, UK and
Arizona in the USA. Although the mining industry has showed a moderate
recovery, it is difficult for MinCo to earn strong competitive position in the
stock market given the complex and uncertain nature of early mining projects.

MinCo
doesn’t always have the complete freedom to choose (Gerry, 2014) between the
strategies listed above given its current state and the characteristics of
different options. This article uses a matrix of four key factors that shows
how to choose between organic development, M and alliances in diverse
circumstances.

3.1  Urgency

It
usually takes over 10 years to move from exploration to production. If MinCo is
going to doing everything itself from scratch, MinCo will have to take a bold
entrepreneurship change in business, which is quite difficult given its limited
resources and capabilities. Alliance is a faster way to access such resources
and skills with the support from bigger peers. Acquisition is the most rapid
way to increase share price.

3.2  Uncertainty

Notwithstanding
that mining market is now at a turning point (S Global Market
Intelligence, 2017), the unknowable future puts a high level of uncertainty
upon players in this sector. Therefore, it is often better to choose alliances
when there is high and unpredictable uncertainty in market (Gerry, 2014).

Mining
industry regularly sees regular cycles of highs and lows (AMF, 2017). If the
mining sector entres a new positive cycle, the strategic alliance may turn into
a full acquisition (Gerry, 2014). The need to increase reserves makes it
important to acquire new projects via M as the global resource basin is
depleting (McKinsey, 2017), but an acquisition may be a disaster if
market goes grey again. Likewise, a risky option as organic development will
force MinCo to resolve all the losses and risks.  

3.3 
Type of capabilities

Acquisition
is the best option when the desired resources and competencies are ‘hard’ (Gerry,
2014), for example, the profitable commodities of MinCo’s projects. Organic
method, on the other way, is good for internal soft skills if MinCo wants to
build a stronger team. Alliance is comparatively loose in control, but it’s an
easy way to take advantage of other bigger peers’ capabilities.   

3.4 
Modularity of
capabilities

MinCo’s
current capabilities are highly modular, in other words, are restricted in
early stages of exploration and development. This means that strategic alliance
and acquisition both make sense, because MinCo will be quite valuable for major
mining companies with good results in its projects. Organic development will be
extremely difficult because MinCo is less likely to finish the rest steps of
mining activities on its own.

Based
on the analysis above in four factors, the author develops a table showing the
total attractiveness of organic development, M and alliances. The scores
1-3 represent from least attractive to most attractive under each criterion.

Table
1: The total attractiveness of organic development, M and alliances for
MinCo

This
graph indicates that M and alliance are both promising options for MinCo,
but strategic alliance is better considering the high uncertainty involved in
MinCo’s business and mining industry.

4.    
The long-term future
and scenarios

Junior
mining entities is more vulnerable and sensitive to changes in macro
environment. After analysing the current state of MinCo and characteristics of
possible strategy, it’s necessary to consider the external environment in the long-term
future of 10 years.

4.1  PESTEL
analysis

Ø  Political
and legal. Government is an important factor affecting mining industry. With
growing emphasize on a greener environment, government may limit mining
activities. Permitting requirements, license negotiations and regulations can also
be complex and unstable, causing delays and rising costs in development.
Furthermore, governments can review licensing agreements and ask for changes to
their benefits (Daniels, 2014). Besides, the negotiations of Brexit will bring
high uncertainty in national policies. Lastly, mining projects are more exposed
to terrorist groups given the remote operation locations. 

Ø  Economic.
Metal and mineral prices are turning bright but some metal prices are less
friendly (Passport, 2017). The demand for development of emerging countries is
hard to imagine. China’s growth moderation (Song, 2016) is happening while
other Asian economies show great growth potential. There is also uncertainty
around the US economy ([email protected], 2017). Fluctuations in global energy
prices influence the running costs and profitability of mining businesses.

Ø  Social.
An aging workforce leaves challenges to mining sectors. Rising awareness of
environment protection bring more cautious consideration on mining projects. Similarly,
the reaction of local communities is worth attention. Furthermore, the rapid
growth of Chinese middle class will bring various demand for commodities.

Ø  Technological.
With the end of silicon’s dominance in the electronics industry (Reuters Staff,
2017), new materials will be in demand to further reducing the size of computer
chips and other electronic devices. The creation of new mining techniques
requires more advanced technologies which can bring additional uncertainties.
Green technologies also demand metals to produce renewable energy facilities.
Furthermore, the rapidly widespread electric vehicles will require new metals,
such as those for battery production.

Ø  Environmental.
Natural disasters such as earthquakes and floods have significant impact on
mining projects (Marsh, 2013), given that mining activities tend to operate in
remote areas. Water shortage is another issue that will place challenges on
costs. Climate change continues to shape the mining industry.

Ø  Legal.
Changes in laws have great impact on business environment of mining, such as
labor laws, environmental laws, safety standards, etc.

Based
on issues above, the author selected 12 most relevant ones in terms of
importance and uncertainty in each part.

Table
2: PESTEL analysis of long-term future

4.2  Scenario
Planning

Four
scenarios are drawn from the PESTEL analysis.

Ø  a.
Thriving Emerging markets

China has lowered growth rates, however,
the ‘One Belt, One Road’ programme is stimulating the development of
infrastructure of neighboring countries. At the same time, growth in India and
other Asian countries might offset the moderate demand from China.

Ø  b.
Greener electric era

Electric vehicle market undergoes a
tipping point, with increasing companies joining the revolution to face a
greener world with tightened environmental regulations. Also, more and more
countries pass policies to encourage the adoption of electric vehicles (Home,
2017).

Ø  c.
Thinner and smaller devices

With a new revolution in tech metals and
minerals, semiconductor manufacturers have started to seek alternative to
silicon chips, meeting the future trend of smaller, thinner computers, mobile
phones and other devices.

Ø  d.
Recovery of mining sector

The mining market is expected to recover
from the previous downturn, with commodity prices rising consecutively for two years. This brings more
finance in mining sector but the investment environment of early stages is
still less healthy.

4.3  Implications

The
tables below show the SOWT analysis for each scenario. The author draws
conclusions from the analysis, including commodities in demand and attractive
countries in future.  

Table
3: SWOT analysis for the first scenario

Commodities:
If healthy growth in other emerging countries
in Asia continues, there will be a demand of similar size as China’s in the
boom years (Deloitte, 2016). Emerging markets are expected to take up 66% of
total economic growth worldwide to 2030 (Boumphrey, 2016), driving the demand
for base metals like aluminium, lead, tin and zinc which are important raw
materials for urbanisation and development.

Countries:
In terms of project locations, Latin America
continues to show great potential for exploration due to resource richness and
relative political stability, occupying 30% of the total nonferrous exploration
budgets in 2017 (Ferguson, 2017). Besides, lower labor costs are another
advantage for MinCo. With sufficient finance backed, MinCo may start new
projects in Latin America. 

Graph
2: Nonferrous exploration budgets by region 2017 (S&P Global Market
Intelligence, 2017)

Table
4: SWOT analysis for the second scenario

Currently
MinCo is not involved in production stage, so it will face little pressure of
improving extraction technologies but benefit from global energy restructure to
achieve lower costs in development stage.

Commodities:
Electric vehicles (EV) are a long-term future
for industrial metals. EV market continues to rapidly grow, and is expected to
make up 25% of the global car fleet by 2040 (Passport, 2016). Therefore, the battery
production and the demand from grid and charging infrastructure is surely about
to increase. As such, production of lithium and graphite, used in lithium-ion
batteries, would firstly benefit (Wealthdaily, 2018). Other metals will be in
demand too, such as nickel, cobalt and zinc, which are being tested for the
improvements in battery technology (Deloitte, 2016).

Table
4: SWOT analysis for the fourth scenario

The
recovery of mining sector indicates a higher level of M&A and rising
commodity prices. It will be easier for MinCo to find strategic alliances and
future acquirers.

Commodities:
Lastly, as for the scenario ‘Thinner and
smaller devices’, MinCo has similar strengths and weaknesses to those in
the ‘Greener electric era’. In this context, MinCo may find it attractive to
explore precious metals, including Gold, Silver and Platinum, which are used in
many important components of most computers and electronic devices (Chipsetc, 2017).

4.4  Evaluation
on current countries of projects

Another
question is whether MinCo chose the right countries of projects. The author
uses The Suns and Clouds Chart to evaluate the balance of opportunities and
risks of the projects in Western Australia, UK and Arizona of USA.

 

 

 

 

 

 

 

Graph
3: The Suns and Clouds Chart of project in Western Australia

For
Western Australia, the chart looks quite favorable. The risks are all below the
diagonal, and opportunities dominate better places although risk 4 is
approaching the thundercloud. Therefore, the project in Western Australia is
highly viable.

 

 

 

 

 

 

 

Graph
: The Suns and Clouds Chart of project in UK

For
UK, however, risk 1 and 5 are in the parabola which presents high level of
danger and failure, while two suns appear at a weaker position. Overall, the
risks surpass the opportunities in the mining sector in UK, showing an
unfriendly environment.  

 

 

Graph
3: The Suns and Clouds Chart of project in Arizona in the USA

For
Arizona in the USA, risk 5 is approaching the parabola while the rest ones are
manageable. The good news is that all opportunities are in favorable places,
balancing the possible adverse impact from risk 5, so this project is still
viable.

Apart
from Australia and USA, MinCo may go to New Zealand and Canada for next
projects, because both countries enjoy abundant resource reserve and the high
closeness of culture, economy, geography and administration to Australia and
Canada respectively.

5.    
Justification of suggested
strategy

From
former analysis we know that strategic alliance is a favorable strategy, but we
also need to see whether it is plausible in the long term.

Ø  Suitability.
Strategic alliances are often created between a
junior exploration company like MinCo and a larger mining company (Abdel-Barr,
2013). Sharing the resources and capabilities of each side, the arrangement
allows MinCo to be better positioned in the industry with the endorsement. With
the added resources and competences from alliances, MinCo obtains stronger
competitive advantages and lowers the impacts of macro risks, completing a more
healthy and sustainable value chain of mining life cycle. Therefore, MinCo can better
pursue exploration and development, adding value to shareholders.

Graph
4: How MinCo collaborates with strategic alliance

Ø  Acceptability.
The strategy should be accepted by both internal
and external stakeholders. As strategic alliance is a loose way of
collaboration, the managers and workers do their work as before but with more
support and knowledge. For external stakeholders, such as government, NGO and
local communities, mining activities look more viable and harmless because
alliance adds credibility to the projects.

Ø  Feasibility.
To attract alliances, MinCo should prove that
the projects underway profitable and the risks are manageable (Daniels, 2014).
With right commodities in right countries discussed, MinCo will be valuable for
major companies to consolidate current markets or to extend global reach.

Ø  Robustness.
The mining sector is affected by various
changes in the market, as well as exploration results (Abdel-Barr, 2013). Strategic
alliances are robust in such environment because the agreement is often not
long term (Abdel-Barr, 2013) and both parties remain the flexibility of ending
the arrangement or turning it into a full acquisition. Also, Strategic alliances
often focus on certain areas and certain commodities (Mining Risk Review, 2017),
allowing MinCo to form different alliances in different projects, so the risks
are mitigated.

Interpretation of
Results

From
the perspective of value chain in mining industry, the author points out that
it is hard for MinCo to achieve sustainable increase in share price given its
limited capability and uncertain results of undergoing projects.

Then
three strategies to improve the condition are analysed and alliance is the best
option. Next, the author considers the long-term nature of external environment
and draws some implications for MinCo. Based on the four scenarios, attractive
commodities are identified. Based on the overall balance of risks and
opportunities, Australia and USA are of lower risks for mining activities while
UK seems hostile.

Conclusions and
Recommendations

In
conclusion, strategic alliance is a promising way to constantly increase
MinCo’s share price given its current state and future scenarios in the long
term, enabling MinCo to keep flexible and robust faced with unexpected changes
and threats.

As
for commodities, the author recommends MinCo to take three directions based on
the scenarios, namely, base metals to meet the demand of emerging markets,
metals used in batteries to face a greener world with EV growth, and precious
metals to support revolution in electronic devices.

In
terms of operating locations, the author suggests that MinCo give up the
project in UK due to unfriendly environment while continue in Australia and
USA. With healthy finance, MinCo may develop projects in New Zealand, Canada,
and Latin America.

References