Materials

R&D Perspectives In The Mining Industry

__
<p>Companies across a range of industries spent US$ 2.3 trillion in 2019, or 2% of global GDP, in R&amp;D, according to Brennan (2020). The pharmaceutical industry leads the way, spending 52% of the EBITDA on R&amp;D, which equates to US$ 178 billion.</p><p><img style="display: block; margin-left: auto; margin-right: auto;" src="https://kradminasset.s3.ap-south-1.amazonaws.com/ExpertViews/Pennapic1.PNG" width="659" height="345" /></p><p><img style="display: block; margin-left: auto; margin-right: auto;" src="https://kradminasset.s3.ap-south-1.amazonaws.com/ExpertViews/Pennapic2.PNG" width="665" height="345" /></p><p>Oil and gas, in comparison, spent only 3% of EBITDA or US$ 28 billion in the same period. The mining industry is not stratified in Brennan&rsquo;s study but is traditionally lower than oil and gas.</p><p>Filippou and King (2011) mention a very low R&amp;D intensity in the mining industry, around 0.5% measured as R&amp;D expenditure/gross revenue, compared to other sectors like IBM (6.1%), Boeing (10.7%) and AstraZeneca (13.4%).</p><p style="text-align: center;"><img src="https://kradminasset.s3.ap-south-1.amazonaws.com/ExpertViews/Pennapic32.png" width="725" height="286" /></p><p style="text-align: justify; padding-left: 40px;"><span style="font-size: 10pt;"><strong>Figure 3- R&amp;D spending trend in the mining industry, data from Alcoa, Anglo American, ArcelorMittal/Arcelor, BHP Billiton, Boliden, Cameco, Codelco, Eramet, Iluka, Rio Tinto, Sumitomo, Metal Mining and Teck</strong></span></p><p>The graph shows that R&amp;D spending in the mining industry steadily decreased up to 2006. The increase after 2006 is attributed to the reduction in revenue after the GFC instead to an actual increase in R&amp;D spending.<br />&nbsp;<br />The mining company's profit was high from 2000-2010, before the GFC. It led to consolidation via mergers and acquisitions, which reduced the R&amp;D departments and, consequently, R&amp;D spending.<br />&nbsp;<br />According to Calzada Olvera (2022), global mining companies reduced their R&amp;D departments when their focus turned to projects closely aligned with their core business. La Nauze and Schodde (2004) mention the case of BHP and Rio Tinto closing their in-house R&amp;D laboratories and Alcoa reducing staff in its Pittsburgh R&amp;D facility.<br />&nbsp;<br />Thompson (2015) mentions that although internal R&amp;D services provide good service to operations, developing breakthrough innovation is a challenge to in-house research alone. As stated by a mining firm executive: "Our budgets seem to be used to solve short-term operational problems rather than to pursue innovative long-term solutions" (Deloitte a, 2017, p. 23).<br />&nbsp;<br />More recent data (Deloitte a, 2017, p. 25) indicates that the trend of low R&amp;D investment in the mining industry continues after the GFC.</p><p><img style="display: block; margin-left: auto; margin-right: auto;" src="https://kradminasset.s3.ap-south-1.amazonaws.com/ExpertViews/Pennapic4.PNG" width="678" height="352" /></p><p>In summary, R&amp;D spending has steadily dropped in the last two decades. Now we will examine a few factors that can be attributed to this decline.</p><h2><span style="font-size: 14pt;">Low Profitability</span></h2><p>The mining industry has a lower return than other industries, as stated by Batterham (2004).</p><p><img style="display: block; margin-left: auto; margin-right: auto;" src="https://kradminasset.s3.ap-south-1.amazonaws.com/ExpertViews/Pennapic5.PNG" width="668" height="333" /></p><p>Most mining products are commodities, and the companies cannot adjust the price, becoming heavily impacted by factors outside their control and not linked to the financial fundamentals of the production process.</p><p>The CapEx structure for most mining projects also contributes to the industry's low profitability. Large CapEx required and the long time until the projects provide return prevent start-ups from entering the market, reducing innovation in the sector.</p><h2><span style="font-size: 14pt;">Commodities Market</span></h2><p>As mentioned before, most mining products are commodities that prevent companies from compensating for losses during low-turn and high-turn cycles.</p><p>Also, the lack of product differentiation contributes to the problem of preventing companies from charging premiums for their products. Most premiums are linked to product quality, and they are usually small.</p><p>There is a recent trend where companies try to differentiate their products with low-carbon badges. These products can attract a premium but have the same quality as traditional products.</p><h2><span style="font-size: 14pt;">Low Cooperation among Companies</span></h2><p>Traditionally, mining companies are very protective of their Intellectual Property (IP). IP is protected via patents and trade secrets leading to a minimal number of cooperative projects.</p><p>Recent effort has been made to improve cooperation among industry peers. One example is the Bauxite Residue project coordinated by the International Aluminium Institute (IAI), where several companies cooperate to develop solutions for a common problem.</p><p>The low mobility of professionals in the mining industry also contributes to the problem. Usually, mine operations are in remote locations, which are not attractive to employees. This proves to be worse when trying to recruit highly specialized people like the ones required for a R&amp;D department.</p><p>In summary, it is a fair assumption to say that mining companies are not listed among the most innovative. Large and capital-intensive companies struggle to manage costs to keep a minimum margin and suffer from low product differentiation.</p><p>According to Pavitt (1984), most innovations are related to cost reduction targeting to improve the margins. This causes most of the innovation to come from their own internal production or engineering departments or via products and services from specialized suppliers.</p><p>The list of factors affecting the decline of R&amp;D in the mining industry can grow quickly, but to keep the brevity of this article, we will stop on these three major factors.</p><p>Recent data confirm that the mining industry has been focusing R&amp;D efforts to improve their core business with a strong emphasis on technological solutions to optimize old techniques &ldquo;as needed&rdquo; (Deloitte b, 2015, p.8).</p><p><img style="display: block; margin-left: auto; margin-right: auto;" src="https://kradminasset.s3.ap-south-1.amazonaws.com/ExpertViews/Pennapic6.PNG" width="751" height="500" /></p><p>The question we must ask now is how sustainable that scenario is when looking at the future challenges the mining industry faces. Let's quickly discuss a few key areas requiring serious consideration by mining companies to challenge their current R&amp;D strategy.</p><h2><span style="font-size: 14pt;">Raw Material Quality Deterioration</span></h2><p>The natural tendency observed over the years is to reduce the ore quality across several commodities, as exemplified by West (2011).</p><p><img style="display: block; margin-left: auto; margin-right: auto;" src="https://kradminasset.s3.ap-south-1.amazonaws.com/ExpertViews/Pennapic7.PNG" width="723" height="356" /></p><p>This fact brings several challenges for the mining companies to develop new technologies to improve exploration and to deal with the low-quality ores in the existing processing operations.</p><p>These challenges are interrelated with other sensitive areas like energy consumption and waste management.</p><p><strong>Environmental Challenges</strong></p><p>Mining companies have faced environmental scrutiny from the communities where they operate. However, the standards have been getting stricter in recent years.</p><p>The environmental issues also changed over the years. While acid rain and effluent treatment were the key concerns a few decades ago, topics like carbon emissions and waste management have become a priority recently.</p><p>Technologies to address these topics are available, but the industry still has a long way to go to make them available on a large scale. The lack of action to develop these technologies will certainly impact the relationship between companies and communities and their operating licenses.</p><p><strong>Increasing Energy Costs</strong></p><p>The mining industry is intrinsically energy intensive. The main challenges are driven by the need to reduce costs due to the rising energy price and to change the energy matrix to renewable sources.</p><p>This last topic is reinforced by the carbon tax and the carbon cap-and-trades schemes currently under discussion in several international forums. These schemes have the potential to increase energy costs even further.</p><p>Renewable energy costs are reducing, but their availability is still an issue for the industry. Reliability is also another area requiring further development.</p><p><strong>Automation</strong></p><p>The term fourth industrial revolution, or Industry 4.0, has become very popular in recent years. It refers to using information technology and/or artificial intelligence to develop solutions for the industry.</p><p>These technologies cover the entire life cycle of the mine, from exploration to production, including transportation and environment monitoring. Although innovation in the mining industry has been relatively flat, the number of patents related to automation has increased significantly, according to Daly et all (2022).</p><p><img style="display: block; margin-left: auto; margin-right: auto;" src="https://kradminasset.s3.ap-south-1.amazonaws.com/ExpertViews/Pennapic8.PNG" width="698" height="396" /></p><p>Automation is not the core business of mining companies, and they usually have few specialists in the area. It does mean the companies need to cooperate with other companies, in many cases start-ups, posing a challenge to the current operating model of developing R&amp;D in the mining industry.</p><p>Again, many more challenges are impacting the future of R&amp;D in the mining industry, but we limit the discussion to the four mentioned above.</p><p>Most of these challenges are wicked problems and require cooperation to be addressed sustainably. The cooperation can take several forms: between competitors in some areas with common problems, between companies and specialized suppliers, between companies and start-ups in non-core areas, and between companies and external R&amp;D institutions, public or private.</p><p>Cooperation has several benefits of which we can mention a few:</p><ul><li style="list-style-type: none;"><ul><li>Sharing the development cost</li><li>Increase of experts pool available for the projects</li><li>Development of specialists in critical areas for the companies</li><li>Development of financing mechanisms to support emerging high-tech companies</li></ul></li></ul><p>&nbsp;</p><p>However, cooperation requires a change in the currently dominant mindset in the industry. Companies need to revise their future R&amp;D budgets to address challenges seriously. Internal R&amp;D departments must be strengthened or rebuilt, and the relationship with other R&amp;D partners must be included in the strategic plan.</p><p>Although cooperation is critical for the success of R&amp;D in the mining industry, the formula is different for each company. The R&amp;D strategic plan must be aligned with the business strategy to deliver the expected outcomes.</p><p>&nbsp;</p><p><span style="font-size: 10pt;"><em>This article was contributed by our expert <a href="https://www.linkedin.com/in/wlademirpenna/">Wlademir Penna</a></em></span></p><p>&nbsp;</p><h3><span style="font-size: 18pt;">Frequently Asked Questions Answered by Wlademir Penna</span></h3><h2><span style="font-size: 12pt;">1. What are some of the innovative methods adopted by the mining industry?</span></h2><p><span style="font-size: 12pt;">Traditionally, innovation is made in-house in the mining industry focusing to solve operational problems or to improve the processing efficiency. R&amp;D departments are usually organised in research programs according to the commodities produced or the areas of the manufacturing process. </span></p><p><span style="font-size: 12pt;">External collaboration was primarily with universities or consolidated R&amp;D organisations. The collaboration with start-ups and other forms of venture capital investment is becoming more common in the last few years.</span></p><h2><span style="font-size: 12pt;">2. What is sustainable development framework for mining sector?</span></h2><p><span style="font-size: 12pt;">The triple bottom line is becoming the standard for most mining companies in the last years. It is basically a framework where companies report not only the financial performance but also includes people and environmental dimensions to measure their performance. </span></p><p><span style="font-size: 12pt;">It is important to notice that R&amp;D has a strong influence on two of these dimensions: performance, contributing to improve the operational efficiency, reduce energy consumption or reduce raw materials consumption; and environmental, reducing the environmental footprint, developing recycling and re-use alternatives and managing waste.</span></p><h2><span style="font-size: 12pt;">3. What impact does mining have on the economy?</span></h2><p><span style="font-size: 12pt;">&ldquo; <a href="https://www.statista.com/statistics/208715/total-revenue-of-the-top-mining-companies/">In 2021, the mining industry's leading 40 companies had a total revenue of approximately 925 billion US dollars, including trading revenues</a>.&rdquo;&nbsp;</span></p><p><span style="font-size: 12pt;"> The International Council on Mining and Metals calculates the importance of mining industry for countries economies as the total production value in US dollars, average 2018 price expressed as percentage of GDP (ICCM. 2020. &ldquo;Role of mining in national economies. Mining Contribution Index (MCI) 5th edition).</span></p><p><span style="font-size: 12pt;"><img style="display: block; margin-left: auto; margin-right: auto;" src="https://kradminasset.s3.ap-south-1.amazonaws.com/ExpertViews/Pennapic.png" width="568" height="356" /></span></p><h2>&nbsp;</h2><h2><span style="font-size: 12pt;">4. Why is R&amp;D and innovation important for mining companies globally?</span></h2><p><span style="font-size: 12pt;">Traditionally conservative and considered a low innovation industry, mining faces many challenges caused by factors like deterioration of ore quality, people living closer to the mine sites creating environmental and social issues, rising energy prices, logistics disruptions caused by political changes, to mention just a few. </span></p><p><span style="font-size: 12pt;">These challenges are significant threats to the already low margin typical of mining companies. Innovation is a possible solution to several of these challenges.<br /></span></p><p>&nbsp;</p>
KR Expert - Wlademir Penna