EDITOR: | September 9th, 2014 | 6 Comments

Mackowski Success Factors for Rare Earths Development – Part 4

| September 09, 2014 | 6 Comments
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MackaIn the previous three articles, “Success Factors for Rare Earths Development – Part 1, Part 2 and Part 3, I introduced and discussed what I consider to be the first two KEY success factors for the development of a rare earth project; mineralogy and the newly defined “basket price”. As a quick summary, I see mineralogy as being the key success factor due to its huge influence on the flow sheet and the resultant capital cost (CAPEX) and operating costs (OPEX) of the processing plant. It is made more so by “todays” difficulty of obtaining the funding of that CAPEX that forces me to make low CAPEX of critical importance, and mineralogy is the key to having a lowered CAPEX. The newly defined “basket price”; the value of the contained REO in one tonne of feed material to the chemical plant, is my second success factor as this presents profit potential in a quantifiable economic metric that can clearly differentiate between projects. Again I repeat, always remember that things change, and what is a success factor today may not be as significant at a later time.

As we move down the list of success factors and the relative ranking of the success factors decreases, it becomes increasingly difficult to quantifiably demonstrate the argument of why success factor three is better than success factor four and so on. This will lead to a more subjective ordering of the factors. They are still all important but how you rank them is more difficult. Even as I write this article, I am of two minds as to the diligence behind the third and fourth success factors. Perhaps with me documenting the discussion it will assist in presenting the argument in a manner better suited to allow you to follow my thinking and develop an understanding.

The next two very important success factors relate to one another but one cannot occur without the other. I will be more precise.

The capability of the Board and Executive team is of paramount importance in project development. It is also of paramount importance to have a clear mine to market place strategy. Since you cannot have the latter (mine to market place strategy) without already having the former, I will rank the capability of the Board and Executive team (success factor 3) higher than the business development strategy (success factor 4).

Before I develop the next two success factors it is important to identify that there are a number of business models that exploration companies can adopt. Exploration company A may buy prospective tenements, add value through regional exploration, and look to divest to another party at a value that returns profit to the shareholders. A sound business model for company A. However, company B looks to purchase tenements that have had some work done, add further value by further resource definition, add value by developing flow sheets for processing, and runs various feasibility studies before divesting. Again, at a profit to shareholders, and again, this is a sound business model. However, the business model that I am developing success factors for and presenting to you is the one (company C) who wants to go to at least the next phase. That is, developing the mine, possibly developing a chemical plant, possibly joining a well-defined supply chain. If you consider the experience and talents of company A versus company B versus company C, it is readily apparent that they will need to be different. This is not to say that there would not be similarities but it is the differences that make the capability of the Board and Executive so important to the success of the REO project. So, it is this last business model (company C) that I will focus upon and use to explain why I think the capability of the Board and Executive team is so important.

One of the critical determinants of a projects success is that the development team has a track record of success. This success is at Board level and at the executive level. In the REO space, all projects are looking at resource identification, resource development, flow sheet development, product suite optimization and market assessment. In gold or iron ore this is a relatively easy series of tasks. But in the REO space there are very few people outside of China who have experience, let alone a record of success, so what do you look for? Let me try to list a few comparable and relevant requirements:

  • Have a track record in minerals research and development (the flow sheet can be unique)
  • Have a track record in development of complex chemical plants (a significant chemical precinct needs to be developed)
  • Have a track record in responsible environment, safety and quality performance (a licence to operate is critical)
  • Have a track record in challenging customer focused markets (the REO spectrum is global, opaque and complex)
  • Have a track record in large denomination project funding (~$1 Billion is a large project)

This is an extensive list of requirements that few individuals would possess. So the team is important to be able to adequately cover all of them.

I am reminded here of a Board of Directors training exercise I attended where a company looks to expand with a new product range; it also looks to expand geographically with its existing products; and thirdly it looks to expand with a new product range at the same time as expanding geographically. What are the relative difficulties between the three options? In the course example they stated that it would be a difficulty factor of 2 to expand a product range; it would also be a difficulty factor of 2 to expand geographically. Therefore to expand product range and expand geographically at the same time is 2 times 2, equals a difficulty factor of 4. I challenged that logic. They were not allowing for an “at the same time” factor. The degree of difficulty would at least be 2 times 2 times and an additional factor of 2 at least. Therefore eight times more difficulty. They revised the course material and notes! The reason this example is important is that the degree of difficulty in moving from an exploration company to a mining company, whilst also changing to become a chemicals development company in a globally competitive market is a very onerous task indeed. Why?

As an example, look at two of the biggest iron ore companies in the world. Successful? You bet. They can export iron ore in mind blowing tonnages at very low operating costs. Do they have a successful Board and Executive team? Of course they do. But can they add value to that iron ore and locally produce an intermediate product that can still feed steel mills. No, and even not after 20 years of massive development expenditure. Why? Because the move from iron ore miner and exporter to intermediate steel producer requires such a mind shift, that requires a totally different approach to operations, safety, environment, maintenance, customer relations etc that the capabilities and experience of the Board and Executive team do not cover those required to “expand the product suite”. And never mind the expanded geography! You only need to look at the REO space to see the transition from an exploration company, to a development company, to an operator of a complex chemical plant operating in a global complicated market place, to see that for a cash-strapped junior this is a very big challenge. A challenge that without the right Board and Executive team is a challenge that is probably too large to achieve success. But it can be done. Lynas and Molycorp are a testament to that.

So capability of the Board and Executive team is ranked success factor 3 and I will discuss the “plan to market” as success factor 4 next week. As I state each article, we are looking at success factors “today”. Again, I would be interested in any comments between now and then to see if you and I are on the same page.


Steve Mackowski

Editor:

Mr Mackowski is a qualified engineer in mineral processing with over 30 years technical and operational experience in rare earths, uranium, industrial minerals, nickel, kaolin ... <Read more about Steve Mackowski>


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Comments

  • Steve Mackowski

    Bob. We are eager to criticise Lynas and Molycorp but look at what they have achieved.
    Resource, flow sheet, EPCM, ramp up. The last couple of years being a SOB time. Poor markets, poor prices, financing difficulty, but they still did it. Other commentators have said their product suite is inappropriate in today’s world. Their resources are their resources. I am sure that Lynas is hot to trot on Duncan when the time is right and I am sure that Molycorp are looking at how to adjust or complement. I have said before that their issues can be worked through and they have the people to do that.
    CAPEX. Both appear to have got caught up in a cost spiral that has impacted across the Western world – but they still did it! Will they keep doing it? Time will tell but they have the team to do so. The unknowns in the roll out of the China story will have the biggest impact on that.

    September 9, 2014 - 7:46 PM

  • merlion

    Steve, thanks for your contributions. They are collectibles.

    There’s a massive rogue element in the equation. I refer to Serendipity – upper case intended.

    Top quality management may get the job done provided those unmanageable forces comply. Think of the many diverse factors ranging from the weather, to plain bad luck to an interfering government spoiling the capital markets.

    Floods suddenly obliterate your drilling plan. Or they sweep away alluvial cover to expose nuggets of gold. Bush fire likewise. A plane crash in the Congo killed the entire Sundance Board in 2010.

    I call them Blessings and they leverage small cap operations far more greatly than large cap.

    Then there’s the Chinese mindset that sees crisis harbouring opportunity, maybe after Serendipity has played its hand.

    Lady Luck is the wild card.

    September 9, 2014 - 7:47 PM

  • Steve Mackowski

    Thanks Merlion. Yes the lovely lady plays her part, luck that is. But we can only control those factors we can measure and manage. The whole crux of this series is that you can measure many more factors than what you might think. Management capability is a classic. I spent a few years developing metrics to measure management. Although they are not in the public domain or in wide spread use, they are invaluable tools.
    The next article is such an example where I will try to explain in a semi-quantitative approach, the mine to market strategy.

    September 10, 2014 - 2:16 AM

  • Jimmy II

    Steve:
    I have been following your series with great interest. Congratulations on a superb job of educating and informing a pretty knowledgeable crowd. Where are you rating infrastructure? Access, near availability of inputs such as grid power, process chemicals, skilled labor. A highly technically skilled input if a company seeks to go to the cracking and refining stages; these types are not usually attracted to isolated locations in far northern Quebec, Africa or the Northern Territory

    September 10, 2014 - 8:44 AM

  • Steve Mackowski

    Infrastructure – a double edged sword. Pluses on the CAPEX and OPEX side but maybe negative on the social licence to operate (Lynas / radiation etc). In todays world of FIFO, the skills issue is not so important. Just have to pay the right $s.

    September 10, 2014 - 10:19 PM

  • Mackowski Success Factors for Rare Earths Development – Part 6 | InvestorIntel

    […] How a new view of “basket price” can point the way as a cover-all financial success factor (2) Part 4 – How the capability of the Board and Management can be viewed as a success factor (3) Part 5 – […]

    September 25, 2014 - 9:30 AM

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