Value Proposition Design

Introduction

There are three foundational concepts when crafting industrial business cases with their primary value derived from ESG:

1.????? Novel ESG-related value propositions will have more than one ‘natural investor’.

2.????? Each partner should invest only in areas that create value for their stakeholders.

3.????? In most cases it will be necessary to create (not find) a regional market.

This all seems reasonably obvious, ?but comes with some challenges because the minesite may need to relinquish some level of control, ecosystem management isn’t typically a core competency, and creating novel value propositions around which to grow a regional market requires a culture more commonly found in a startup environment than in resource and commodity-centric businesses.?

Following on from the last article, I’ll principally use the Newmont-Cadia tailings case study published in the 2024 ICMM report ‘Tools for Circularity’ (www.icmm.com) as a reference point.? It’s important to state that I’m using it because it’s a good illustrative example of the challenges that’s in the public domain, and I have some familiarity with the site (worked there in 1998!). ?I’ll explore some of the ‘traps’ in the case, then cycle back to the foundational concepts. To get started, in the image below, I’ve highlighted some areas of the case study to support the discussion.

The Case Study

The stated value proposition

An initial scan of the case (particularly the KPI’s) suggests that it’s main value to Newmont relates to tailings intensity, and conceptually separation of a coarse sand from the tailings stream could reduce the volume of tailings while being ‘cost neutral’.

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The context

Before I go too much further, it’s necessary to cover a little of the technical detail.? In 2019, the Cadia plant processed around 29 million tonnes of ore (Geoghegan & Haines, 2023), which was processed to a particle size of <600um (Haines et. al, n.d).? Around the same time, Cadia was mining the Cadia and Cadia East deposits (operations.newmont.com), for which the host rock is a quartz monzonite (Forster & Seccombe/Geoscience Australia).? ??Quartz Monzonites are feldspar-dominated igneous rocks with >5% quartz (Wikipedia).? ?Feldspars in turn are common aluminium silicates (Wikipedia).

The result is that Cadia is likely able to produce millions of tonnes per year of angular (crushed not weathered), slightly contaminated, feldspar-rich sand with >50% of particles <600um (one of the industry specs).? ??To have a meaningful impact on the tailings volumes, let’s assume that the site needs to produce at least 3MTPA of this product to achieve its stated objective.

The market

The Cadia operation is approximately 200km West of existing major sand and construction material producing sites operated my major organisations serving the Sydney Planning Area.? The market for construction sand (overwhelmingly silica) in the Sydney planning area might be estimated at 5-6MTPA, of which coarse angular sands is around 15% (inferred from Pienmunne & Whitehouse, Supply and Demand for Construction Sand in the Sydney Planning Region, 2001).? ?Using napkin-maths, the total credible market is therefore is around 0.9MTPA.? The market is commoditised (literally has Australian standards on the products), and is dominated and contested by major entrenched players (eg CSR, Boral) that are producing a higher-quality product from established long-life assets that are ~200km closer to the end use markets than Cadia.? ??Even assuming that feldspars can substitute for silica in some applications (very sketchy assumption), the market simply isn’t big enough, and the additional logistics costs would be more than the market value of the ‘sand’.?

Failure of the traditional value proposition

The issue is common to many minesites – the waste minerals are bulk commodities that are low value, yet mines are (nearly) always long distances from established markets.? Mines are also not good at extracting rock at the same cost that a quarry does.? ?While the underlying idea has merit, the red-ocean value proposition described by Newmont is doomed to failure.

Value proposition innovation

In the case of Cadia, the fundamental concept of extracting a relatively clean waste product and doing something useful with it is sound, but the value needs to be ‘concentrated’ locally before it can be ‘moved’, and the full economic (and ESG) value of the activity needs to be captured.? While Newmont is the sector leader for ESG performance, it is unlikely to invest on the basis that ‘if everything goes well we’ll break even’.? On the other hand, elements that have tangential value to Newmont (eg regional economic development, strategic land use planning, sustainable development) have considerable value to other stakeholders.? Some of the other stakeholders (eg governments) also work on much longer time horizons than mining companies.? ??This creates opportunities that the mining companies cannot execute alone.? To be direct, Newmont likely has very little interest in what the city of Orange looks like in 30-50 years but the various layers of government routinely plan over that horizon.?

In this case, the various layers of government are therefore an example of a stakeholder that should invest in the aspects of the project related to economic development, while Newmont should (largely) limit investment to the aspects that make direct financial sense.??? Most governments have little interest in subsidising a private proponents financial business case, but economic development is investable where it’s aligned to strategic policy.

This will inevitably require development of secondary industries that can serve new or existing markets.? In the ICMM paper there are some examples of other mines seeking to ‘concentrate’ value in this way, for example by producing bricks from the tailings (Freeport-McMoRan), although again they suffer from transport and logistics due to the sheer volume of mine waste being generated annually (ICMM.com)

The blind spot is that the secondary industries do not need to operate on the same timescale as the mine. This mistake arises from group-think because the mine is assumed to be the principal party in every initiative.? ?The government owns the resource, and they have a much, much longer view than most mines (though they are also not generally business operators).? As we add nodes to the value chain, ecosystem thinking is required to progress.

Using the Cadia example, and for the sake of imagineering, what if some layer of government invested (at a much lower cost of capital…) in a dedicated impoundment for the sand product.? Cadia continues it’s operations, but separates the ‘sand’ and diverts it to the new ‘third party’ impoundment, creating an intergenerational economic resource for the region.? Cadia eventually depletes it’s copper and gold resources and closes the site, but the new ‘sand’ resource remains and is owned by the government (the same way the government owned the original copper-gold resource).? Secondary industries (bricks, glass, construction materials, etc) can develop with confident supply of environmentally sustainable feedstock, while producing at levels that tertiary markets can absorb over a much longer time horizon.? ?Instead of arguing about mine closure liability, we may instead be talking about a regional industrial hub.? In this example Cadia picks up the financial benefits of reduced tailings and risk exposure but the overall value proposition is much greater (keep in mind that it’s on track to get nothing now).

This is a relatively simple example of aligning the investors with the value proposition that has meaning for them, but requires that we think differently.? Considering ESG (which is inherently intergenerational) over the time horizon of a single mining operation doesn’t make sense, yet mine operators have to have the humility to take second chair and recognise that by trying to capture all the value, they’ll be on track to capture none of it.?

Conclusion

As mining moves beyond ‘financially obvious’ value propositions that can be reverse-mapped to a corporate ESG program, it is necessary to think beyond a one-company or one-industry approach.? Value propositions will inherently require multiple investors, each of which should invest only in the part that aligns to their stakeholder needs.? Value will need to be “concentrated” locally through secondary industries and in regional communities, that will likely outlast the mine itself.? Governments have a key role to play to bridge the financial and economic value cases to ensure the long-term prosperity of the regions, ensure sustainable development, ?and to maximise the value of their scarce natural resource.?

Over the next two articles, I will look at the skills and capabilities required to unlock this value, and compare that to existing mines in Australia (I promise to give Newmont a break).? Later, I’ll look at how to ‘level up’ this approach through active market development (ie not just placing bricks into an existing market).

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About the Author

Matthew Magee is an accomplished General Manager with 25 years experience in the water, mining, technology and chemical industries, driving operational excellence and business growth. He is skilled in strategic planning and leading diverse teams in complex environments.?? He has considerable expertise in operations management, productivity improvement and strategic innovation, and is committed to delivering measurable results while strengthening stakeholder relationships. He thrives in fast-paced and ambiguous environments where he can synthesise complex information to derive unique insights, and has a reputation as a driven, visionary and passionate leader who provides differentiated strategic thinking to a team. Matthew has broad base of technical, commercial, operational and leadership experience. ??Outside work, he is a husband to one, father to three and long-distance hiker with many.? He lives by the motto ‘if you’re not a little bit scared, you’re not sailing close enough to the edge of the map’.