The Mining Business Model

How does the mining industry create value? The answer to that question is provided by the mining business model. But what is a business model?

Here is one definition:

The term “business model” is used to describe how systems and people are organized to create, capture, and deliver value.

Shown below is an illustration of the current business model of Mine Co. Government owns the mineral rights and gives Mine Co a permit to develop and operate a mine. In return royalties and taxes are paid by Mine Co to Government. Mine Co sells products from the mine to buyers. A network of local and international companies supplies Mine Co with the equipment and materials needed to operate the mine. Benefits may arise if there is engagement between Mine Co, Government, and Community. The community determines whether the mining project is granted a “social licence” to operate.

This model has worked well, but has given rise to some notable non-technical risks that suggest some changes are necessary. For example, there could be disagreement between Mine Co and Government about taxes and royalties and unless the disagreement is resolved Government could expropriate the operation. Also, the engagement between Government, Community, and Mine Co should provide benefits to Community resulting from a combination of redistribution of royalties and taxes from Government and initiatives developed by Mine Co. However, there is no guarantee that any part of this combination will happen. A failure to deliver benefits to Community can lead to anti-mining sentiment and disruptions to operations. The common result is that Mine Co becomes subject to high expectations trying to satisfy Government and Community as well as provide value to shareholders.

An alternative model is illustrated below. In this new model, a service company, MaaS Co (Mining as a Service), enters into a contract with a Mineral Rights Owner (MRO) to extract and process minerals which are sold to buyers. The proceeds of the sales are subject to a revenue-sharing agreement between MaaS Co and MRO. Maas Co builds a supply network by means of contracts with both local and remote suppliers. To deliver benefits, MaaS Co and the MRO work with Community to form a local supply chain.

MaaS Co would be in competition with similar companies to be the provider for the MRO. MaaS would achieve competitive advantage through superior application of technology. Further advantage can be achieved by development of innovative engagement schemes with Community and local suppliers, which governments would likely look upon favourably.

This model replaces the non-technical problems with market-based structures. For the model to function over the long-term, the relationship between the MRO and MaaS Co must be a partnership. It cannot be a form of contract mining.

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