Capital Shift Disruption in Mining
This was originally published online by Interlate.
G. McCullough1, D. Meldrum2 and M.
Strategy, Interlate, Brisbane QLD 4064. Email: email@example.com
2.CEO, Interlate, Brisbane
QLD 4064. Email: firstname.lastname@example.org
3.EGM – Digital
Industry, Siemens Australia, Melbourne VIC 3153. Email: email@example.com
The global mining sector is undercapitalised. There are
some important reasons for this, but these are outside of the scope of this
paper. Nevertheless, the restricted access to capital is constraining
innovation and technology adoption, which in turn is constraining productivity
In 2010, the mining industry had a total market
capitalisation of $1.7T and was attracting significant capital to fuel growth.
In just 3 years however, this dropped to a third of that value. By 2017, it had
fallen to just $500B. In this landscape it is important to consider that the
current value of funds under management globally, is $90T. This is money being
managed by professional fund managers, actively looking to put that money at
work. In stark contrast, the current global mining industry market
capitalisation represents only 0.001% of this available capital!
Effectively the mining industry is cut off from capital,
other than the capital that is already active in the industry. As an example, in
2018 Snapchat’s IPO was worth $30B but the total new investment in the mining
sector globally for the same year was considerably less than that. Not only has
the pace of capital investment in the industry slowed, the profile of capital
has shifted from expansion capital to sustaining capital.
One of the reasons for external investment shying away
from mining is that the drivers of a return on investment are not always clear.
Capital will flow, if it can see a clear path to deliver a return.
How Technology Leads to Capital Shift Disruption
If capital can see that a new technology or business model
is likely to generate better returns on investment than the incumbent solution,
it is going to shift. The capital effectively accelerates the disruptive
process into hyper-growth, making it both global and permanent.
Examples of Capital Shift Disruption in Other Sectors
Examples of disruption are well publicised. Case studies
such as Skype, Netflix and Wikipedia are well known. However, there are other
less textbook or well-known examples of disruption caused by shifting capital.
Siemens had a global communications business in the early 2000s that accounted
for approximately a third of its global revenues. In that era however, Siemens
did not recognise that the technological advancement of data and voice
convergence combined with consumer demand for this, could have significant commercial
implications. They didn’t understand quickly enough how capital would rally
behind the companies that did. As a result, Siemens communications business was
carried away with the rest of the telecommunication incumbents in a wave of
disruption sparked by Qualcomm and amplified by Apple.
Implications for Mining and Metals Companies
The Siemens example is relevant because Siemens has a
market capitalisation in the order of $130B, much the same as the world’s
largest mining company, and Siemens will attest that size is no defence.
For mining, investment in technology is low compared with
other asset intensive industries. A
notable consequence of this is the equally low levels of productivity improvement
evident in recent years. Historically, the mining industry has been recognised
as a slow adopter of technology-led innovation. Although evidence supports
growing momentum in this area since 2010, seemingly small gains in resultant
productivity have seen capital leaving the sector. Only in more recent years,
have we witnessed a modest 2% increase in productivity.
These trends are attracting the attention of start-ups and
companies from other industries who see mining as a prime target for
disruption. Netflix was the prime disruptor of the entertainment industry and
the main lesson here is that it did not take a cadre of companies to cause the
disruption, it only took one. This is the power of capital shift. The capital
got behind Netflix and the rest is history.
The implication for mining companies is profound. If they
are not tuned into disruptive forces either emerging from within or coming from
outside, they could find themselves caught in a structural change.
The disruption will be not be caused by technology itself,
but by how the capital markets follow the mining companies, or new entrants,
that quickly adapt to innovative approaches and service models.
A plausible scenario is that one or two mining companies
discover a new business model or technology that enables them to release significant
value improvement from each asset that they touch. They will be able to find
value where others have not. This means that any asset in the world suddenly
looks appealing, even a bargain for them. This will get the attention of the
fund managers controlling the investment of capital, and the shift, or flow
will occur to those companies. This could propel a wave of acquisitions or even
introduce new entrants. This has happened in other industries. Mining will be
In such a scenario, mining companies pondering the
potential implications of a capital shift disruption should be considering if
they are willing to be the acquired or the acquirer.
To be the acquirer, a miner is going to need to attract
the attention of “new” capital i.e. capital that is not normally associated
with mining. To attract this attention, they are going to need to be able to
demonstrate they can add value to assets that others can’t.
To do this, they could look to suppliers (mining and other
industries) for tools and enablers. They could set up their own separate,
arms-length organisations to do this. A more practical solution may be to
partner with an organisation or coalition that understands these issues and has
the capability to shepherd a progressive and successful transformation in the
The authors would like to acknowledge Interlate and
Siemens for their permission to publish this paper.