10/05/2016 - 05:26

Why Australia needs exploration

10/05/2016 - 05:26

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University of Western Australia academics John Sykes and Allan Trench suggest that mineral exploration should remain a corporate imperative – but why find more mineral supply when markets are so weak?  

Why Australia needs exploration
Iron ore mining in the Pilbara historically replaced low-quality iron ore mines in North America and Europe.

University of Western Australia academics John Sykes and Allan Trench suggest that mineral exploration should remain a corporate imperative – but why find more mineral supply when markets are so weak?  

Classical economists and industry executives typically point to supply and demand; their logic goes something like this: ‘Why should we maintain exploration expenditure through the bust of the cycle’? Why would we want to find more supply when markets are weak? Stop drilling.’

That initially sounds perfectly rational – but actually it misses the entire value that exploration brings. The ‘yes’ case for mineral exploration in 2016 requires a more in-depth perspective.  Our view is different, founded on cross-disciplinary research to be published in the new book Strictly Mining Boardroom – A Practitioner’s Guide for Next Generation Directors.

True frontier exploration in Australia is not about finding more supply or meeting short-term market needs; it is about finding better supply of long-term strategic value. These are the new deposits that can be mined at lower cost than those of today. Such industry-changing, world-class deposits are found in places we have not looked, and using techniques we have not fully mastered as yet.

Exploration and discovery is about looking for something new, and finding it against all odds – frontier exploration helps to find the next generation of mines that will maintain Australia as a world leader in the minerals sector. Put simply it does not add more supply overnight that depresses the current business cycle – it replaces uncompetitive existing supply, making sure you are still around for the next business cycle.

The situation is analogous to research and development in other industries. R&D is not undertaken to find more technology, it is done to find better technology. New technology replaces what went before by doing things cheaper and better.

New better, technology is discovered by businesses doing things that have not been done before, in areas of research that have not been explored before. So researchers are explorers too; they are just exploring the boundaries of science and technology, rather than the boundaries of the mapped earth.

Malcolm Turnbull’s call for greater business innovation in Australia is timely. Exploration is one of the mining sector analogues to new invention in the technology sector. It is not, therefore, a case of choosing between mining and technology industries; mining is all about innovation too – in part through frontier exploration.

High tech

To look at another frontier-focused industry, the hi-tech world is all about inventing the next disruptive technology. Mobile phones replaced landlines, search engines and websites replaced encyclopaedias and newspapers, e-commerce replaced bricks and mortar stores; all these innovations do things better and cheaper than the previous ways things were done, creating more choice at better prices.

Hi-tech companies do not stop investing in these highly disruptive potential technologies just because of a downturn in the business cycle; they keep plugging away, in the knowledge that inventing the next disruptive technology beats the cycle and changes the game.

For example, Apple launched a new iPhone each year through the GFC, winning market share. The iPhone changed the game, introducing intuitive touchscreens (better product) and simultaneously made smart phones affordable to everyone (more distribution).

 

True frontier minerals exploration and mining R&D is also about disruption, about replacing what went before, gaining a new competitive edge that wins in the market. The Pilbara region historically replaced low-quality iron ore mines in North America and Europe (thus it was better), while simultaneously materially increasing the supply of cheap iron ore to the market, allowing both Western economies and fast growing Asian economies to build and to consume more.

The prize from exploration is for Australia’s mining industry to grow faster than everyone else’s industry and provide more, cheaper minerals for all of us to consume.

However, be warned, if we do not do it, then someone else will discover the great new deposits and inventions elsewhere. That is, in the absence of next generation exploration discoveries locally, Australia’s mining industry will fail to remain competitive. Such a future will make the current situation in the industry look positively rosy; think of the UK coal industry in the 1980s.

For Australia to lead the world in the mining industry it needs a greater focus on exploration – and needs it now.

 

John Sykes is a PhD researcher at the UWA Centre for Exploration Targeting.

Allan Trench is a professor at the UWA Business School and at the Centre for Exploration Targeting.

 

• Business News subscribers purchasing the book online will have the $6.50 postage and handling fee waived by using the code MINING when they purchase the book online at majorstreet.com.au/product/strictly-mining-boardroom-vol-ii/

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