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As my previous blogs have indicated I am an ardent fan of adopting new technology. However, I am, these days, as equally a vocal opponent of resource companies getting involved directly in research and development.
I know that the ATO offers tax incentives to companies to undertake R & D and that we all utilise this feature of tax policy. However, in my opinion, for most resource companies, R & D should be confined to the narrow set of original work required to bring a new project to fruition. Resource companies should not become so heavily involved in original research into new technologies that their continued existence is governed by its success or failure and its timeline.
Many of us in the industry observed; albeit from a distance, the rather disastrous HPAL experience that the nickel industry went through in the late 90’s. This was a very public display of mining companies becoming engaged in R & D, building what were essentially large demonstration plants. They certainly demonstrated that the technology wasn't as commercially viable as its proponents had asserted! Whilst I concede that Murrin Murrin is still operating, at what cost? They had to add another production train in order to get it to original nameplate capacity and I strongly suspect that it is not producing nickel for $1/lb. Not that you can discern that from the Glencore reports.
There have been less widely reported instances of smaller companies hitching their trailer to a technology still in development with no less serious consequences.
One of the first issues that arises when a listed mining company enters into a relationship with a technology developer, is the question of public disclosure.
When a listed company invests in a private company undertaking R & D, it will enter into a confidentiality agreement with that private company. This will allow the private company to control what may be said in public regarding the technology under development. It must be borne in mind that the technology and intellectual property is owned and controlled by the private company and that as a private company it has no public reporting obligations, other than a few statutory obligations to regulators, ASIC in the case of Australia. Therefore a public company that is an investor in a private company must seek and gain approval for any public statement made by the public company, irrespective of whether the report is positive, negative or neutral.
If one stands in the technology owner's shoes it is easy to understand why they would be reticent about making any public statements regarding their technology, until such time as it is ready to deploy at a commercial scale. It is not simply about whether laboratory test work or a pilot plant trial is progressing well or poorly, it is about protecting the intellectual property (IP) that is built up around the laboratory test work and pilot plant trials.
Whilst the technology itself may be protected by patents, which as we have seen in recent years, can be circumvented, it is the IP that is built up with every laboratory test or operating run that is the real commercial advantage that the technology owner has. Any release of information, however small and particularly if it contains data, adds to the knowledge base of would be competitors.
Publicly listed companies on the other hand have significant public disclosure obligations as well as shareholders eager to find out how their company’s investment in a new technology is developing. This is where the tension arises between the public companies desire to report on progress and the private companies desire to keep as much information as possible confidential.
A compromise is may be arrived at over the course of a few iterations of a release, but I go back to my earlier statement that it has to be remembered who owns the technology and therefore who has the right to determine what public statements may be made regarding it. Therefore, most releases are inclined towards brevity.
Where the listed company has other projects to focus on, this may not be a huge problem as the technology dependent project is only one of a number of avenues for development.
However, where a listed miner has a single project that is reliant on the development of a new technology, then I believe that the perception of its shareholders shifts. It is no longer seen as an exploration and development company but a "technology play". As a consequence shareholders become extremely focused on the progress of the new technology and often berate the company for not releasing more information regarding its progress. Yet, as explained earlier, the company's hands are tied with regard to the release of information.
One of the fundamental flaws of exploration and mining companies becoming involved in R & D, is that the time horizons; at least for investors, are disparate. Most investors in resource companies generally think short-term, they look for a return on their investment in perhaps 2 to 3 years. Research and development; when conducted properly, can have very much longer time horizons, 10 years or more to perfect a commercial process would not be unheard of.
Rarely does everything go right with R & D, problems and unexpected events may require the technology developer to rethink the process. If they follow proper scientific methodology they will hypothesise, then test a solution. This can involve hundreds or even thousands of laboratory tests in order to not only validate the hypothesis but to optimise the parameters. Also a change in one part of the process can have implications downstream, all of which needs to be considered when contemplating a revision of the process. It is therefore easy to see how timelines can stretch out.
With extended timelines comes the inevitable requirement for further funding rounds. The listed company has to decide whether to contribute additional funds in order to maintain its percentage holding in the company, or abstain and allow itself to be diluted.
When confronted with the disparity in timelines the publicly listed company has to decide on its strategic response. One option is to stick with development of the technology as its sole development route and to ride out the inevitable investor disquiet over lack of progress and the lack of information. However, this strategy is fraught with risk, either that the technology will not ultimately be commercially validated or that it will simply take so long to achieve that the company runs out of money before the technology is commercialised and has little prospect of raising further funds in order to survive.
A smarter strategy is to diversify the risk and to seek out alternative development opportunities.
The problem with this change in strategy can be investor perception.
If the company is seen as a "technology play", then despite a clearly communicated diversifying strategy, investors remain focused on the technology and may pay little attention to a new acquisition or development opportunity.
So whilst this diversification should result in a re-rating of the listed company’s stock as the value of the alternative development route is recognised, investors may seem unable to change their perception and therefore valuation of the stock.
With the understanding that I have gained over the years, I would certainly not recommend any exploration or mining company becoming involved in research and development, especially not junior companies.
I note that when the majors such as BHP Billiton and Rio Tinto, invest in R & D, they usually do so by funding research establishments rather than making investments in technology development companies. These companies are large enough to write off expenditure on unsuccessful projects without flinching and because of the size and diversity of their organisations and the fact that R & D does not comprise a huge portion of their budget, do not have the need to report on every research and development project that they are sponsoring.
If you really feel that you have no other option than to become dependent on the successful development of a new technology, then please, please make sure that you extract the maximum value that you can from the relationship, such as exclusivity for a particular region and a given period of time. But it is better to avoid it altogether if you can.
The bottom line for me, is that if you are an explorer or miner, stick with what you know and leave R & D to those who specialise in it. When a technology is ready to commercially deploy, then by all means be an early adopter!
I know that the ATO offers tax incentives to companies to undertake R & D and that we all utilise this feature of tax policy. However, in my opinion, for most resource companies, R & D should be confined to the narrow set of original work required to bring a new project to fruition. Resource companies should not become so heavily involved in original research into new technologies that their continued existence is governed by its success or failure and its timeline.
Many of us in the industry observed; albeit from a distance, the rather disastrous HPAL experience that the nickel industry went through in the late 90’s. This was a very public display of mining companies becoming engaged in R & D, building what were essentially large demonstration plants. They certainly demonstrated that the technology wasn't as commercially viable as its proponents had asserted! Whilst I concede that Murrin Murrin is still operating, at what cost? They had to add another production train in order to get it to original nameplate capacity and I strongly suspect that it is not producing nickel for $1/lb. Not that you can discern that from the Glencore reports.
There have been less widely reported instances of smaller companies hitching their trailer to a technology still in development with no less serious consequences.
One of the first issues that arises when a listed mining company enters into a relationship with a technology developer, is the question of public disclosure.
When a listed company invests in a private company undertaking R & D, it will enter into a confidentiality agreement with that private company. This will allow the private company to control what may be said in public regarding the technology under development. It must be borne in mind that the technology and intellectual property is owned and controlled by the private company and that as a private company it has no public reporting obligations, other than a few statutory obligations to regulators, ASIC in the case of Australia. Therefore a public company that is an investor in a private company must seek and gain approval for any public statement made by the public company, irrespective of whether the report is positive, negative or neutral.
If one stands in the technology owner's shoes it is easy to understand why they would be reticent about making any public statements regarding their technology, until such time as it is ready to deploy at a commercial scale. It is not simply about whether laboratory test work or a pilot plant trial is progressing well or poorly, it is about protecting the intellectual property (IP) that is built up around the laboratory test work and pilot plant trials.
Whilst the technology itself may be protected by patents, which as we have seen in recent years, can be circumvented, it is the IP that is built up with every laboratory test or operating run that is the real commercial advantage that the technology owner has. Any release of information, however small and particularly if it contains data, adds to the knowledge base of would be competitors.
Publicly listed companies on the other hand have significant public disclosure obligations as well as shareholders eager to find out how their company’s investment in a new technology is developing. This is where the tension arises between the public companies desire to report on progress and the private companies desire to keep as much information as possible confidential.
A compromise is may be arrived at over the course of a few iterations of a release, but I go back to my earlier statement that it has to be remembered who owns the technology and therefore who has the right to determine what public statements may be made regarding it. Therefore, most releases are inclined towards brevity.
Where the listed company has other projects to focus on, this may not be a huge problem as the technology dependent project is only one of a number of avenues for development.
However, where a listed miner has a single project that is reliant on the development of a new technology, then I believe that the perception of its shareholders shifts. It is no longer seen as an exploration and development company but a "technology play". As a consequence shareholders become extremely focused on the progress of the new technology and often berate the company for not releasing more information regarding its progress. Yet, as explained earlier, the company's hands are tied with regard to the release of information.
One of the fundamental flaws of exploration and mining companies becoming involved in R & D, is that the time horizons; at least for investors, are disparate. Most investors in resource companies generally think short-term, they look for a return on their investment in perhaps 2 to 3 years. Research and development; when conducted properly, can have very much longer time horizons, 10 years or more to perfect a commercial process would not be unheard of.
Rarely does everything go right with R & D, problems and unexpected events may require the technology developer to rethink the process. If they follow proper scientific methodology they will hypothesise, then test a solution. This can involve hundreds or even thousands of laboratory tests in order to not only validate the hypothesis but to optimise the parameters. Also a change in one part of the process can have implications downstream, all of which needs to be considered when contemplating a revision of the process. It is therefore easy to see how timelines can stretch out.
With extended timelines comes the inevitable requirement for further funding rounds. The listed company has to decide whether to contribute additional funds in order to maintain its percentage holding in the company, or abstain and allow itself to be diluted.
When confronted with the disparity in timelines the publicly listed company has to decide on its strategic response. One option is to stick with development of the technology as its sole development route and to ride out the inevitable investor disquiet over lack of progress and the lack of information. However, this strategy is fraught with risk, either that the technology will not ultimately be commercially validated or that it will simply take so long to achieve that the company runs out of money before the technology is commercialised and has little prospect of raising further funds in order to survive.
A smarter strategy is to diversify the risk and to seek out alternative development opportunities.
The problem with this change in strategy can be investor perception.
If the company is seen as a "technology play", then despite a clearly communicated diversifying strategy, investors remain focused on the technology and may pay little attention to a new acquisition or development opportunity.
So whilst this diversification should result in a re-rating of the listed company’s stock as the value of the alternative development route is recognised, investors may seem unable to change their perception and therefore valuation of the stock.
With the understanding that I have gained over the years, I would certainly not recommend any exploration or mining company becoming involved in research and development, especially not junior companies.
I note that when the majors such as BHP Billiton and Rio Tinto, invest in R & D, they usually do so by funding research establishments rather than making investments in technology development companies. These companies are large enough to write off expenditure on unsuccessful projects without flinching and because of the size and diversity of their organisations and the fact that R & D does not comprise a huge portion of their budget, do not have the need to report on every research and development project that they are sponsoring.
If you really feel that you have no other option than to become dependent on the successful development of a new technology, then please, please make sure that you extract the maximum value that you can from the relationship, such as exclusivity for a particular region and a given period of time. But it is better to avoid it altogether if you can.
The bottom line for me, is that if you are an explorer or miner, stick with what you know and leave R & D to those who specialise in it. When a technology is ready to commercially deploy, then by all means be an early adopter!
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