Does regulation impede innovation in mining? Part 1: technical innovation
Does investor-protection regulation such as Canada’s National Instrument 43-101 (or by equivalence JORC, or SAMREC) create obstacles to innovation in mining? This is a perennial debate that rarely gets the in-depth treatment it deserves.
Let me first accept the (trite) argument that NI43-101 is silent on the question of innovation. Word-search “innovation” and you will find zero occurrences in the Instrument and even in the Companion Policy. And it is of course true that NI43-101 is not intended to have any impact on innovation, nor to be an engineering standard.
It's also true that stop signs are not intended to cause collisions at intersections. But that is not a reason to exclude signage from debate about how safe interaction is managed on the road.
And it’s not unfair of me to use NI43-101 as the lightning conductor for a lot of flaws in mining system engineering: although the regulation itself is little more than a set of truth-in-advertising rules (that emerged for good reason), its effect has been to create practice privileges for technocrats that have spawned an entire cottage industry of “NI43-101 compliant” people and design products. As a result, NI43-101 now sits as the brand apex of a whole canon of regulations, standards and guidelines, written almost exclusively by professionals and their societies, that formularize the way mining and mineral processing systems are assembled and integrated.
In my view, there is a traceable influence from NI43-101 to innovation barriers, but it is an unintended, emergent property of this complex system of actors and projects. If we are to improve systemic treatment of innovation in mining, as most people seem to think we should, then we have to address the whole system, including access to capital for system integration and deployment. NI43-101 is the gatekeeper of that capital.
Come with me as I suggest some cause-and-effect relationships. This will be a two-part series, the first focussing on technological innovation, the second on business model innovation. Throughout, please remember that I am not opposed to truth-in-advertising rules!
And yes, we at Inspire Resources do have some ideas for better alternatives, which will emerge in future articles.
Quasi-mandatory standards
When we say that “NI43-101 is not an engineering standard”, we are playing word games. In the Companion Policy we find this:
In other words, “use CIM or equivalent standards, or else”. We might as well cut and paste the standards into NI43-101. The rest of the rule-stack is even more tightly interwoven, which is no surprise given the small community of professionals that writes it (as fine volunteers whom I salute, by the way).
Standards and guidelines are not necessarily a bad thing, but they do not lead or even facilitate innovation – they follow it, sometimes at a depressingly long distance, and they seek to avoid risk rather than to seize opportunity. Often incumbents (including professional associations) will try to use standards to build protection around their own technologies and business models, creating tensions in otherwise collaborative processes.
If the apex document effectively mandates standards and guidelines, then only innovations that comply with the standards and guidelines can be offered to public markets. This greatly limits the novelty and scope dimensions of the innovation window, because standards are written through the rear-view mirror. If it’s not a proven drop-in, it won’t see the light of day (although there have been some exceptions, they prove the rule by their rarity).
Reliance on individuals
NI43-101 places accountability firmly at the door of the individual professional (the “Qualified Person”, QP). If you are steeped in the century-old Canadian tradition of regulatory capture by professions, this may seem unremarkable – you might not even be able to imagine an alternative. But it has implications for innovation.
Embracing uncertainty and novelty is fundamentally a team game because the consequences are complex; if they were merely complicated, they could be revealed by expertise alone. For complex problems, we need experts, but we also need the perspectives of people who could not be QPs. NI43-101 inadvertently impedes this in several ways:
QPs taking responsibility for Technical Reports must have experience relevant to the subject matter, and when relying on others, must understand the essence of what others are saying sufficiently to take personal responsibility for it. Consider a feasibility study that depends on an unproven technology. The technology proponent is almost certain to lack the credentials to be a QP herself, and the QP is quite likely not to understand the technology, let alone have experience of it. The QP cannot therefore base the study on the novel technology without risk of losing his livelihood. This is the consequence of trying to put a square peg (managing complex innovation risk) into a round hole (reserved practice for individual professionals), and it spirals into impossibility for innovations at the system level, rather than just technology substitution into a flowsheet.
Where a Technical Report is required to be independent, there is an additional barrier to the above scenario. Innovators are never independent with regard to their technology – they always have a vested interest. Yet without demonstration, there can be no independent assessment – a catch-22. Consider a scenario in which a development-stage publicly-listed company wants to pursue a project that depends on unproven innovation: the company is unlikely to find an independent QP willing to take responsibility for the Technical Report, so the innovation opportunity cannot be offered to public markets. Additionally, the innovator may have good reason to be wary of sharing technical detail with an independent consultant rather than a customer.
Design change is bad
I have heard many times advice to investors to beware of technical concepts that change between successive Technical Reports; my heart sinks when learning is suppressed this way. Perhaps this school of thought is more folklore than rule-stack, but it arises within the framework of a prescribed sequence of formulaic technical disclosures. The inadvertent consequence is an access-to-capital penalty for adopting innovations during the long march to construction. Better to play it safe from the first pre-feasibility study and lock-in a proven concept.
Disproportionate focus on capital cost
The pursuit of economy-of-scale and the avoidance of innovation are mutually-reinforcing phenomena in mining. As innovation risk disappears out of our consciousness, risk perception becomes skewed towards capital cost uncertainty. So the design enterprise is preoccupied with capital expenditure control while also trying to maximize economic value. This disadvantages innovative technologies because they have yet to come down the Wright’s Law curve for manufacturing cost – even if they might generate a lot of value. And without adoption, there can be no manufacturing, and no cost reduction.
It might seem that this is remote from NI43-101, but it is not. The factors that would limit appetite for economy of scale are overwhelmingly social and environmental in nature. In regulatory parlance these are called “modifying factors” – in other words, they are deemed by guidelines (not NI43-101 itself, which doesn’t even mention them) to be auxiliary to the value equation, not central. It is an open secret that many Technical Reports, perhaps most, do a terrible job of addressing modifying factors. It is also widely recognized that committees trying to improve regulatory treatment of modifying factors have struggled to make progress. These factors are not easy to quantify, tend to be interconnected in complex ways, and do not fit neatly into pigeonholes of expertise over which technocratic professions rule. Thus they are prevented from becoming a driver of innovation (I will return to this in Part 2).
The one-scenario fallacy
There is a general understanding that a Feasibility Study is acceptable if it calculates economic feasibility in a single scenario. I wonder whether this comes from the fact that NI43-101 outsources its definition of Feasibility Study to the CIM Definition Standards for Mineral Resources & Mineral Reserves: resources and reserves are communicated to markets as single-point numbers, not probability distributions, so the latter document is, let’s say, unambitious in its treatment of uncertainty.
The mine design enterprise could do a much better job of managing uncertainty, but it has lagged behind other sectors in probabilistic tool development. Why does this matter for innovation? Because to assess the impact of technology risk, you have to evaluate countless scenarios in which the risk materializes. This cannot be done with spreadsheets and spider diagrams by specialists designing sequentially like a bucket brigade. It requires parametric models, collaboration, simulation and iteration.
If regulations and guidelines required probability distributions of economic value to be communicated to markets, we would have far better insights into technology risk and opportunity simply because of the tools that would need to be adopted. (And investors would be better served). But they do not.
Conclusion
Although NI43-101 is silent on innovation, it is the public-facing apex of an entrenched ecosystem whose practices could be much more amenable to innovation. Regulation has the laudable goal of protecting a non-specialist retail investor from some of the risks of a highly uncertain business; but in doing so, it inadvertently freezes out risk’s alter ego, opportunity.
There are no easy answers, and I will repeat that I am not against truth-in-advertising rules; Bre-X was very bad. But I think it is naive and unhelpful to put NI43-101 on a stand-alone pedestal of virtue when it has so much influence over the wider enterprise.
Look out for Part 2 when I will talk about business model innovation and why we might need an alternative framework to bring new investment into mining for the critical minerals era.