Why do innovators keep talking about small scale mining?

If you are an expert in mining or mineral process engineering, you may be tired of neophytes and academics arguing that there is value to be created in small-scale mining. You have a lifetime of spreadsheets telling you that economy of scale is always the right answer; that optimization is a well-established practice with no magic wormholes where the laws of physics are suspended. You know that the overheads of mine development are substantial, that permitting is getting harder, that the majors ignore anything smaller than a million ounces, that grades are declining, that demand is increasing, that investors don’t entertain small ideas, and that artisanal mining would disappear if it had to meet industry safety standards. You probably don’t even bother explaining this stuff any more.

And of course you are right. Those are all valid reasons why the incumbent mining paradigm starves out small scale projects.

Sydney Smith, passing through a bye-street behind St. Paul’s, heard two women abusing each other from opposite houses. “They will never agree,” said the wit; “they argue from different premises.” (Probably a false attribution.)

To some extent, innovators keep raising this topic just to poke the bear. We are probing for weaknesses (and looking for allies on the inside!). Trying to find the crack that will let the light in, to paraphrase Leonard Cohen. For some, disruption is just a purpose in life, although I suspect most of these “tactical mavericks” don’t hang around mining for long; mining companies tend not to retain divergent sh*t-disturbers through economic cycles.

For others – strategic mavericks? - there is an irresistible systemic problem confronting mining in a new era of shifting expectations, and the small-scale gap has left the sector critically short of solutions.

Let me unpack that.

The success of capitalism – rising standards of living – depends on a dynamic interplay between efficiency and novelty. Schumpeter famously cast this as “creative destruction”, and the duality is evident everywhere in the literature: Safi Bahcall talks of “loonshots” vs. “franchises”; Govinderajan and Trimble contrast the “innovation engine” with the “performance engine”. Different cultures with opposing goals, but there is widespread agreement that progress – even organizational survival – depends on how the two cultures interact. No scholar argues that either should be abolished, and for good reason. They need each other.

A world containing only disruptors is easy to imagine: it’s chaos. Perhaps less easy to picture is a world of insufficient disruption. Nassim Nicholas Taleb colourfully illuminates such a world for us, showing that organisms (people, companies, countries) become fragile in the absence of disruptive stressors. At the macroeconomic scale, numerous authors describe failures of capitalism where incumbents extract growing rents from protected positions; dystopian outcomes perhaps, but they are the observable result of rational behaviour inside organizations pursuing stability and efficiency in their own business models, unchallenged. Social upheaval is often the end result. Innovation is what gives social licence to the inequalities of capitalism. Dynamism is robust.

Many mining companies, to their great credit, have tried to run programs that actively nurture an ecosystem of innovators. Very few can show that they have allowed those innovators to change the way their mines operate, at least beyond “better mousetrap” incrementalism. It’s easy to see why: the companies with the cash flow to fund innovation have that cash flow because they are the most efficient. They operate large-scale mines, they have market power over their suppliers, and they can extract rents. Because they are mature and stable, they devolve authority to their mine sites, on whom they impose financial efficiency goals. In Loonshot terms, they are clearly franchise companies. Their mines require enormous throughput, they have almost no redundancy, and interruptions are prohibited. In Taleb’s terms, they are fragile, and that is why they resist innovation. It’s rational. (The fact that we think of large companies as resilient simply reflects that in commodity cycles, others will fold first.)

Innovators are not necessarily repelled by capital-intensive value chains with long payback periods, no redundancy, and few incentives to change. But they know that they need to approach such risk-averse customers via stepping stones, and it is these stepping stones that mining lacks.

What innovators look for is early adopters with higher appetite for gains from novelty and some tolerance for risk. But early adoption almost never happens at large scale, outside of the defence sector. Miller and Coté outline a “system breakthrough” innovation mode with examples such as the Dassault-Toyota partnership that created the CATIA system, but they emphasize the need for a visionary, deep-pocketed, high-endurance customer, and they point out that such customers’ expectations of exclusivity make them unattractive to most innovative system integrators.

Innovators therefore expend enormous effort on customer discovery. To put it bluntly, we are trying to avoid wasting time on customers who will take longer to sign a contract than we can survive. Even if a large mining customer validates the need we describe, their structural obstacles (hierarchical roles and organizational routines) will tend to kill the solution. Why? Because those structural obstacles are the necessary protection for a fragile (i.e. efficient) organization. The resistance is rational.

If you are still with me, thank you! Now we get to the answer I propose. Innovators are looking for small scale mines because companies with a reasonable number of them would have the potential to contain the risks of experimentation. Such a company would trade capital efficiency for antifragility, and would need innovators in order to be successful. It would pursue Robert Merton’s dictum that “a portfolio of options is always more valuable than an option on a portfolio”. (It’s worth noting here that the junior mining sector does not, and on its current trajectory will not, play this role. It is a gap. It could be a subsidiary of a tier 1 miner, but one would not expect strong stock market support.)

I can hear the greybeards saying, well, experimentation is what pilot plants and test mines are for. And to some extent that’s true, at least for technological innovations. However, the challenges facing the mining industry go far beyond the technological: some of the most cogent calls for small-scale mining arise because of geopolitical imperatives, rights recognition, business model innovation and shifting social contracts. These shifts are already creating situations that nullify expected NPVs, even for gigantic projects. And although these challenges may be new, Fritz Schumacher was already onto some of the solutions with his masterpiece “Small is Beautiful” more than a half-century ago.

To summarize, the arguments against small scale are correct, within the paradigm that led to bigger-is-better groupthink (surprise!). If nothing changes, there will be no sudden outbreak of small scale mining. But please do consider the possibility that innovators may have been sent from a future paradigm to help us adapt. They may be saying that the industry as a whole needs a more diverse structure, in order to spread its creative wings. And there may be value in that, even if it doesn’t yet fit the columns of our spreadsheets.

In the next article, I will discuss the self-reinforcing system of business models and incentives that locks the large-scale mining paradigm in place. In the article after that I will suggest a new way of looking at the mine development journey that could reduce the risk of systemic fragility in critical raw material supply chains. And yes, it will involve some small-scale thinking. Maybe even a little modularity. Stay tuned!