Optionality in large resource development projects

Large resource development projects can often be held captive to decisions made in the early stages of development when outlook is most uncertain. Embedding optionality into the design of such projects allows for alternate development pathways when major assumptions change. Not only does this allow a business to adapt, but it can also bring about profit making opportunities from future changes in technology, resource utilisation, community expectations and market competition. 

The quantum of early capital investment in large projects contributes a large proportion to the lifetime value proposition of the mine. With this project lifetime being so long, there is a fundamental mismatch with the increasing speed of external shifts that will change the economics of the project. 

These shifts create management complexity that demands the flexibility and agility enabled by embedding optionality the value chain.  Managers need to examine likely futures and craft their operating strategy and design to optimise and embrace potential external shifts.

However, optionality is not free, nor easy.  Even in the instance where the investment required for adding optionality is relatively small, the effort to identify and embed optionality at the leadership level is complex, particularly in traditional hierarchical/deterministic organisations. It is all the more challenging when people believe they require a compelling benefit they understand and are recognised for enabling.

In order to maximise value from optionality investments, businesses must adopt an offensive, rather than defensive strategic posture. The mindset should be one that examines all options to find maximum value and realistic achievability. This process of consideration garners no implementation risk until evidence-based decisions are confirmed and followed through with, however often requires parallel investigation through feasibility study stages.

Major sources of optionality value are likely to come through in the forms of:

  1. Competitive advantage through acquisition or diminishment of competitors. For example, ownership of infrastructure options facilitating acquisition, or having the capacity to pre-emptively secure markets, locking out competitors
  2. Capacity for rapid step change production and incremental elasticity i.e. better, sooner, faster, and in either direction as needed. This is intrinsically linked with competitive advantage, but has substantive value in its own right through the ability to leverage unexpected demand and price upside 
  3. Break-through technologies, particularly in respect of automation, extraction, processing and secondary operations that future mines may allow. Over the long term, the potential for step change technologies in finding and extracting minerals is significant.  
  4. Social license to operate through response to changing demand. Ability to leverage changing social expectations including environmental impact, economic development, provenance and ethics

Most sources of option value rest on the foundation of seeing possible futures earlier, and having the ability to act faster, than industry competitors.  That is, compression of lead times from sensing to acting is critical.  The challenge is how to crystalize this option value with the minimum possible capital investment.  For example, purchasing a mobile fleet that has electric transmission rather than mechanical, in anticipation for the shift to electric battery vehicles. Or utilising simulation technology to play out construction sequencing scenarios in order to optimise development.

To ensure optionality is embedded, it must be integrated as part of the “DNA of the business” and be pursued aggressively. Embedded optionality is a function of three dimensions:

  1. Social: culture, organisational structure, collaboration, connectivity
  2. Technical: Technology, visibility, simulation, innovation
  3. Commercial: industry analysis, risk assessment, investment decisions, external scenarios

Each of these elements are part of an integrated approach to optionality. With the best technical design in the world, if people within the business are not actively aligned with the strategic intent, then they will either deliberately or inadvertently inhibit optionality.  Likewise, with the best intent in the world, unless the “physics” of the system is supportive, then optionality cannot be achieved, particularly in such large-scale processes.

For large resource development projects, the capital intensity is massive, the life is multi-generational, and social, economic and technical developments are moving fast. The ability to react to disruption through embedded optionality will create opportunities for greater success, resilience and competitive advantage.

Graeme Stanway

Graeme Stanway

Graeme Stanway is a partner of VCI Ltd, a global strategy design company. Graeme has over 20 years’ experience in mining, heavy industry and technology businesses. He holds a PhD from Imperial College University of London, has been awarded the Medal of Innovation from the Institution of Civil Engineers in the UK. His strategy work has been referenced in the book “The First 11” as a benchmark case study in strategic transformation.