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R&D Perspectives In The Mining Industry

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10 Oct 2022

Companies across a range of industries spent US$ 2.3 trillion in 2019, or 2% of global GDP, in R&D, according
to Brennan (2020). The pharmaceutical industry leads the way, spending 52% of the EBITDA on R&D, which
equates to US$ 178 billion.

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Oil and gas, in comparison, spent only 3% of EBITDA or US$ 28 billion in the same period. The mining
industry is not stratified in Brennan’s study but is traditionally lower than oil and gas.

Filippou and King (2011) mention a very low R&D intensity in the mining industry, around 0.5% measured as
R&D expenditure/gross revenue, compared to other sectors like IBM (6.1%), Boeing (10.7%) and AstraZeneca
(13.4%).

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Figure 3- R&D spending trend in the mining industry, data from Alcoa, Anglo American, ArcelorMittal/Arcelor, BHP

Billiton, Boliden, Cameco, Codelco, Eramet, Iluka, Rio Tinto, Sumitomo, Metal Mining and Teck

The graph shows that R&D spending in the mining industry steadily decreased up to 2006. The increase after
2006 is attributed to the reduction in revenue after the GFC instead to an actual increase in R&D spending.

The mining company's profit was high from 2000-2010, before the GFC. It led to consolidation via mergers and
acquisitions, which reduced the R&D departments and, consequently, R&D spending.

According to Calzada Olvera (2022), global mining companies reduced their R&D departments when their
focus turned to projects closely aligned with their core business. La Nauze and Schodde (2004) mention the
case of BHP and Rio Tinto closing their in-house R&D laboratories and Alcoa reducing staff in its Pittsburgh
R&D facility.

Thompson (2015) mentions that although internal R&D services provide good service to operations,
developing breakthrough innovation is a challenge to in-house research alone. As stated by a mining firm
executive: "Our budgets seem to be used to solve short-term operational problems rather than to pursue
innovative long-term solutions" (Deloitte a, 2017, p. 23).

More recent data (Deloitte a, 2017, p. 25) indicates that the trend of low R&D investment in the mining industry
continues after the GFC.

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In summary, R&D spending has steadily dropped in the last two decades. Now we will examine a few factors
that can be attributed to this decline.

Low Profitability
The mining industry has a lower return than other industries, as stated by Batterham (2004).

Most mining products are commodities, and the companies cannot adjust the price, becoming heavily
impacted by factors outside their control and not linked to the financial fundamentals of the production process.

The CapEx structure for most mining projects also contributes to the industry's low profitability. Large CapEx
required and the long time until the projects provide return prevent start-ups from entering the market, reducing
innovation in the sector.

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Commodities Market
As mentioned before, most mining products are commodities that prevent companies from compensating for
losses during low-turn and high-turn cycles.

Also, the lack of product differentiation contributes to the problem of preventing companies from charging
premiums for their products. Most premiums are linked to product quality, and they are usually small.

There is a recent trend where companies try to differentiate their products with low-carbon badges. These
products can attract a premium but have the same quality as traditional products.

Low Cooperation among Companies

Traditionally, mining companies are very protective of their Intellectual Property (IP). IP is protected via patents
and trade secrets leading to a minimal number of cooperative projects.

Recent effort has been made to improve cooperation among industry peers. One example is the Bauxite
Residue project coordinated by the International Aluminium Institute (IAI), where several companies cooperate
to develop solutions for a common problem.

The low mobility of professionals in the mining industry also contributes to the problem. Usually, mine
operations are in remote locations, which are not attractive to employees. This proves to be worse when trying
to recruit highly specialized people like the ones required for a R&D department.

In summary, it is a fair assumption to say that mining companies are not listed among the most innovative.
Large and capital-intensive companies struggle to manage costs to keep a minimum margin and suffer from
low product differentiation.

According to Pavitt (1984), most innovations are related to cost reduction targeting to improve the margins.
This causes most of the innovation to come from their own internal production or engineering departments or
via products and services from specialized suppliers.

The list of factors affecting the decline of R&D in the mining industry can grow quickly, but to keep the brevity
of this article, we will stop on these three major factors.

Recent data confirm that the mining industry has been focusing R&D efforts to improve their core business
with a strong emphasis on technological solutions to optimize old techniques “as needed” (Deloitte b, 2015,
p.8).

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The question we must ask now is how sustainable that scenario is when looking at the future challenges the
mining industry faces. Let's quickly discuss a few key areas requiring serious consideration by mining
companies to challenge their current R&D strategy.

Raw Material Quality Deterioration

The natural tendency observed over the years is to reduce the ore quality across several commodities, as
exemplified by West (2011).

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This fact brings several challenges for the mining companies to develop new technologies to improve
exploration and to deal with the low-quality ores in the existing processing operations.

These challenges are interrelated with other sensitive areas like energy consumption and waste management.

Environmental Challenges

Mining companies have faced environmental scrutiny from the communities where they operate. However, the
standards have been getting stricter in recent years.

The environmental issues also changed over the years. While acid rain and effluent treatment were the key
concerns a few decades ago, topics like carbon emissions and waste management have become a priority
recently.

Technologies to address these topics are available, but the industry still has a long way to go to make them
available on a large scale. The lack of action to develop these technologies will certainly impact the
relationship between companies and communities and their operating licenses.

Increasing Energy Costs

The mining industry is intrinsically energy intensive. The main challenges are driven by the need to reduce
costs due to the rising energy price and to change the energy matrix to renewable sources.

This last topic is reinforced by the carbon tax and the carbon cap-and-trades schemes currently under
discussion in several international forums. These schemes have the potential to increase energy costs even
further.

Renewable energy costs are reducing, but their availability is still an issue for the industry. Reliability is also
another area requiring further development.

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Automation

The term fourth industrial revolution, or Industry 4.0, has become very popular in recent years. It refers to using
information technology and/or artificial intelligence to develop solutions for the industry.

These technologies cover the entire life cycle of the mine, from exploration to production, including
transportation and environment monitoring. Although innovation in the mining industry has been relatively flat,
the number of patents related to automation has increased significantly, according to Daly et all (2022).

Automation is not the core business of mining companies, and they usually have few specialists in the area. It
does mean the companies need to cooperate with other companies, in many cases start-ups, posing a
challenge to the current operating model of developing R&D in the mining industry.

Again, many more challenges are impacting the future of R&D in the mining industry, but we limit the
discussion to the four mentioned above.

Most of these challenges are wicked problems and require cooperation to be addressed sustainably. The
cooperation can take several forms: between competitors in some areas with common problems, between
companies and specialized suppliers, between companies and start-ups in non-core areas, and between
companies and external R&D institutions, public or private.

Cooperation has several benefits of which we can mention a few:

Sharing the development cost

Increase of experts pool available for the projects

Development of specialists in critical areas for the companies

Development of financing mechanisms to support emerging high-tech companies

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However, cooperation requires a change in the currently dominant mindset in the industry. Companies need to
revise their future R&D budgets to address challenges seriously. Internal R&D departments must be
strengthened or rebuilt, and the relationship with other R&D partners must be included in the strategic plan.

Although cooperation is critical for the success of R&D in the mining industry, the formula is different for each
company. The R&D strategic plan must be aligned with the business strategy to deliver the expected
outcomes.

This article was contributed by our expert Wlademir Penna

Frequently Asked Questions Answered by Wlademir Penna

1. What are some of the innovative methods adopted by the mining industry?

Traditionally, innovation is made in-house in the mining industry focusing to solve operational problems
or to improve the processing efficiency. R&D departments are usually organised in research programs
according to the commodities produced or the areas of the manufacturing process.

External collaboration was primarily with universities or consolidated R&D organisations. The
collaboration with start-ups and other forms of venture capital investment is becoming more common in
the last few years.

2. What is sustainable development framework for mining sector?

The triple bottom line is becoming the standard for most mining companies in the last years. It is
basically a framework where companies report not only the financial performance but also includes
people and environmental dimensions to measure their performance.

It is important to notice that R&D has a strong influence on two of these dimensions: performance,
contributing to improve the operational efficiency, reduce energy consumption or reduce raw materials
consumption; and environmental, reducing the environmental footprint, developing recycling and re-use
alternatives and managing waste.

3. What impact does mining have on the economy?

“ In 2021, the mining industry's leading 40 companies had a total revenue of approximately 925 billion
US dollars, including trading revenues.”

The International Council on Mining and Metals calculates the importance of mining industry for
countries economies as the total production value in US dollars, average 2018 price expressed as
percentage of GDP (ICCM. 2020. “Role of mining in national economies. Mining Contribution Index

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(MCI) 5th edition).

4. Why is R&D and innovation important for mining companies globally?

Traditionally conservative and considered a low innovation industry, mining faces many challenges
caused by factors like deterioration of ore quality, people living closer to the mine sites creating
environmental and social issues, rising energy prices, logistics disruptions caused by political changes,
to mention just a few.

These challenges are significant threats to the already low margin typical of mining companies.
Innovation is a possible solution to several of these challenges.

KR Expert - Wlademir Penna

Principal Advisor - Process Engineering at Rio Tinto | Former Senior Consultant Process Development at
Alcoa

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