Download - Society of Economic Geologists

More documents

Recommendations

Info

12 SEG NEWSLETTER No 65 • APRIL 2006... from 11The Mineral Exploration Business: Innovation Required (Continued)budget in 2004, created eight separate“Discovery Sites” and a CentralDevelopment Site in 2000 with a viewto maintaining the excitement of asmall discovery unit (http://pfizer.com/pfizer/main.jsp). GlaxoSmithKline, thesecond pharmaceutical company with a2004 R&D budget of £2.8 billion ($5.0billion), also restructured their R&D in2001 into six “international biotechnologycompanies” which would competefor resources and operate autonomously.These are called “Centres of Excellencefor Drug Discovery” (CEDDs). The unitsare divided along therapeutic or diseaselines (equivalent to commodities).Their job is to deliver drugs with“proof of concept” to GSK’s drug developmentorganization—in other words,their role is discovery. They describe theidea as being to maintain agility,entrepreneurial spirit, and individualaccountability. The parent companywill then carry out the high cost development(clinical trials, equivalent toreserve definition and feasibility studyin the mining sector) in theirDevelopment Organization. At thattime, GSK had a “less-than-ideal latestagepipeline”—i.e., a lack of new discoveries—with50 drugs at the trialstage. In a mining company, thisequates to depletion of reserves andlack of new projects. By 2004 they wereable to claim substantial R&D growthfrom 118 to 140 projects in clinicaldevelopment between 2001 and 2004,including an 80% increase in “NewChemical Entities” in their pipeline.Building on the success of theCEDDs, they introduced six MedicineDevelopment Centres (MDCs) in 2004to integrate R&D with manufacturingand marketing in order to speed up thedelivery of new products to the market(i.e., patients; GlaxoSmithKline, 2005).However, in spite of high spendingand innovative management of R&D,many of the big pharmaceutical companiesare failing to deliver significantnew products (Wood Mackenzie,2005a), leading some analysts to questionthe current R&D focus on blockbusterdrugs (those with sales of over $1billion per year—read, world-classmines).Yet there is a strong “junior” sector,well-funded biotech companies developingnew ideas. Why should biotechnologycompanies share their ideas andpotential development with companiesthat could be seen as competitors? Itcomes down basically to survival, andalso that a major corporate partner providescredibility to that biotechnologyfirm’s research.Typical biotechnology/big pharmaceuticalcompany deals include the following(Robbins-Roth, 2000):• An up-front licensing fee that givesthe big pharmaceutical partnerrights to use the technology;• R&D funding for the life of the agreement(typically 3 to 5 years, initially),which covers the people andsupplies used by the biotechnologypartner to carry out the work;• Milestone payments that give thebiotechnology partner rewards formoving the project forward andreaching benchmarks that are significantfor product commercialization(for example, filing for FDA permissionto start clinical testing, startingPhase I / II / III trials, filing for marketingpermission, product launch);• A purchase of equity in the biotechnologypartner by the big pharmaceuticalpartner.The last point is not always included.Robbins-Roth (2000) points out that thebig pharmaceutical companies do notalways see stock as useful commodity,and usually buy shares only becausethe biotechnology firm wants them to.The amount of money a biotechnologycompany can command for each ofthese points is very dependent on theperceived quality of the company andits technology; i.e., whether the technologyis seen as “cutting edge” or thethird runner-up in an area, how crucialthe technology is to the big pharmaceutical’sinternal strategy, and how hungrythe big pharmaceutical partner isfor new product candidates to fill itspipeline.Although associations betweenmajor mining companies and explorationcompanies are becoming morecommon, there is a need for innovativefinancing models that require less capitalto get to discovery, which meansthat we need management teams thatcan do more with less.The oil business is in a similar situationto mining, with a decline inreserves considered to be partly responsiblefor the oil price reaching over $70per barrel recently. Oil companies areno longer replacing reserves throughnew discoveries (Wood Mackenzie,2005b). Exploration spending is at twothirdsof the 1998 level, resulting in a50% decline in reserve replacement. Thereduction in exploration spending hasbeen caused by growing technical risksand uncertain oil prices, and while thishas resulted in good returns for thecompanies, it has been at the cost ofreserve depletion. This is due to the philosophyof “capital discipline” whichhas been in vogue since at least 1998when the oil price last crashed(Brethour, 2004). This is a conservativestrategy of risk-avoidance which focuseson the short-term returns of quarterlyresults at the expense of buildingreserves. As a result, exploration spendingis 73% of six years ago in the top 10listed oil companies, down from $11 billionin 1998 to $8 billion in 2003. In relativeterms, the fall has been evengreater, with the average annual explorationexpenditure per unit of productionfalling from US$1.70/barrel of oilequivalent (boe) to US$1.00/boebetween 1998 and 2003. This is at amuch lower level than the mid-cap peergroup where relative spends have fallenfrom US$2.80 to US$2.50/boe (WoodMackenzie, 2004).THE BUSINESS OFEXPLORATION:MANAGING FOR SUCCESSMany articles have been written on theingredients required for success inexploration (e.g., Miller, 1976; Bailly,1979; Frost, 1980; Eggert, 1993; Sillitoe,1995; Stevens, 1996). Sillitoe (1995), inanalyzing the case histories of the 54most important discoveries made in theCircum-Pacific region from 1970 to1995, concluded that the most importantelements were the following: longtermexploration, systematic and wellplanned,scientifically groundedprograms, quality of the geologicalteam; competitive remuneration toattract and retain the right people, androck contact time of those quality people.Yet from our experience, manycompanies pay only lip service to theseingredients.The importance of people is a recurringtheme in analysis of explorationsuccess. Stevens (1996, p. 37) wrote that“... best people, in my experience are
APRIL 2006 • No 65 SEG NEWSLETTER 13the only competitive explorationadvantage.” The best people are a company’sdistinctive capability. For thepurposes of strategy, the key distinctionis between distinctive capabilities andreproducible capabilities (Kay, 2000).Distinctive capabilities are those characteristicsof a company that cannot bereplicated by competitors, or can onlybe replicated with great difficulty, evenafter competitors realize the benefitsthey yield for the originating company.In terms of exploration management,one must identify the distinctive capabilityof the company, i.e., quality people,and seek to surround them with acollection of reproducible capabilities orcomplementary assets that enable thecompany to sell its distinctive capabilitiesin the market in which it operates;e.g., exploration focused in a certainregion or deposit type.If people are such a key componentfor success, one would consider that themajor companies are in the best positionto attract such people by offeringlucrative remuneration packages.However, this is no guarantee. Due tothe structure in such established firms,innovation is often difficult. Firms mayemploy the most capable people, butthen set them to work within processesand business models that doom them tofailure, a problem not unique to themining industry (Christensen andOverdorf, 2000), which is beingaddressed in the big pharmaceuticalindustry, as discussed above.The other factor to consider is that,with the market upturn, the miningindustry is now short of skilled people.Many experienced geologists left theindustry during the past decade, eitherreleased by the major companies inmergers and cost-cutting, or forced toseek alternative employment by thelack of financing during the severedownturn in the junior sector. Inaddition, universities have cut back ongeology and related degree programs,so there are fewer new graduates cominginto the business.On the understanding that the qualityof the geological team is vital forsuccess, how can management of thiscritical element further enhance a company’scompetitive advantage?Economic geologists fit a category ofemployee defined as the knowledgeworker (Drucker, 1999). They own their“means of production,” which is theirknowledge. An increasing number ofpeople who are full-time employees,such as knowledge workers, have to bemanaged as if they were volunteers(Drucker, 1999). Volunteers have to getmore satisfaction from their work thanpaid employees, precisely because theydo not get a paycheck. Knowledge workersare paid, of course, but they havemobility. They can leave. Money alonedoes not motivate people to perform,although dissatisfaction with themoney earned grossly demotivates.Knowledge workers need, above all,challenge. They need to know the company’smission and to believe in it.They need continuous training. Theyneed to see results. Drucker (1999)believes that the productivity of theknowledge worker is likely to becomethe focus for the management of people.But in terms of exploration groups,as in R&D, one does not “manage” peopleso much as lead them, and the goalis to make productive the specificstrengths and knowledge of each individual.It is in this context that the bigcorporations, even if they maintainexploration teams, are less likely to besuccessful.However, assembling a quality teamof geologists is not enough. As pointedout by Sillitoe (1995), their value isenhanced by maximizing the rockcontact time of the exploration team.It is often stated that the high cost ofexploration is one of the main disincentivesfor exploration. However, ifpeople—the geological team—are oneof the critical factors in explorationsuccess, this is actually a relativelylow-cost investment. Essentially, thesystematic testing of ideas is whatenables E&D companies to discoverand define resources. What is criticalin E&D is that unpromising propertiesare eliminated at the earliest possibletime before expenditure becomes toohigh, instead of becoming an expensivemistake. This equates to Dow’s(2002) conclusion that if explorationgeologists are to play a leading rolethey have to understand the realbusiness difference between ore andmineralization.In terms of managing for success,comparison with R&D is critical.Management publications need to becontinually reviewed for ideas. Anexample is a recent article by Thomke(2001) which has some very enlighteningpointers for the E&D sector. Brieflystated, the writer points out that innovationrequires the right R&D (E&D)systems for performing experiments(fieldwork) that will generate the informationneeded to develop and refineproducts (resources, reserves) quickly.The challenges are managerial as wellas technical:1. Organize for rapid experimentation:for E&D, organize for rapid exploration;2. Fail early and often, but avoidmistakes;3. Anticipate and exploit earlyinformation;4. Combine new and traditionaltechnologies.to page 14 ...John L. Lufkin, ConsultantUniversity of Colorado/Denver12505 W. 7th AvenueGolden, CO 80401(303) 284-2646Ore Petrology/MicroscopyFeasibility StudiesEnvironmental AssessmentsPROPERTY EVALUATIONS — PROJECT GENERATIONGEOCON, INC.REGIONAL STUDIES — U.S. AND FOREIGNRICHARD L. NIELSEN, CONSULTANTExploration and Mining Geology13741 Braun DriveGolden, CO 80401 Phone/FAX (303) 279-3118PAID ADVERTISEMENTPAID ADVERTISEMENT
Page 1 and 2: Advancing Science and DiscoverySEGN
Page 3 and 4: APRIL 2006 • No 65 SEG NEWSLETTER
Page 5 and 6: APRIL 2006 • No 65 SEG NEWSLETTER
Page 7: APRIL 2006 • No 65 SEG NEWSLETTER
Page 10 and 11: 10 SEG NEWSLETTER No 65 • APRIL 2
Page 48: Contact SEGOur Headquarters address

Download - Society of Economic Geologists

Create successful ePaper yourself

Delete template?

Save as template?