SOCIETY FOR & ~

PREPRINT
NUMBER
MINING, METALLURGY, AND
EXPLORATION, INC.
P.O. BOX 625002 UTILETON. COLORADO 80162-5002
BUSINESS DYNAMICS AND DIVERSIFICATION PLANNING
F. Alsobrook
Alsobrook & Company, Incorporated
Medford, New Jersey
For presentation at the SME Annual Meeting
Salt Lake City, Utah - February 26-March 1, 1990
90-63
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MINING ENGINEERING
Abstract. Industrial minerals are re-
ceiving increased attention by metals, coal and
other companies seeking to diversify and
stabilize earnings. Each industrial mineral has
a unique set (and sub-sets) of business dynam-
ics, however, and the diversity can present a
bewildering maze to the corporate planner.
Shrugging off this complexisty and relying on
serendipity for entry often
results in unsuitable acquisi'tions. An effec-
tive alternative used in exploration can also be
applied to strategic planning. By providing
focus and direction, this flexible methodology
can prevent wasting corporate resources on
random pursuits and result in a quicker, more
satisfactory achievement of diversification
goals.
INTRODUCTION
The methodology described in this paper is
most often used by mining companies for prior-
itizing their exploration expenditures. It can
also be used to fucus new product development
efforts, to screen acquisition opportunities and
to direct diversification programs. It is
therefore adaptable to projects keyed to
internal growth as well as those involving
external growth. Its premise is that results
which will meet the company's long-range
objectives, in this case with regard to divers-
ification by are more likely to be
achieved by means of a rational, analytical
approach than by one that is haphazard. The
latter responds to whatever opportunity comes in
from the outside, is largely passive in nature,
and leads to a "mineral-of-the-month" mental-
ity. The former sets a course of direction, is
more pro-active in nature, and should result in
an overall more efficient use of corporate
resources.
METHODOLOGY
The step in the approach is a dis-
assessment by an acquisitive company
of its own culture, management style, strengths
and weaknesses, and business objectives. With-
out adequate attention paid to this phase, whieh
should include participation by the CEO, the
effectiveness of any strategic business plan can
be jeopardized. Such plans are occasionally
revised to reflect changed financial circumstan-
ces and competitive influences, so a methodology
for evaluating acquisition and diversification
opportunities should be flexible enough to
accommodate these revisions.
Several excellent books have been written
which describe the procedures used in this first
phase involving corporate self-assessment, so
they will not be dwelt upon here. Certainly the
company will want to evaluate its strengths and
weaknesses in terms of financial resources,
technological sophistication, retail vs. whole-
sale marketing, exporting, transportation, and
particular expertise or entrees into certain
markets. It will also need to establish its
investment criteria for acquisition candidates,
including the purchase price range, annual sales
revenue, annual gross profit or operating
income, growth prospects, market share, and
1
relative capital, marketing and technological
intensity.
After this first phase is completed. the
question of which industrial mineral busi-
nesses should be targeted for acquisitions will
remain. Which sectors of the industry are
likely to satisfy the company's business
objectives and investment criteria? Are
production-driven commodities or marketing-
driven specialties more compatible with its
operating style and orientation? Will it be
interested in businesses which commonly
integration downstream into manufacturing, where
the capital investment is greater but operating
margins can also be higher than for a mineral
producing operation only? In order to narrow
the field, a number of parameters can be
selected and assigned weight values corres-
ponding to the company's perception of their
comparative importance to it. A weighting scale
of 0.1 to 1.0 is suggested, divided into 0.1
increments and with 1.0 assigned to parameters
of the highest importance. Examples of
parameters that can be used are listed below.
Market Size
Outlook
Pricing
Supply/Demand
Industry Concentration
End Use Diversity
Cyclicality
Downstream Integration
Substitution
Export/Import
Transportation
Constraints
Environmental

Technological
Intensity
Resource
Availability
Marketing
Capital Intensity
The structure and internal dynamics of each
industrial mineral business should then be
characterized and evaluated according to these
sixteen parameters and perhaps others. The
comparative attributes and shortcomings of one
mineral versus another can be represented by
point values assigned to each parameter by the
researcher. For some parameters these point
values are easily arrived at, such as for Market
Size; whereas for others considerable judgement
is required, such as for Environmental Consider-
ations. A point scale of 0 to 5 is suggested.
although 0 to 4 can be equally effective.
The evaluation parameters selected will vary
from one company to another, but the sixteen
listed above will usually address adequately the
business structure and dynamics of most indus-
trial minerals. The question then becomes "what
is desirable or undesirable under each of these
parameters?". In this regard the discussion
below is'offered only as an illustration. Each
acquirer should address this question from its
own perspective. One company might give a high
point value to high technological intensity, for
example, reasoning that this characteristic will
represent a significant barrier to entry by
would-be competitors. Another firm might give a
low point value to high technological intensity,
especially if the company is generally in low-
tech businesses and views sophisticated, some-
times proprietary technology as a significant
obstacle to its own entry. The point value
structure for each parameter can be tailored to
each firm in terms of both the value cutoffs
tho do!inltlonn at to what fcaturoc arc
c<l!li:'ablo or lrable.
!n and of
businosz one be
1I1ert to r:ich(lS ' ... hiei. have a much higher
ratio than tho as
.j, ..... nole. ::1 order not -=.0 overlook
soc':.crn by using a too ganeral!.=.od or over ...
stMoLified accroach, businesses need to
00 evaluated separately. One ex-
ample drilling mud grade barite as distinct
from glass, chemical and filler grade barite.
In addition, some parameters may need to be sub-
divided and evaluated separately, as in the case
of exports and imports.
O!SCUSSION
aarket Size - In general, the larger the
total tonnage and value of annual sales the
!:Jetter. Acquisition candidates ... hich meet the
company's minimum criteria for both are more
Likely to be found in large businesses than in
small ones. In terms of tonnage, this parameter
can be defined as total tons consumed annually
by US markets for businesses in which imports
exceed exports, or total tons per year sold or
used by US producers for businesses in which
exports exceed imports.
5
4
3
2
1
o
Size (tons per year)
>100 million
10-100 million
1-10 million
100,000-1 million
10,000-100,000
<10,000
2. Growth OUtlook - The higher the growth
rate the better. This parameter assesses the
relatively long-term (e.g., to year 2000) out-
look for annual growth in demand or consumption
in terms of volume (tons). Expressed as a per-
centage, the figures represent a weighted
average of the annual growth forecast for all
major markets in which the mineral is used.
can be compared with projections of real
GNP growth after taking into account pricing
or weakness addressed next. Some firms
have criteria for growth '"hich set minimum per-
,::entage points in excess of real GNP in terms of
sales value. The average annual percentages
given below as illustrations are for tonnage but
assume price stability.
?oint Rate (% oer ',earl
-
>7.5
4 6-7.5
3 4.5-6
2 3-4.5
1. 5-3

<1.5
3. Pricino - This does not lend
itself to subdivision into six neat compart-
;'(lents. ?oint 'faiues can therefore be assigned
somewhat subjectively, based on how well or
poorly a mineral's pricing structure is
characterized by a collection of features.
2

S Pricos high and/or
high--prices cost rolated. croducer
detormined and based--
good '/alua-added and croduct dif-
ferentiat!on opportunities.
o PrlCes low and/or volatlle--marglns
low--prices not cost related, pro-
ducer determined or performance
based but are negotiated and may
commonly be discounted off list--
markets highly price sensitive--fow
opportunities for adding value or
differentiating products.
4. sucply/Demand - Expected shortfalls in
supply correspond to high rates of production
capacity utiliation, lower fi:<ed costs per unit
produced, higher operating profit margins and
stronger pricing.
Degree of Balance
5 Shortages prevalent or likely in
domestic and imported supplies.
4 Temporary shortfalls in domestic
supplies, but imports are suffi-
cient.
3 Relative balance or equilibrium
between supply and demand.
2 Temporary surpluses due to periodic
domestic overcapacity.
1 Serious surpluses and chronic
domestic overcapacity.
o Same as before, plus an abundance of
competitive imports.
5. Industry Concentration - In principle, the
fewer the companies in a particular business,
the greater the likelihood that entry will pro-
vide the acquirer with a recognizable, if not
major, share of the market. All else being
equal, most entrants will prefer to acquire a
number 1, 2 or 3 position in terms of market
share.
5
4
3
2
1
o
Concentration
<5 producers, all primary--no
captive production.
5-10 producers, all approximately
the same size.
10-20 producers, but with ac-
counting for >75% of the market.
20-30 producers, but with 5-10 ac-
counting for 50-75% of the market.
30-50 producers--significant invol-
untary (by-product) production.
>50 producers--significant involun-
tary and/or captive production.
6. End Use Diversity - The premise here is
that businesses supplying mineral products for
highly diverse end uses in a wide variety of
markets are preferred over those which sell to
only a limited number of industries. Wide
diversity generally provides more stable sales
revenue and earnings from year to year, because
noncyclical and countercyclical markets help
offset downturns in demand from other markets.
Degree of Diversity
5 Extremely wide variety of applica-
tions and a very large customer
base.
4 Wide diversity, but one or more mar-
kets account for 10-25% of demand.
3 Wide diversity, but one or more mar-
kets account for 25-50% of demand.
2 110derate diversity, with one or more
markets accounting for 25-50% of de-
mand.
1 Limited diversity, small customers,
and one market respresents 50-75% of
demand.
o Very restricted, small customer
base, and one market represents >75%
of demand.
7. Cyclicality - Businesses whose markets are
relatively immune even from cycles in the
general economy provide more stable sales
revenue and earnings from year to year. Those
whose markets are highly cyclical in terms of
frequency and/or amplitude are less stable,
especially where cycles have a profound effect
on prices and are caused by circumstances beyond
management's control.

5
4
3
2
1
o
Degree of Cyclicality
Steady demand; >90% of the market is
relatively immune from general eco-
nomic cycles.
Fairly steady demand; <25% of the
market tracks general economic
cycles.
Fairly steady demand; 25-50% of the
market tracks general economic
cycles.
Moderately cyclical; 50-75% of the
market is characterized as cyclical.
Cyclical; >75% of the market is
characterized as cyclical.
Volatile boom-bust swings in demand
from 90% or more of the market, with
a major impact on prices; major
fluctuations in consumption from
year to year.
8. Downstream Integration - The premise here
is that the company desires to be a producer of
minerals, not a manufacturer of mineral-sourced
chemicals or other finished goods. Some busi-
nesses are commonly integrated downstream into
further processing (e.g., expanded perlite, ex-
foliated vermiculite and lime), and others are
primarily manufacturing in orientation but with
upstream integration into captive raw material
production (e.g., refractories and chemicals).
5
4
3
2
Extent of Vertical Integration
None; no consumers in major markets
have captive mineral operations.
Minor; integrated consumers repre-
sent <10% of total market demand.
Relatively unimportant; integrated
consumers account for 10-25% of
total market demand.
Moderate; integrated consumers
represent 20-40% of total market
3
demand.
1 Significant; 40-60% of production is
captive.
o Extensive; >60% of production is
captive to manufac"'Curing firms.
9. Substitution - l1inerals that have
physical and/or chemical properties and there-
fore face little competition from cost-effective
substitutes, whether natural or manufactured,
are preferred to those which can easily be re-
placed by a variety of cost-effective altern-
atives. Minerals that are unlikely to be
rendered obsolete in major end uses due to
changes in the technologies used by customers
and by their customers are likewise more at-
tractive, as are those which are seldom re-
claimed and recycled and therefore face little
competition from secondary and by-product
sources.
5
4
Extent of Substitution
Mineral's properties are unique;
virtually no substitutes; secondary
sources unimportant.
Few competitive substitutes in uses
that account for >75% of demand.
3 Few competitive substitutes in uses
that account for 50-75% of demand.
2 Significant substitutes in uses that
represent 50-75% of demand.
1 Significant substitutes in uses that
represent >75% of demand.
o Wide variety of substitutes in all
end uses; secondary sources im-
portant; major impact of techno-
logical change within consuming in-
dustries.
10. Export/Import - Businesses for which
imports supply very little of domestic demand,
whether in the form of minerals or finished
goods, are generally preferred, especially if
exports represent a significant percentage of
the total output sold annually by US producers.
Net Import Reliance
5 Exports significant and far exceed
imports in any form; minimal
from import.
4 Exports significant; imports only of
finished goods.
3 Exports significant, as are imports
of minerals and finished goods.
2 Exports insignificant; imports only
of finished goods.
1 Exports insignificant, but signif-
icant imports of minera-ls and
finished goods.
o Heavy dependence on imports, with
which domestic sources are not com-
petitive on price and/or quality;
essentially no exports.
11. Transportation Constraints - For the
purpose of this example, specialty, high-value
minerals whose marketing is relatively un-
restricted by transportation costs are preferred
over high place-value minerals whose markets
are extremely delivered price sensitive and
therefore largely local.
5
Degree of Cost sensitivity
Specialty products marketed inter-
nationally, unconstrained by freight
cost.
4 Markets sensitive to delivered price
but international because product is
3
2
1
o
unique or scarce.
Markets restricted nationally; es-
sentially no international trade.
Markets regional due to delivered
price pressures.
Markets regional due also to the
widespread availability of substi-
tutes.
A high place-value commodity with
only local markets due to extreme
sensitivity to delivered price.
12. Environmental Considerations - Businesses
which produce minerals that are themselves known
or suspected of being toxic have a higher risk
of legal and financial exposure arising from
disability and product liability claims filed by
employees and consumers. Companies whose ores
and processed products contain accessory amounts
of such minerals are also exposed, even though
their primary mineral poses no health risk.
5
Degree of Risk
Mineral is nontoxic, and ore con-
tains no toxic impurities; minimal
risk.
4 Mineral is nontoxic; minor amounts
of suspected toxic minerals in the
product; low risk.
3 Mineral is nontoxic; major amounts
of suspected toxic minerals in the
product; moderate risk.
2 Mineral is nontoxic; minor amounts
of known toxic minerals in the
product; caution is advised.
1 Mineral is nontoxic; major amounts
of known toxic minerals in the
product; controls are essential.
o Mineral is a toxic health hazard,
heavily regulated and under attack
by environmental authorities; high
risk of legal exposure to product
liability claims.
13. Technological Intensity - Businesses
which have a high degree of technological
complexity and whose technology is patent pro-
tected or otherwise highly proprietary are more
difficult to enter. Companies that are in such
businesses, however, generally face less threat
of competition, price structure erosion and
:ndustry overcapacity caused by new greenfield
operations.
5
4
3
of COmplexity
Technology is very complex and
proprietary; a high level of R&D is
required.
Technology is complex but not pro-
prietary.
Only moderate technological intens-
4
ity; modest level of R&D is re-
quired.
2 Technology is relatively simple.
1 Technology is simple and off-the-
shelf; little if any R&D is re-
quired.
0 Technology is very simple; entry is
easy; no R&D is required.
14. Resource Availability - The ideal situa-
tion here is a mineral for which there is only
one commercial deposit containing huge reserves.
In general, the more widespread are large,
economically minable deposits of a particular
mineral, the greater the likelihood that exist-
ing producers will lose market share. to new
greenfield ventures.
5
4
3
2
1
o
Characteristics
Very few, unique deposits (e.g., (5)
but with large reserves.
Few, unique deposits (e.g., (5) but
with smaller reserves.
Five to 10 operations with
moderately large reserves clustered
geographically.
Ten to 20 operations with large re-
serves distributed regionally.
Twenty to 40 operations with
large reserves located in at least
25 states.
Huge reserves at >40 operations;
widespread occurrences that are
easily accessible.
15. Marketing - This parameter can encompass
a variety of features--prevalence or rarity of
long-term supply contracts, direct vs. indirect
selling and distribution, degree of marketing
intensity required, extent of technical and cus-
tomer service required to support sales, and the
importance of advertising and packaging (e.g.,
for retail sales). For the purpose of this
example, marketing intensity and the level of
technical sales support required are considered,
with high point values corr.esponding to minerals
for which both are low.
5
4
3
2
,
.1.
Degree of Intensity
Mineral has unique properties and
faces little competition from sub-
stitutes in major markets;
marketing effort and little techni-
cal sales support required.
Highly competitive industry, but
marketing intensity is low because
product is a bulk commodity and com-
petition is based on price, not per-
formance.
Moderately competitive industry;
moderate level of. marketing inten-
sity and technical sales support
services.
Availability of substitutes necess-
itates a strong marketing effort,
but t.echnical service requirement is
only moderate.
Highly competitive, marketing inten-
sive industry with a high level of
technical sales support and customer
service required, because competi-
tion is based on performance.
o Few =ommercial uses for the mineral
at present; major market development
effort is required.
16. ~ a p i t a l Intensity - This parameter
includes initial capital investment as well as
replacement or maintenance capital and "new"
capital, such as for new product lines, required
annually. Capital intensity can be interpreted
two ways, howe,ver--a) the total dollar amount of
investment required, or b) the capital invest-
ment per ton of installed, or nameplate, pro-
duction capacity. Bulk commodity minerals
usually require very large total investments but
a relatively small amount of capital per ton of
capacity. Specialty minerals require compara-
tively smaller total investments that are
higher, however, in terms of annual product
capacity provided. The qualitative descriptives
used in this example attampt to take both inter-
pretations into account. Quantitative descrip-
tives are not used, because capital projects can
vary so widely in content that rigid measure-
ments, such as $1 million to $5 million or
$50-75 per ton of annual capacity, can be mis-
leading.
Point Level of IntenSity
5 Very low
4 Low
3 Low to moderate
2 Moderate to high
1 High
o Very high
CONCLUSION
The methodology discussed above is very
straightforward but calls for a significant
amount of information research and evaluation in
order for point values to be selected realistic-
ally and without bias. Since some judgement is
required, the procedure is at best semiquantita-
tive; but attempts to remove the judgemental
element by defining each point value in rigorous
numerical terms can impose constraints which re-
duce its effectiveness, flexibility and/or ap-
plicability and give only the illusion of
enhanced precision. This methodology also lends
itself to computer programming for rapid up-
dating and strategic planning under "what if"
scenarios. Its flexibility allows periodic
modification to reflect changes in corporate
guidelines and in the competitive environment
within individual mineral businesses. If the
sixteen parameters mentioned above do not
adequately cover your firm's circumstances,
change them. If the definitions of desirable
and undesirable features under each parameter do
not coincide with your firm's thinking, change
them. The point is that, once installed, this
procedure will help reduce the bewilderment and
indecision that stifle corporate growth and the
random wild goose chases that waste corporate
resources. It will not directly identify
specific producers as attractive acquisition
targets, but it will definitely help focus an
acquisition program on those sectors of the in-
dustrial minerals industry in which acquisition
5
candidates should be sought because of their
potential for a good fit with your firm.
A rather exhaustive study of 26 industrial
minerals and mineral groupings and a briefer
review of 19 additional minerals were completed
recently by my firm for a client seeking
direction for entry into this industry. The
emphasis of that project was on specialty
minerals as broadly defined, not on commodities
such as potash, phosphate and sulfur. The
weight values assigned to the evaluation par-
ameters we used were established by that client
according to its own perspectives, so the
ranking that resulted will not be applicable to
all companies interested in acquisition-based
diversification. With that caveat understood, I
will simply mention that among the ten highest
ranking industrial minerals for that firm's
attention were wollastonite, diatomite, indus-
trial garnet, ball clay, fullers earth and
lasca. The last-named material is high-purity
quartz used primarily as the nutrient in growing
cultured quartz crystals. It exemplifies the
need to subdivide some mineral businesses into
distinctly different segments in order not to
overlook niches by being too general in applying
this methodology, because industrial silica sand
'and gravel as a whole ranked fairly low in our
study. Other niches that could rank dispropor-
tionately high in attractiveness compared to
their industry as a whole include chemical grade
barite, low-arsenic fluorspar, organoclad
bentonite, pearle scent pigments, metallurgical
grade silica materials and strategically located
high-calcium limestone.
For some firms the methodology as described
above will be sufficient. For others it can
represent the skeleton upon which to flesh out
further refinements, such as by subdividing
certain mineral businesses into segments serving
distinctly different markets. This might not be
warranted for feldspar, kyanite or ball clay,
but it could prove revealing in terms of dis-
covering opportunities in other businesses
having much more diversified markets. In any
event, the process can be beneficial to small
and large firms alike. To paraphrase a well-
known planner, "Plans are sometimes useless, but
the planning process itself is indispensible".