Big spenders - exploration expenditure and metal prices
Exploration expenditure is a good indicator of the health of metal prices. Michael Forrest tracks the trends with David Cox of the Metal Economics Group.
Exploration is at the heart of the mining industry driven by, among other factors, metal price. But there also has to be a healthy and vibrant equity market for junior and intermediate companies that funds and promotes their activities. That investment market is responsive to the global economic sentiment, and to the perceived multiplier effect that successful exploration brings to share prices.
The Metals Economics Group (MEG), based in Nova Scotia, Canada, tracks global exploration expenditure. Since 1989, the company has undertaken an annual corporate exploration survey that involves contacting and interviewing mining and exploration companies worldwide. In its latest survey, MEG approached around 2,400 companies with a declared budget of more than US$100,000 for non-ferrous exploration, which MEG claims accounts for 90–95% of all commercially orientated exploration. In 2011, the total figure reached a record US$17.25 billon, up 45% on the expenditure noted in the 2010 survey.
David Cox, Vice President at MEG, says results have been variable, reflecting metal price in the global economic market. ‘Budgets steadily increased through the early 1990s to a peak of more than US$5 billion in 1997, before falling for five years to a cyclical low of just US$2 billion in 2002.’ As prices for most metals enjoyed their multi-year bull run to the peak levels reached in 2008, global exploration budgets increased dramatically to a high of more than US$14.4 billion before plummeting in 2009, following the credit crisis. The link to metal prices is convincing, although there is a time delay of around one year as the explorers respond in market conditions.
Another major driver is the need of major and intermediate producers to replace the reserves that have been mined. These can be new world-class deposits, which are becoming increasingly rare, or new areas that show promise. Cox continues, ‘New significant discoveries in west Africa have fuelled an exploration boom, in part driven by the success of Red Back Mining, which sold its properties to Kinross Gold Corporation for US$7.1 billion in 2010. There also has to be an healthy equity market for junior and intermediate companies to raise risk capital.’
The surging commodity prices following the 2008–2009 economic downturn stimulated intermediate and junior mining companies to embark on an unprecedented exploration expenditure in 2011. Using the criteria of significant drill result announcements, there was a significant rebound in the number of greenfield finds, new zones and satellite deposits as well as those around existing mines. Of these significant results, 92% were for gold, silver and copper.
The survey breaks down total exploration expenditure by a number of criteria, including geographic location, commodity and company size, among other factors. Gold is still as popular as ever, dominating the exploration spend in a number of areas from Alaska via Yukon and Ontario to west Africa and western Australia. It is only those regions of exceptional base metal endowment such as Chile, Mexico, sub-saharan Africa and Peru where gold comes second in the share of exploration dollars.
Where the money goes
In the 2011 report, Latin America retained its position as the prime geographic location, accounting for 25% of global exploration expenditure, which together with Africa accounted for the largest dollar increases. Argentina, Brazil, Colombia, Guyana and Mexico accounted for the majority of expenditure, with gold increasing its share and base metals falling to the smaller share for the first time in more than a decade.
Canada’s second place is driven in large part by domestic flow-through and super flow-through share incentives, as well as by a large pool of junior mining companies. Three provinces – Quebec, Ontario and British Columbia – attracted more than 60% of expenditure, with exploration dollars allocated to gold exceeding base metal by a factor of 2.5.
There has also been a dramatic rise in the Europe/ Asia region, comprised of Europe through to mainland Asia together with Russia and China. In addition to the latter two countries, Kazakhstan, Finland, Turkey and Mongolia each have accounted for more than US$100 million in expenditure. The majority of this was for gold, but of particular note are expanding budgets for copper and nickel, especially in Russia, China, Poland and Kazakhstan.
2011’s exploration expenditure in Australia kept pace with the global average, despite the mining taxation changes that have taken place. The largest budgets were in western Australia, accounting for about half of the total, while gold and base metal received the lion’s share with platinum, diamonds and uranium trailing far behind. Iron ore is not yet included in the survey, but would increase the Australian budget and western Australia’s share, although MEG estimates that the total budget for iron ore is US$184 billion. The US spend, at 8% of world budget, is mainly concentrated in Nevada, Arizona and Alaska, which take more than 60% of the national budget, with gold attracting the majority of funds (the USA is the world’s third-largest gold producer). However, base metal exploration, particularly copper exploration in Arizona and Utah, has raised its share to the second-highest percentage share in the past decade. Exploration in the Pacifi c islands is mainly concentrated around Indonesia, Papua New Guinea and the Philippines, with the budget equally split between gold and base metals.
It is in Africa that the greatest percentage increase in expenditure occurred during 2011, claiming 15% of the global budget and valued at US$2.6 billion. South Africa regained pole position from the Democratic Republic of Congo with gold exploration the principal benefactor, as it was in 2010. Of special note is the rapid rise in gold exploration in west Africa, particularly Burkina Faso, in third place in 2011 up from twelfth the previous year.
According to the survey, the rapid rise in 2011 exploration budgets is apparent in most countries, with geology driving the activity. Of the 121 countries hosting the 2,400 companies surveyed, a number of them have well documented problems relating to security, government policy, taxation and crucially property tenure. Some 21% of these countries fall into the high risk category that in 2010 accounted for less than 15% of the global budget. In 2011, this had risen to 23% – an indication that, given good geological prospects, companies were prepared to accept higher risk for potentially higher rewards. The majority of this exploration is at an early stage, mostly carried out by junior companies, and presumably supported by their equity shareholders who also seek high rewards upon exploration success. These projects are often the fi rst to be cut in a downturn.
‘Early stage exploration pays dividends to a country, as one day, it will lead to new mining operations’ says Cox. Research work done by the Prospectors and Developers Association, Natural Resources, Canada, and mining analysts on the economic impact of exploration show that on average, every dollar spent on exploration eventually results in US$10 worth of capital expenditure, US$88 worth of revenues, US$6–12 worth of wages, and US$2–3 worth of royalties in the future. Clearly, given the potentially large positive impact, it is in every government’s interest to nurture their exploration industry.
David Cox: firstname.lastname@example.org