Canada leads way as exploration spending rises

Worldwide spending on mineral exploration has increased for the first time since its peak in 1997, according to the Metals Economics Group (MEG).

The recent edition of the group’s Corporate Exploration Strategies report states that allocations for exploration of commercial nonferrous metals (excluding exploration spending for iron ore) are up by about 26% from 2002.

Global nonferrous exploration spending steadily increased through the early 1990s to a zenith of $5.2 billion in 1997, before falling for five straight years to a 10-year low of $1.9 billion in 2002 — an overall drop of more than 63%.

The MEG’s 2003 analysis of 917 companies’ exploration budgets (using a $100,000 budget cutoff) totals $2.19 billion, which covers about 90% of worldwide expenditures; if one includes the additional 10%, exploration expenditures for 2003 total about $2.4 billion.

Prior to this year’s increase in exploration spending, several factors — substantial cutbacks by large mining companies, the negative effects of industry consolidation, and a loss of funding for a great number of junior companies — contributed to five straight years of declining exploration spending by companies covered in the study.

This year’s increase in worldwide exploration budgets is largely due to the combination of increased spending by the majors as they recognize the dearth of new projects moving up the pipeline, the significant reduction in the negative effects of industry consolidation on exploration from the peak consolidation levels seen in 2001 and 2002, and two consecutive years of increased spending by junior companies on the back of increased gold prices and rising investor interest.

If the gold price remains buoyant and demand for both copper and nickel remains strong, the MEG expects exploration budgets will continue to rise in 2004, aided by a sustained reduction in high-level industry consolidation and increased junior spending.

Junior company exploration budgets are up by about 25% this year, building on last year’s 3% rise in spending that followed four consecutive years of substantial declines. The upturn in exploration activity by junior companies over the past two years is primarily due to an increase in investor sentiment towards gold equities, which corresponds with the recovery in gold prices that began in late 2001.

The bulk of the overall increase in junior spending this year is allocated to Canada, as many Canadian juniors have taken advantage of the combination of an improvement in mining equity investment and Canada’s super flow-through share program to boost domestic exploration. Canadian domestic exploration spending will likely continue at a high level over the next two years. Several Australian organizations are lobbying the Australian government to adopt either a flow-through share program similar to Canada’s or some other type of new tax-rebate scheme for exploration expenses to address the decline in Australian domestic exploration. If one of these programs is instituted, the MEG expects to see a near-term rise in Australian domestic exploration contributing to an overall continued rise in junior exploration spending over the next few years.

Although acquisition activity so far this year is up from 2002’s low, it is still considerably lower than the record level of 2001. Of note, a large portion of current consolidation and acquisition activity in the industry is being driven not by high-level consolidation but by external factors, such as fulfilling black-empowerment ownership requirements in South Africa.

Throughout 2000 and 2001, the industry saw the demise of several significant mining and exploration companies to consolidation that effectively wiped out the acquired companies’ exploration budgets in the year following the acquisition as the surviving companies’ budgets either remained essentially unchanged or were reduced even further, despite incorporating an expanded exploration portfolio. In 2002 and so far in 2003, high-level consolidation in the mining industry slowed considerably as major companies have faced far fewer attractive targets and as several majors announced their intention to return to internal reserves growth rather than pursue acquisitions. The slowdown in industry consolidation in 2002 has had a far less negative effect on 2003 exploration, and although total acquisitions activity is up again in 2003, high-level consolidation in the industry remains somewhat muted for 2003 to date and will not have the negative impact on overall exploration spending in 2004 that it had in the years leading up to 2002.

The accompanying graphs illustrate the regional distribution of the $2.19 billion in exploration allocations by the 917 companies included in this year’s study, compared with $1.73 billion budgeted by 724 companies in 2002.

The downward trend in exploration spending that had been apparent in almost every region of the world since 1997 has finally reversed, as all regions are experiencing an increase in exploration allocations this year. In dollar terms, allocations increased the most in Canada (up by $154.3 million) and Africa (up by $117.3 million) and increased the least in the Pacific/ Southeast Asia region (up by only $7.8 million) and the U.S. (up by $28.2 million). Canada and Africa experienced the largest exploration increases in terms of percentage of worldwide allocations, whereas the percentages for Latin America and Australia each fell by more than 2%, and smaller percentage decreases (less than 1% each) are apparent for the Pacific/Southeast Asia region, the U.S. and the rest-of-the-world category.

Although Latin America is still the most popular destination for exploration this year, its lead over second-place Canada’s surging level of activity is only $46.5 million in 2003, compared with a $130.8 million margin over Canada in 2002. For the second year in a row, Canada is in second place regionally and first place by country, after surpassing Australia in 2002, which had held these positions since 1994. Canada’s flow-through share tax deduction and super flow-through share exploration investment tax credit for minerals exploration are large factors in the improved investment climate and significant increase in domestic exploration in Canada. The sustained search for diamonds in Canada has also contributed to the increase in Canadian exploration spending.

Africa, led by a surge of spending in South Africa, has surpassed Australia for the first time, moving into third place by region, and Australia has slipped to fourth place by region this year while maintaining second place by country. The large increase in allocations reflects Africa’s enormous geologic potential, but its many problems continue to impede investment in exploration and development. Contributing to the surge in South African spending is the reaction to changes to the country’s Mining Charter, which will see privately held mineral rights gradually transferred to 100% state ownership, with mineral properties licensed to operators by the government. Many companies have increased their exploration spending in South Africa to evaluate their large landholdings ahead of this transfer of mineral rights so they can retain their most prospective ground.

— The preceding is from an information bulletin published by the Metals Economics Group, which is based in Halifax, N.S.