Exploration budgets reach US$5.1B

According to Halifax-based Metals Economics Group’s recent edition of Corporate Exploration Strategies, this year’s analysis of the exploration budgets of 1,431 companies (using a US$100,000 cutoff) totals US$4.89 billion, which MEG estimates covers more than 95% of worldwide commercially oriented nonferrous expenditures. When MEG also includes estimates for budgets that it could not obtain, its estimate of total 2005 expenditures for commercial nonferrous metals exploration is US$5.1 billion.

The 820-page report says that worldwide nonferrous exploration spending steadily increased throughout the early 1990s to a crest of US$5.2 billion in 1997, before falling to a 12-year low of US$1.9 billion in 2002 — an overall decline of more than 63%. Since 2002, MEG’s estimated total has risen for three years, rebounding to a level just shy of the high-water mark set during the last exploration boom. This year’s US$5.1 billion estimated total is up 34% (US$1.3 billion) from last year — a rise of 168% (US$3.2 billion) since 2002.

The initial rise in worldwide exploration in 2003 can be attributed to a combination of increased spending by the majors as they recognized the dearth of new projects moving up the pipeline, significantly reduced industry consolidation from peak levels in 2000 and 2001, and increased spending by the junior sector on the back of higher gold prices and rising investor interest.

As the gold price continued to rise and prices for other commodities began to reach their current long-term highs, yearly budget increases by the majors (struggling to replace mined reserves) and meteoric increases by the juniors in 2004 and 2005 pushed the worldwide exploration total by surveyed companies to US$4.89 billion, an increase of 38% over last year and 182% since 2002.

Junior company exploration budgets included in MEG’s study are up almost 57% to US$2.33 billion this year, accounting for 63% of the overall US$1.34 billion increase in exploration allocations by all surveyed companies — the second consecutive year that the juniors have accounted for more than half of the overall increase. Since 2002, junior exploration spending has increased a remarkable 347%, accounting for 57% of the overall US$3.2 billion increase in exploration allocations by all surveyed companies from 2002 to 2005. This year’s rise in junior budgets continues to outstrip increases by other industry groups: the juniors account for nearly half (48%) of this year’s worldwide exploration total by all surveyed companies, the highest proportion allocated by the group since MEG began this series of studies in 1989.

Latin America leads

The table on page 5 shows the regional distribution of the US$4.89 billion in exploration allocations by the 1,431 companies included in this year’s study. Latin America continues to be the most popular destination for exploration, increasing its lead for the second consecutive year over second-place Canada to US$205 million, after Canada’s exploration tax incentives helped close the gap to less than US$50 million in 2003. Africa remains in third place by region, closely followed by the “rest-of-world” category, which includes Europe, the former Soviet Union, Asia, and the Middle East. Despite a gradual slide from first place by region in 2001 to fifth place this year, Australia remains solidly in second place by country. The United States and the Pacific/Southeast Asia region are in sixth and seventh place, respectively, positions they have held since 2001.

In dollar terms, exploration allocations by surveyed companies have increased in each of the regions of the world for the third consecutive year. Budgets increased the most in Latin America, led by Mexico and Peru; MEG’s rest-of-world category, led by continuing interest in Russia, China, and Mongolia; and Africa, with Angola, the Democratic Republic of the Congo, and Gabon showing the largest gains.

Rise in exploration

The continuation of the current junior-led recovery in exploration relies entirely on the ability of junior companies to raise capital. The juniors have raised substantial amounts of money over the previous two years and many already have the coffers to at least partially fund exploration programs that will run into next year. High metals prices will also help them continue to attract investors for the short term. In addition, while MEG believes that many of the major producers are unlikely to increase their budgets substantially over the next few years, a few major and intermediate companies do have room to expand their exploration programs. Looking forward, MEG expects that a continued increase in exploration spending by the junior sector, coupled with modest gains by a handful of intermediate and major producers, will likely result in an increase in worldwide exploration spending in the range of 10-15% in 2006.

— The preceding is an edited version of an information bulletin published by the Halifax-based Metals Economics Group, a mining and metals consulting firm.

Table 1: Worldwide Exploration Budgets by Region 2005

1,431 Companies’ Budgets Totalling US$4.89 Billion

Latin America23.1%

Canada19%

Africa16.5%

Rest of World16.4%

Australia12.6%

United States8.1%

Pacific/Southeast Asia4.3%