Facts ‘n’ figures: Record US$18B spent on exploration in 2011, says Metals Economics Group

The following is an excerpt from the Metals Economics Group’s Worldwide Exploration Trends 2012 report based on the firm’s Corporate Education Strategies series of studies. The exploration budgets in the report include spending for gold, base metals, platinum group metals, diamonds, uranium, silver, rare earths, potash and phosphate and many other hard-rock metals, but specifically exclude iron ore, coal, aluminum, oil and gas and many industrial minerals. Visit www.metalseconomics.com to view the full report.

The Metals Economics Group’s twenty-second edition of Corporate Exploration Strategies concludes the industry’s aggregate budget for nonferrous metal exploration surged to US$18.2 billion in 2011. Despite periods of weakness and volatility, metal prices — the primary driver of exploration spending — have improved significantly since bottoming in early 2009, and have remained well above their long-term trends through 2010–2011. Almost all companies have responded by increasing their exploration budgets over the past two years. As a result, the industry’s aggregate exploration total jumped 44% in 2010 and a further 50% in 2011, more than doubling from 2009’s recent low of US$8.4 billion to the new all-time high of US$18.2 billion in 2011. 

Global spending increases

Exploration allocations for all regions increased to record highs in 2011, led by the largest dollar increases in Latin America and Africa. Latin America remained the most popular exploration destination, attracting 25% of global spending in 2011, with six countries — Mexico, Chile, Peru, Brazil, Colombia and Argentina — accounting for the lion’s share of the region’s total. Buoyed by strong growth in gold exploration in Colombia, Guyana, Brazil and Mexico, the share of allocations targeting gold in Latin America increased in 2011, while base metals slipped to its smallest share in more than a decade.

Canada has been the industry’s second-favourite region for the past decade, and continued to take advantage of its large pool of junior explorers and exploration-focused tax incentives to attract 18% of the global total in 2011. Three provinces — Ontario, Quebec and B.C. — accounted for more than 60% of the planned Canadian nonferrous exploration spending. Gold remained the leading target in the country, attracting more than two-and-a-half times the base-metal budget.

Eurasian countries make up the third largest region, led by allocations for China and Russia, and by four other countries — Kazakhstan, Mongolia, Finland and Turkey — that each attracted aggregate budgets exceeding US$100 million in 2011. Although gold remained the region’s top target in 2011, base-metal allocation increased at a faster pace owing to rapidly growing copper and nickel budgets for Kazakhstan, Russia, China and Poland.

Africa saw the biggest year-on-year percentage increase of all regions in 2011, claiming 15% of the world total and widening its lead over fifth-place Australia. After slipping to second place in 2010 behind the Democratic Republic of the Congo, South Africa regained the top spot for planned spending in Africa during 2011. Burkina Faso rose from twelfth in 2009 to third in 2011, leading the rapid rise in gold exploration in West Africa in recent years. The increased efforts in West Africa translated into gold receiving more than half the African exploration total in each of the last two years. In contrast, since accounting for about a third of African budgets in 2004, diamond allocations dropped to an all-time low of 6% in 2011, primarily due to waning diamond spending in sub-Saharan Africa, as many companies focus more in countries such as Russia and India.

Exploration spending in Australia kept pace with the world average increase in 2011, maintaining the country’s share of the total at about 13%, despite mining reform at both the national and state levels dominating the country’s headlines for much of the year. Spending in Western Australia accounted for almost half the country’s 2011 nonferrous exploration total, while South Australia saw the largest year-on-year percentage increase. Gold and base metals accounted for the bulk of Australia’s 2011 exploration total, with allocations for diamonds, uranium, platinum group metals, and other targets trailing by wide margins. 

Gold and copper exploration in the U.S. kept it in sixth place regionally, ahead of the Pacific Islands. Nevada had the largest share of the country’s 2011 exploration total, and three states — Nevada, Arizona and Alaska — accounted for almost two-thirds of the country’s total.

Although gold attracted more than half of all spending in the U.S., base metal reached its second-highest percentage share in the past decade, based in part on increased copper exploration in Arizona and Utah.

Among the Pacific Islands, allocations for Papua New Guinea, Indonesia and the Philippines accounted for the bulk of the region’s 5% of the world exploration total, with budgets split between gold and base metals. Despite the region’s high prospectivity for gold, copper and nickel, investors continued to be wary of the political and social unrest, uncertainty of tenure and periodic anti-mining violence that have plagued the region for years. As a result, we have not seen a lot of new entrants into these countries in recent years, with most exploration conducted by larger producers in and around their existing assets.

Equities slump: an opportunity?

With risk capital-dependent junior companies accounting for close to half of annual exploration spending, the state of equity markets plays a key role in shaping trends and strategies in the exploration industry from year to year. Strong market conditions enabled junior explorers to raise a combined US$7.4 billion for precious and base metals exploration in the final quarter of 2010 and the first half of 2011. Despite reports of drill-rig shortages and assay lab backlogs in some key exploration regions, significant drill results trended strongly upward for most of 2011.

Equity markets struggled in the second half of 2011, and the pace of exploration financings fell back to the levels of late 2009 and early 2010. Since most of the money a junior spends on exploration in a given year is typically raised between the fourth quarter of the previous year and the middle of the current year, if equity markets fail to improve in the first half of 2012, many juniors may have trouble raising the necessary funds to sustain or increase exploration spending in 2012. In contrast, intermediate and major producers with healthy balance sheets are likely to intensify their efforts to replace reserves by increasing their exploration allocations in 2012. If this scenario plays out in the coming months, the juniors’ share of overall exploration spending in 2012 will decline.

These conditions — historically strong commodity prices, resource hungry miners with strong balance sheets and a relative shortage of available risk capital — can create interesting opportunities for the exploration industry. Juniors with promising projects at current and long-term metal prices, but with insufficient access to equity funding to advance them in the short term, are more open to financing, joint venture or acquisition discussions with larger players, or may look to consolidate with better financed peers, particularly when both are working in the same exploration camps. In addition, if equity markets do not improve relatively early in 2012, majors and intermediates looking to finance or joint-venture with cash-strapped junior explorers are likely to negotiate far more favourable
terms than they would have in 2011.

Looking ahead

Despite concerns about the global economy and lacklustre growth projections for most countries, China and other resource-hungry emerging and developing economies are expected to lead global gross domestic product growth and demand for metal over the next few years. On the supply side, the industry faces many of the limitations that existed prior to the 2008 economic downturn that set back the clock on many developments. While periods of weakness and volatility will likely continue in the near term, most metal prices are expected to remain above their long-term trends and comfortably above the nominal cost of production through 2012.

Most major and intermediate producers remain committed to exploration to replace mined reserves and strengthen and grow their pipelines, particularly while metal prices stay relatively strong. We expect most producers — many of which have much healthier balance sheets than they did a few years ago — to continue to invest in organic growth, resulting in a moderate increase in their aggregate exploration allocation in 2012.

Exploration spending by risk capital-dependent junior companies may be a different story, however. As the pace of exploration financings weakened in late 2011 — traditionally the busiest time of year for junior exploration-related financing, as companies cash-up ahead of the upcoming field season — many juniors have had trouble raising the funds needed to sustain or increase exploration spending in 2012. Although early indications are that some juniors plan to increase their exploration budgets in 2012, unless equity markets improve over the first quarter, many will likely be forced to reduce exploration spending this year. We expect a slight decline in spending by the juniors, offset by increased spending by the producers, resulting in a net increase of 5% to 15% in exploration spending by the industry as a whole in 2012 — a relatively small change, compared with the 40% to 50% swings of the past few years.