2004 brought rising Metal Prices, more investor interest The warming trend

It’s been a good year for the mineral industry, the second one in a row. After a long period in the cold, we’re hardly used to it.

And even if it was the Year of the Disappointed Gold Bug, failing to produce the breakout in gold prices some had anticipated, commodity prices did have a falling U.S. dollar and a gently expanding world economy to support them.

The gold price didn’t skyrocket, but in U.S.-dollar terms it is higher than it had been since 1988. It has continued to rise against the major reserve currencies, even as they have been making gains against the greenback. Moreover, in the past two or three years, the whole psychology of the gold market has changed; news that would have sent prices reeling in the late 1990s makes little or no impact now.

Silver prices have ridden an uptrend since the beginning of 2003; platinum is now at 1980 prices, but it’s no spike this time.

Base metal prices have, in aggregate, been strengthening since mid-2002. Nickel and copper have both seen “silly-season” price spikes, but through that noise the trend lines for all the metals have been up. The same goes for the minor metals; though even more susceptible to supply squeezes, their prices have clawed generally upward.

And, of course, improved commodity prices have sent a tide of black ink washing over the metal producers.

Then there is the rise in exploration spending. Figures from Halifax-based Metals Economics Group show exploration budgets probably ran to US$3.8 billion in 2004, slightly higher than in 1998, the year the long slump started.

It might be suggested that US$3.8 billion — in nominal terms, only 73% of the 1997 peak in exploration funding — is a pretty anemic response to some of the best metal prices in years. But we’d counter that too much money was one of the main things wrong with the mid-90s mineral exploration boom, and that relatively slow growth in exploration budgets may force the industry to concentrate on the best projects. Starvation isn’t good for the mineral industry, but over-indulgence always ends in a hangover.

After all, history was only repeating itself between 1994 and 1997, when resource-stock euphoria ended in a string of con games that culminated with the Busang fraud. The mid-80s tragedy that foreshadowed the mid-90s farce was the mismanagement of flow-through exploration funds. In both exploration booms, money wound up being spent merely because it was there, not because a good prospect needed drilling.

We’d argue the real measure of good times is not only the level of spending, but what that money is being spent on. Good exploration ultimately brings discoveries, which sustain the flow of capital in an industry that has only that to live on. In good years, there is money, and there are also good projects.

In a recent presentation to the London Bullion Market Association’s Shanghai Precious Metals Conference, Metals Economics Group’s David Cox tracked the increase in financings for junior gold-exploration companies from the beginning of 2000 to mid-2004. The trough came in 2001, when juniors raised about US$650 million; in 2003, they raised about US$2.2 billion. In the first half of 2004, they had raised almost as much as in all of 2002. There’s no doubt the money is flowing.

The evidence that the industry is spending that new money more responsibly is only subjective, but we think there are at least two good signs: fewer really bad projects are being pumped, and some of the marginal ones appear to be under conservative, hard-nosed management.

Cox’s study also shows evidence that exploration is based on a broader set of commodities than back in 1997. Gold remains the favoured metal; 53% of exploration funds go to gold exploration. But that is down from 65% in 1997, and for five years in the last eight, gold exploration took up less than half of total spending.

Base metals’ share of exploration spending had risen from 27% in 1997 to nearly 40% in 2001, while absolute dollar amounts were falling. That increase probably reflected the financing drought among junior exploration companies through the dark years: major base metal producers may have cut back, but their share of the worldwide exploration budget rose when the juniors pulled back much more drastically.

There are reasons junior explorers look for gold. The barriers to entry in the gold business are generally lower, and a competent small organization can run a small gold mine profitably without needing the economies of scale that a base metal mine, shipping concentrate to a smelter, might need. Investors, even now, probably gravitate to gold stories. That, in turn, means juniors, who depend much more on bringing in new money than do the larger companies, can raise money more easily for gold projects than for other plays.

So to see gold lose its “market share” of exploration by almost a fifth over that eight-year cycle — a cycle that turned upward, at last, in 2003 — is to sense that a wider range of commodities is driving the increase in exploration spending. That diversification can do no harm, and may do a lot of good.

Exploration spending is up; metal prices are up; the majors are making money again. Yes, the gross indicators are good, but they’ve been good before. What is encouraging is that common sense remains in charge, and that hasn’t always been so.