Better base memtal prices fail to spark exploration

“The biggest danger facing the Canadian resource sector is not that the resources are not there, but that we will not discover and develop them faster than we run out of established reserves,” he told a mineral conference in Ottawa.

But if mining’s movers and shakers are concerned about the lack of new base metal discoveries in Canada and the United States, there is little evidence to suggest that they are going to do anything about it in 1989.

Preliminary indications are that spending on base metal exploration increased in 1988, both in dollars spent and as a percentage of exploration expenditures, well beyond the $130 million spent in 1987. Leaner and now healthier base metal producers like Falconbridge Ltd. (TSE) and Inco Ltd. (TSE) will have more money to spend on exploration thanks to recent surges in copper and nickel prices.

Even if there is a major increase in the amount of money spent on base metal exploration, the industry would have a long way to go to redress the imbalances shown between the percentage spent on precious verses base metals in recent years. Base metals

In 1987, for example, mining and exploration companies spent an estimated $850 million in Canada to look for new deposits. Of that amount, 82% of Canadian exploration spending was directed at precious metals, chiefly gold, compared to 12% for base metals. The large gap between mine operating costs ($227(US) per oz on average) and the price of gold ($437(US) per oz last year) made it the principal exploration target in all provinces and territories except Alberta (where coal remains the main target).

The trend away from base metals and towards precious metals is something that has increased steadily with the price of gold since 1983 when 42% of exploration dollars were focused on precious metals compared to 29% for base metals. The result is that since 1981, gold reserves have grown by 94% while copper and zinc reserves have declined by 21% and 24% respectively.

However the record high prices for copper and nickel combined with a slackening in the price of gold, has suddenly made base metals a much more attractive exploration target than they have been for much of the 1980s. That doesn’t mean Canada’s mining companies are about to answer the clarion call sounded by Keevil last May. Junior companies

“Refocusing on other metals will be easier said than done because the glamor is still in gold, and junior companies depend upon glamor to raise capital,” said Keevil.

“Big companies won’t commit a larger percentage of their budgets towards base metals until they see current prices hold up for a while,” added John Harvey, president of Noranda Exploration. “We need a period of stability.”

A number of factors have also entered the picture to prevent junior and even senior mining companies from leaping aboard the base metals bandwagon.

They include the October 1987 stock market downturn which is still playing havoc with the share prices of the majority of junior explorers. The phasing out of the old Mining Exploration Depletion Allowance (MEDA) and introduction of the Canadian Exploration Incentive Plan has created a certain amount of uncertainty in investment circles.

Under the new plan, Canadian exploration expenses incurred by a company from funds raised through flow-through share financing, qualify for a 30% incentive grant from the Federal government.

“We are dealing with a new program and even if the rate of return is just as good as MEDA, it is something new and it is not perceived in the same way,” said Yves Mercille, an analyst in the Mineral Policy Sector of the Department of Energy Mines and Resources. Share issues

The difficulty with predicting what is going to happen in 1989 is that no-one knows what can be raised through flow-through share issues. Federal government figures suggest that about $900 million was raised via flow-through financings in 1988, down from $1.2 billion in 1987. Officials at Energy Mines and Resources doubt that those lofty heights will ever be reached again unless gold prices rise to $800(US) per oz or more from $390. The amount raised via flow-through share issues will almost certainly decrease still further this year, according to Mercille.

Before Jan 1, when the 331/3% earned depletion allowance was replaced by CEIP, investors who had enjoyed a 133% tax write off for every dollar spent on Canadian mineral exploration didn’t look closely at the risks involved in buying gold stocks. “They just wanted the tax credit,” said Mercille. Investors now realize that this is a very risky market and are taking a more cautious approach.

The stagnant market combined with uncertainty over CEIP make it much more difficult for junior exploration companies to change overnight from precious to base metal exploration even if they wanted to. Judging by the percentage of money set aside for precious and base metal exploration the industry heavyweights appear to be sticking to what they know best. Exploration spending

Placer Dome Inc., for example, will increase its exploration spending this year to $60 million from $50 million in 1988. But Canada’s biggest gold producer will continue to focus almost entirely on precious metals. “About 98% of our 1988 exploration budget was spent on precious metals and that won’t change,” said a company spokesman.

Noranda Minerals is setting aside a minimum of $117 million this year for exploration, down from $179.3 million in 1988. (Money earmarked for pre-feasibility studies on 10 key projects could bring the 1989 figure up to around $180 million). The percentage spent by Noranda on base metals projects will increase this year to 331/3% from 25%, according to Harvey.

Echo Bay Mines (TSE), North America’s fourth largest gold producer spent slightly more than $9 million on exploration in 1988 and the Edmonton company is planning to spend about the same amount in 1989. Echo Bay directs all of its efforts toward precious metal exploration and there will be no chan ge in that strategy this year.

Although Inco and Falconbridge are currently basking in the hot base metal climate, all of the money they spend on exploration will be directed towards replacing ore which is scheduled to be mined in the next few years.

In 1989, Inco will spend about $41 million on a number of exploration projects in Canada. That represents a substantial increase from the $23 which the free world’s largest nickel producer spent on exploration last year. Gold subsidiary

The company’s commitment to gold is reflected in the $29 million (compared to $13.5 million last year) to be spent by Inco’s gold subsidiary, Inco Gold, this year. Nickel exploration will cost $12 million this year compared to $9 million in 1988, according to Inco estimates.

Of the $32 million which Falconbridge Ltd. has earmarked for mineral exploration in 1989 only 15% will go towards gold. That represents a significant decrease from 50% two years ago.

However, experts say that as long as the price of gold doesn’t drop below $320(US) per oz, the margin between price and cash operating costs will continue to make it the number one exploration target. Canada’s base metal producers will be reluctant to tamper with the healthy returns they are currently getting for their product by increasing supply, according to Robert Jones, director of cost analysis the federal department of Energy, Mines and Resources. That may not be music to the ears of Norman Keevil, but it will ensure that companies like Inco and Falconbridge remain healthy for the foreseeable future. Exploration expenditures Base metals vs precious metals (Percentages of total mineral exploration expenditures).

Base Precious Year Metals Metals 1975 63% 7% 1977 42% 7% 1979 35% 12% 1981 34% 25% 1983 42% 29% 1985 20% 65% 1986 14% 76% 198
7 12% 83%

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