EDITORIAL Exploration gets cut first

Near the bottom of every business cycle major mining companies suddenly realize they’re going to lose money unless metal prices go up or operating costs go down. They can’t control metal prices, but to some degree they can control costs. And when it comes to cutting costs, exploration is the first to be slashed. That is happening now. Exploration budgets and staff are being cut to the bone as many senior mining companies take drastic measures to protect their income statements and balance sheets.

It is nothing new, but that does not mean it is any less painful for those who are out of work.

This time, unlike the recession of 1981-82, gold producers are being hit the worst. Gold just can’t seem to shake itself free from the US$360-390 level. That’s high enough to keep most producers in business if they keep a careful eye on costs, but not enough to warrant looking for more.

Prices for other metals are holding up well, but even base metal producers, anticipating softer markets for their metals as the recession takes hold, are watching their pennies carefully.

In short, everyone is trying to maintain revenue while controlling costs. In mining, controlling costs usually means laying off geologists.

Unlike some other cost-cutting measures, cutting exploration costs doesn’t have any immediate corresponding reduction in revenue. That’s what makes it relatively easy to justify. Exploration expenditure cuts for 1991 won’t have any effect on revenue for years to come.

What’s more, there is no way to measure what the long-term cost will be of foregoing exploration today. Five years from now there will be no way to determine the gains that might have been if exploration expenditures had been maintained. No one will be held accountable for any measurable shortfall. Those running the companies in the late 1990s will only have the luxury of blaming meagre profits on the shortsightedness of management a decade earlier.

The only consolation is to consider what effect these cuts might have on junior mining companies. The major mining company that cuts exploration staff today will need mineral deposits tomorrow. Cutting in-house exploration staff leaves a vacuum best filled by prospectors, junior mining companies and independent geologists.

It may be small comfort today, but those explorationists who keep plugging away during these dark days might find solace in the experience of others who were in similar circumstances in earlier economic downturns. It won’t be long before the cycle turns once more and the majors are beating a path to their door seeking the mineral deposits they inevitably will need.