More Pain To Come In Exploration Sector: Fraser Institute Survey

— The following is an edited version of the executive summary and related press release for the Fraser Institute’s influential Survey of Mining Companies 2008/2009.

The 92-page survey polled 658 mining executives and managers worldwide on the public policy and mineral endowment of 71 jurisdictions, including provinces and states in Canada, Australia and the United States. This year, the institute added Guatemala, Norway and Kyrgyzstan as jurisdictions, as well as questions about the economic crisis, the credit crunch, and falling commodities prices. The survey, which the think tank has produced annually since 1997, is available at www.fraserinstitute.org.

Survey responses indicate that the mining sector expects dramatically decreased investment plans along with a large number of bankruptcies. More than four out of five miners believe that at least 30% of exploration companies will be forced out of business in the current economic downturn.

A breakdown of survey results is even more revealing: two out of five respondents believe 30% of the world’s exploration companies will be forced out of business; another two out of five believe that 50% or more will be forced out of business.

Over 90% of respondents believe the exploration and development activities of exploration companies will be curtailed, with 57% saying the activity will decline “a great deal.” Nearly 85% of respondents say that the activities of production companies will be curtailed, though only 31% believe that the activity of production companies will decline “a great deal.”

This comes after years of soaring exploration and development activities, as demand for commodities and their prices rose. Almost 70% of survey respondents indicated that they’d had increases in exploration and development activity over the last five years. Many had planned increases into 2009. While the vast majority of companies are curtailing investment and reducing planned increases in investment, 23% of respondents say they will continue or only partially curtail new investment, leaving a net planned increase over last year’s outlays, even if these increases are less than they would have been.

All this is bad news for an economy looking forward to recovery. With the projected extinction of large numbers of exploration companies and with a vast majority of mining companies planning to curtail exploration and development investment in 2009, the world may face a shortage of raw materials and skyrocketing commodity prices as the world economy moves past the recession and into renewed growth.

The curtailment of development activity will hit in the short term, likely during the opening phases of the recovery period. The gap between exploration and production typically spans five to 10 years. This means that the negative impact from the lack of exploration on commodity supplies will begin to hit as the recovery matures.

These problems could weaken the recovery and spark inflation fears.

Perhaps because of this, most miners believe that over the long term, commodity prices will resume their upward movement. An increase in commodity prices over the long term would be a break from past history.

For the past 100 years, commodity prices have declined by about half in real terms. This is due to factors such as new finds, recycling, increased efficiency both in the manufacturing process and in the use of materials in the final product, and the shift to a service economy.

The long-term decline in commodity prices has led to uncertainty as to whether the run-up in prices prior to the recent economic crisis would reverse itself, as other short-term price run-ups have, or endure due to long-term increased demand from developing nations such as China, India and Brazil.

Over 70% of miners believe that commodity prices will resume an upward trend as the economy recovers, a quarter believe prices will be stable, and less than 5% of miners believe the downward trend in prices will continue over the long-term.

In other words, despite past history, miners believe that the current drop in commodity prices is the exception — increasing prices will be the rule.

Despite the overall gloom, industry executives give many of Canada’s provinces top marks for policies that encourage mineral exploration and development.

For the second year in a row, Quebec is ranked first overall (policy plus mineral endowment) while Wyoming earns second place, moving up from eighth last year and sliding perennial favourite Nevada down by one spot to third.

Seven Canadian provinces or territories are ranked among the top 10 best jurisdictions in the world for mining policy: Quebec (1), Alberta (4), Newfoundland & Labrador (5), New Brunswick (6), Manitoba (8), Saskatchewan (9), and Ontario (10). Rankings for the others are: Nova Scotia (12), Yukon Territory (15), British Columbia (24), Northwest Territories (40) and Nunavut (43).

The bottom 10 policy scores belong to Venezuela, Ecuador, Guatemala, Honduras, India, Bolivia, Zimbabwe, Kyrgyzstan, Democratic Republic of the Congo, and Indonesia.

“Mining is a fully international business and the survey results once again demonstrate that jurisdictions must be prepared to compete on an international basis to attract mining investment,” said Fred McMahon, the survey’s co-ordinator and the institute’s director of trade and globalization studies. “Jurisdictions that fail to recognize rule of law or respect negotiated contracts and property rights will not be successful at attracting mining investment.”