Economic Pressures Caused Worst Decline in Exploration Budget of the Last Two Decades
A report released by the Metals Economics Group (MEG) has painted a grim picture for the nonferrous exploration industry. From a record budget high in 2008 of about US $13 billion, the sector has fallen to US $7
millionbillion, suffering the sharpest decline in over 20 years, says the study. The slowdown began in September of 2008, amidst the economic turmoil that left the global exploration budget at around the same level as in 2006.
The budget of the 1,846 companies included in the study (using a US $100,000 cutoff) accounted for more than 95% of worldwide commercially-oriented nonferrous expenditures.
Unlike in the early 2000s, when exploration budget declines were the result of cutbacks by majors and industry consolidation, last year's record falls were due to reduced commodity demand and sharp falls in metal prices, according to the MEG report. However the increased cost of exploration during the last six years is also a concern for the industry, given that "…the substantial increases in exploration budgets from 2004 to 2008 did not result in a proportionate rise in actual activity on the ground," the report says. The increased cost of everything from fuel to labour is a major factor, the report cites, for rising costs and reduced benefits, especially for the minors.
Jason Goulden, Vice President of Research at the Metals Economics Group, says that while some analysts may have predicted the decline in prices, most were surprised by the speed and severity of the fall-off. "[A]ll companies suffered significant erosion in their market capitalization," says Goulden. Similarly, as most analysts were predicting a long and protracted global recession and a grim outlook for global demand, few would have guessed that metals prices, and the industry as a whole, would begin to recover as quickly as they did.
Rough calculations show that far more has been invested in exploration in each of the past few years than at the last exploration peak of the late 1990s. Through early 2008, it was clear that the industry's exploration dollars were not going as far as they did a decade ago. Higher demand for services, such as drilling and assaying, and rising input costs on everything from fuel to geoscientists, significantly increased the costs of exploration during the upswing. As a consequence, the substantial increases in exploration budgets from 2004 to 2008 did not result in a proportionate rise in actual activity on the ground.
While they were beyond the scope of the Corporate Exploration Strategies study to quantify, the cost of these services likely peaked in 2008, before falling somewhat later in the year and into 2009 as demand for services declined along with exploration budgets.
Juniors Led the Decline
After six years of increased exploration budgets-including five years of growth averaging almost 60% annually-junior companies' aggregate exploration total fell by more than half in 2009. Not surprisingly, junior explorers led the decline in nonferrous exploration budgets in 2009, accounting for about 60% of the overall drop. Major and intermediate companies' aggregate 2009 exploration budgets also declined significantly, but the cuts were not as deep; as a result, the majors accounted for the largest share of the 2009 exploration total for the first time since being eclipsed by the juniors in 2004.
The juniors' dependence on equity financing to fund exploration is what makes them the most volatile sector of the industry, the report explains. However, given the rebound in availability of capital to the juniors since bottoming in early 2009, MEG does not expect to see a further decline in junior exploration budgets this year.
While all regions experienced reduced allocations in 2009, the largest decreases in dollar terms were in Canada and Latin America and the smallest were in Pacific/Southeast Asia and the United States.
Latin America remained the most popular exploration destination, a position it has held since 1994, with about 82% of its 2009 allocation directed to the traditional big five countries-Peru, Chile, Mexico, Brazil and Argentina. Allocations in a total of 23 Latin American countries fell by less than the 42% worldwide average, increasing the region's share of overall expenditures to more than 26% (its highest percentage since 2001).
Canada experienced the largest decrease of any region in 2009 (falling by more than half), dropping it to third place with 16% of worldwide allocations. Canada had held the second spot since overtaking Australia in 2002.
For the first time ever, MEG's rest-of-world region (including Russia, China and Mongolia, which together accounted for almost two-thirds of the region's total, and 37 other countries in Europe, mainland Asia, and the Middle East) moved into second place. Planned expenditures in this region, says the report, were down just a third from 2008, increasing its share of worldwide exploration to 17%. Africa dropped from third to fourth position in 2009, its share remaining at 15%; major exploration destinations on the continent included South Africa, Democratic Republic of Congo, Angola, Ghana and Tanzania. Australia appeared firmly entrenched in fifth place, with almost 13% of the total. The United States remained in sixth place with almost 7% of the global total, its lowest percentage ever. The Pacific/Southeast Asia region experienced the smallest drop (32%) in spending in 2009; allocations represented more than 6% of the worldwide total and were only a few million dollars behind the United States. The traditional big three-Indonesia, the Philippines and Papua New Guinea-attracted almost three-quarters of the region's total.
Peru and Russia: Main Exploration Destinations
The distribution of 2009's exploration budgets for the top ten individual countries (Canada, Australia, Peru, U.S., Russia, Chile, Mexico, China, Brazil and South Africa) remained almost the same. However, these countries –which accounted for 67% of the overall budget total-experienced a shift in their relative positions.
Although metals prices (and the economy in general) remain vulnerable to setbacks, with some showing signs of weakness in early 2010, the general consensus among industry watchers is that most metals prices will remain relatively firm and are expected to increase somewhat in 2010. Early signs are that many major, intermediate and junior explorers are planning modest to substantial increases in their exploration budgets for 2010. Barring a significant setback in metals prices prior to midyear, we expect that most explorers will follow this trend, which will result in a healthy increase in worldwide exploration allocations in 2010.
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