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Significant drill results tied to strong junior sector

by Virginia Heffernan on March 4, 2014 market

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More than 55% of the 351 projects that reported at least one significant drill result in 2013 were located in the countries with the top three budgets — Australia had 90 projects, Canada had 76 and the United States had 29 — and the remainder was divided among 51 other countries.

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Locations of projects with significant drill results in 2013.

Countries where juniors companies contribute substantially to mineral exploration report far more significant drill results than countries that have weaker junior sectors, according to SNL Metals & Mining’s Corporate Exploration Strategies, an annual study.

Australia, Canada, the U.S. and West Africa, where junior companies are particularly active, reported more noteworthy results than countries such as Chile, Peru and China, despite healthy levels of exploration in the latter regions.

The correlation underscores the importance of the junior sector to exploration, though the fact that juniors are more likely to report results in order to satisfy material disclosure rules and attract investment than their senior counterparts is a consideration.

“Juniors are very vocal about their exploration results,” says Kevin Murphy, an analyst for SNL. “There are some areas, such as South Africa, where there is a fairly significant amount of exploration being conducted, but mostly by seniors who do not need to be as forthcoming about their results.”

Murphy expects a 10-20% decline in overall exploration budgets in 2014 and an even greater decrease in reported drill results as juniors struggle to attract investors to their projects. The worldwide budget for nonferrous metals exploration was $15.2 billion last year, a 29% drop from the 2012 level, according to SNL.

Relief could come in the form of higher metal prices. After witnessing an 18% decline in its metals and mining index in 2013, Canada’s Scotiabank is calling for a commodity price bottom in early 2014. The bank says current gold prices of about US$1200 per oz. cannot fall much further because they are close to the all-in cash costs of 20% of the world’s highest-cost gold producers, while copper is already responding to higher demand in China with an uptick to US$3.32 per lb. in January.

According to SNL’s study, gold projects attracted the most exploration spending in 2013, followed distantly by copper, nickel, uranium, zinc-lead and PGM projects.

Tax incentives for exploration, popular in Canada, could also help the besieged junior sector. For example, British Columbia Premier Christy Clark stated in January that the province is considering making its exploration credit, which costs about $10 million per year, a permanent tax break. Companies spent $476 million exploring B.C. in 2013, down from $680 million in 2012.

Another trend identified by Corporate Exploration Strategies is the growing allocation of spending to late-stage assets at the expense of earlier-stage projects that would provide the next generation of mines. The study reports that 196 reserve-development and feasibility-stage projects had significant results compared with 90 early-stage projects.

Although there is a good reason for the shift (it’s easier to attract investor interest and potential buyers to later-stage assets than to riskier, grassroots projects), the trend is a threat to future metal supply.

“This is really going to come around and bite us in the future,” says Murphy. “If we don’t have the early-stage exploration, we can’t develop the later-stage assets and the potential mines. It won’t hurt us tomorrow, but ten years down the road it could start to be an issue.”

 


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