Print PDAC booklet 3 - Prospectors & Developers Association of Canada
A Special Report from Metals Economics Group for the PDAC 2005 International Convention
World Exploration Trends
Corporate Exploration Strategies The PDAC was pleased to work with Metals Economics Group to make this special report on World Exploration Trends available to our members and PDAC Convention 2005 delegates. The PDAC uses Metals Economics Group’s Corporate Exploration Strategies (CES) as an essential tool for obtaining information on global exploration trends. CES is acknowledged as the primary source of information on exploration and mining statistics worldwide. Tony Andrews, Executive Director, PDAC
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riefly, Corporate Exploration Strategies examines the nonferrous exploration activities of all mining companies worldwide. Volume I provides a ten-year summary of trends in exploration spending and an industry-wide analysis of allocations by location, target, stage of development, and more. Volume II reports in detail each company’s exploration budget and its breakdown by country, target, and stage of development. Companies planning to spend more than US$5 million are given special attention—each company’s current exploration program, strategy, and most advanced exploration projects are profiled in detail. The study also includes an appendix of companies that do not have exploration budgets but which do have significant exploration projects for which they are seeking financing or joint ventures.
Subscribers to Corporate Exploration Strategies include most major mining companies, national and provincial governments, mining service and equipment companies, and financial institutions. Mining companies typically use Corporate Exploration Strategies for benchmarking their exploration programs, developing competitor intelligence, strategic planning, and corporate and board presentations. Governments and mining industry associations use the CES in a similar way—benchmarking country exploration budgets and gathering intelligence on national competitors for exploration spending—as well as analyzing trends to develop mineral policy. Mining service and equipment companies perform market and strategic-trend analysis as well, but also use the CES to shift resources to emerging markets, target specific clients, and develop competitor intelligence. Financial groups commonly use the CES for investment decision support and mining-market and strategic-trend analysis.
Overview World Exploration Budgets 2004 Worldwide exploration budgets rebound to highest level since 1997 peak. According to Metals Economics Group’s 15th annual edition of Corporate Exploration Strategies, worldwide allocations for commercial nonferrous metals exploration have risen for two straight years, rebounding to a level just slightly above the 1998 total. The $3.8 billion 2004 total is up 58% over the previous year and is double the worldwide nonferrous total seen at the bottom of the cycle in 2002. (All figures in this report are in U.S. dollars.)
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orldwide nonferrous exploration budgets steadily increased through the early 1990s to a crest of $5.2 billion in 1997, before falling for five straight years to a 12-year low of $1.9 billion in 2002—an overall decline of more than 63%. Since that time, exploration budgets have risen for two straight years, rebounding to a level just slightly above our 1998 estimate of $3.7 billion. Metals Economics Group’s 2004 analysis of 1,138 companies’ exploration budgets (using a $100,000 budget cutoff) totals $3.55 billion, covering about 95% of worldwide commercial nonferrous allocations. Therefore, including the additional 5%, 2004 exploration budgets total almost $3.8 billion, double the worldwide total seen at the bottom of the cycle in 2002. Prior to last year’s increase from the bottom of the cycle, substantial cutbacks by the majors, the negative impact of industry consolidation, and a loss of funding for a great number of junior companies together contributed to five straight years of declining exploration budgets by the companies covered by our studies, from a high of $4.57 billion in 1997 to a low of $1.73 billion in 2002—an overall decline of almost 63%. The initial increase in worldwide exploration allocations in 2003 was in large part due to the combination of increased spending by the majors as they recognized the dearth of new projects moving up the pipeline, a significant reduction in the negative influence of industry consolidation on exploration from the peak consolidation levels seen in 2000 and 2001, and two consecutive
years of increased spending by junior companies on the back of increased gold prices and rising investor interest. As the rise in gold prices took hold and prices for other commodities strengthened in late 2003 and early 2004, continued budget increases by most major companies and increased availability of capital to the juniors continued to push worldwide exploration allocations higher in 2004.
Junior exploration budgets doubled in 2004 Exploration budgets by junior companies included in our study rose 103% to $1.58 billion in 2004, accounting for almost 60% of the overall increase in exploration allocations by all surveyed companies. This was the third
consecutive yearly increase for the junior sector, building on a nominal 2% increase in 2002 and a 25% increase in 2003. Junior allocations account for almost 45% of the 2004 worldwide exploration total, well above the average of about 33% seen over the past few years and the first time above 40% since the 1997 peak. The current revival of junior exploration spending is largely being driven by commodity prices, as the recovery in the gold price that began in late 2001 and the subsequent recovery in other commodity prices beginning in late 2003 have substantially improved investors’ sentiment toward the mining industry. The collapse of the dot.com market at the beginning of this period has also
Estimated Total Worldwide Nonferrous Exploration Budgets, 1994-2004 (year-by-year changes from 1994 through 2004, including about 5%-10% not covered by this study in any given year)
Year 2004 2003 2002 2001 2000 1999 1998 1997 1996 1995 1994
MEG Estimated Total Budgets (US$ billions) $3.8 $2.4
% Change from Prior Year +58%
$ Change from Prior Year (US$ millions) +$1,400
$1.9
+26% -14%
+$500 -$300
$2.2 $2.6 $2.8 $3.7 $5.2 $4.6 $3.5 $2.9
-15% -7% -24% +29% +13% +31% +21% +16%
-$400 -$200 -$900 -$1,500 +$600 +$600 +$600 +$400
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Figure 1: 2004 and 2003 Worldwide Nonferrous Exploration Budgets by Region 2004 Worldwide Exploration Budgets by Region
Worldwide Exploration Budgets by Region, 2003-2004
(1,138 companies’ budgets totaling $3.55 billion)
(US$ millions)
and as a result acquisitions have had a far less negative impact on exploration over the past two years—a trend we anticipate will continue in 2005.
contributed, freeing up additional capital that had flowed away from mining. The resulting increased interest in the sector led to a sharp rise in the availability of capital to juniors, allowing much of the sector to raise the funds necessary to restart exploration and also encouraging a flurry of IPO activity during the past two years. Canada’s exploration tax incentives (flow-through and super flowthrough share programs) have also significantly contributed to the scale at which junior spending has risen. Since the super flow-through program has been extended through 2005 (with an expenditure deadline of December 2006), we expect Canadian companies to remain well funded in the near term. An ongoing lobbying effort to make Canada’s super flow-through program permanent, coupled with the hopes of a similar incentive program in Australia, could provide continued support for a strengthened junior exploration effort for several more years. 2
Recent acquisition activity has less of a negative impact on exploration Metals Economics Group’s Gold and Base Metals Acquisitions Services have reported and analyzed all the significant nonferrous project and corporate transactions worldwide since 1993. During the period of declining exploration spending from 1997 to 2002, the value of substantial gold and base metals acquisitions vacillated around an average annual total of about $8 billion, rising to a record high of more than $14 billion in 2001 before cooling to slightly more than $5 billion in 2002. Since that time, the value of significant gold and base metals acquisitions has increased to a little more than $7 billion in each of the past two years. If we look at the effects of industry consolidation on exploration spending over
the recent past, we see that large portions of the acquired companies’ budgets effectively disappeared in the years following the acquisition, as the surviving companies’ budgets either remained the same as before the acquisition or were reduced further, despite incorporating an expanded exploration portfolio. While cost savings through overhead synergies certainly contribute to the decline in a surviving company’s exploration budget, our analysis shows much of the declines attributable to consolidation over the past few years is the result of actual cuts to exploration programs. From 1997 through 2003, the industry saw the demise of 39 significant mining and exploration companies, effectively erasing a cumulative $433 million from worldwide exploration efforts during this period. While major company consolidations have had a negative effect on subsequent exploration in each of the years since 1997, industry consolidation at the peak of acquisition activity in 2000 and 2001 cumulatively cut $246 million in exploration budgets, together accounting for more than 40% of the overall decrease in exploration from 2000 to 2002. Although the value of acquisition activity in general has risen from 2002’s low, major company consolidations have remained muted since the 2001 peak. While the acquisitions in 2000 and 2001 were largely driven by the growth strategies of senior companies, a large portion of the activity since then is the result of other factors, such as fulfilling South African black-empowerment ownership, substantial divestments by senior companies, and government-owned projects coming to tender. While annual acquisition values have risen since the 2002 low, the rate of industry consolidation at the top levels has dropped,
Although several large companies with substantive exploration budgets are in play (negotiations to acquire Noranda, Gold Fields, and WMC are continuing as we go to press), because of the time required to complete an acquisition of this magnitude, we do not anticipate that these acquisitions will impact overall exploration allocations in 2005. If these three companies succumb to consolidation in the near future, either with current suitors or with other interested parties, we would likely not see the effects on global exploration until 2006 at the earliest. As well, if the current industry environment persists, we would expect at least a measurable portion of their respective annual exploration budgets would survive within the newly merged companies.
Latin America continues to lead Figure 1 above illustrates the regional distribution of the $3.55 billion in exploration allocations by the 1,138 companies included in our 2004 study compared with the $2.19 billion budgeted by 917 companies in 2003. Exploration allocations by surveyed companies have increased in each of our identified regions of the world for the second consecutive year. In dollar terms, budgets increased the most this year in our rest-ofworld category (up by almost $304 million), led by sharp increases in Russia, Mongolia, and China; Latin America (up by $256 million), led by increased spending in Peru and Mexico; and Canada (up by $226 million). Latin America continues to be the most popular destination for exploration led by increased allocations in Peru and Mexico, increasing its lead over second-place Canada to more than $76 million this year from the $46 million margin in 2003. Africa remains in third place by region, having surpassed Australia for the first time in 2003. The substantial increase in allocations in our restof-world region (encompassing Europe, the Middle East, and most of mainland Asia), led by sharp increases in Russia, Mongolia, and China, moved it to fourth place by region, outstripping a more moderate recovery in Australia, which slipped to fifth position. Before beginning its gradual slide in recent years, Australia had firmly held second place
Figure 3: 2004 and 2003 Worldwide Nonferrous Exploration Budgets by Target 2004 Worldwide Exploration Budgets by Target (1,138 companies’ budgets totaling $3.55 billion)
Worldwide Exploration Budgets by Target, 2003-2004 (US$ millions)
Gold accounts for 50% of spending
lifted global diamond exploration to its highest level since we initiated this series of studies in 1989. Since the discovery of the Ekati diamond pipe deposits in the Lac de Gras area of Canada’s Northwest Territories, which sparked a diamond exploration boom in the early 1990s that is continuing today, Canada has increasingly vied with Africa as the most popular destination for diamond exploration allocations.
by region from 1994 to 2001, when Canada displaced it for the first time. The United States and the Pacific/Southeast Asia region remain in sixth and seventh place, respectively, positions they have held since 2001. Despite multiple layers of regulatory involvement and strong environmental activism, exploration in the United States has shown surprising strength, led by increased activity in Nevada and Alaska, whereas growth in the Pacific/Southeast Asia region remains somewhat muted amidst uncertainty of tenure and continued political and social unrest. Figure 2: 2004 Exploration Budgets for the Top Ten Countries (Budgets total $2.54 billion, 72% of 2004 total budgets of $3.55 billion)
Figure 2 above shows the distribution of 2004 exploration budgets for the top ten individual countries, which account for about 72% (almost $2.54 billion) of the overall budget total, well within the 70%-73% range seen in the previous five years. The traditional big three—Canada, Australia, and the United States—head the list, with Canada continuing to widen the gap, followed by Peru, which moved ahead of South Africa into fourth place last year. Mexico and Russia both jumped ahead of Brazil into the sixth and seventh slots, and Chile dropped back to ninth place. Mongolia, where Ivanhoe’s $78 million 2004 budget accounted for almost 79% of the country’s total, joined the top ten last year, bumping Argentina from the list for the first time in a decade. Also worth noting is a surge in the number of surveyed companies active in China, resulting in a 350% increase in allocations from $19 million in 2003 to about $86 million in 2004, giving it the eleventh-place ranking.
Figure 3 above shows the distribution of the $3.55 billion in exploration allocations by target for the 1,138 companies included in our 2004 study compared with the $2.19 billion budgeted by 917 companies in 2003. Gold, which consistently attracts more exploration expenditure than any other metal, accounted for 50% of 2004 allocations after four consecutive years of receiving less than half of the overall budget total. Gold allocations rose 68% in 2004 to a total of almost $1.8 billion, but are still well below the 1997 peak, when gold allocations reached almost $3 billion and represented 65% of overall spending. During the past three years, geopolitical uncertainty on a global level, a weaker U.S. dollar, a spiraling increase in the U.S. deficit, and continued producer dehedging have all contributed to strengthening the gold price, which in turn is both sparking and supporting the resurgence of gold-related exploration spending. We expect the current trend of increased gold exploration to continue in 2005, with a strong gold price and continuing investor interest in junior explorers underpinning a high level of activity. Base metals allocations have increased over the past two years as prices for copper, nickel, and zinc are at their highest levels in many years. Exploration budgets for base metals totaled $937 million in 2004, up about 60% over 2003’s total, led by a substantial rise in copper allocations. Despite two years of increased spending, the dollar amount devoted to base metals exploration in 2004 was still down 23% from the peak of $1.2 billion in 1997. Diamond allocations rose 47% to $471 million in 2004, below the 62% average increase for all commodities; however, substantial increases in dollar terms over the past two years have
Exploration for platinum group metals had the smallest increase (18%) in 2004, compared with a 54% increase in 2003, while PGM exploration as a percentage of overall spending dropped to 4% this year from 6% in 2003. Platinum prices are at historic highs, and the traditional parallels with gold (as a fellow precious metal) and palladium (as an industrial metal) seem to be severed, as each market is responding to its own forces. In platinum’s case, the positive fundamentals of growing demand and slower increases in supply have resulted in production deficits for five straight years. Budgets for other targets (mainly silver, mineral sands, cobalt, and industrial minerals) experienced the largest increase of all target categories in 2004, rising 114% from $103 million in 2003 to almost $222 million. As a percentage of the overall exploration budget, allocations for other targets increased to 6% in 2004 from 5% in 2003.
Companies are focusing on late-stage exploration Figure 4 on the next page illustrates the distribution of the $3.55 billion in exploration allocations by stage of development for the companies included in the 2004 study compared with the $2.19 billion budgeted in 2003. Yearly exploration allocations for all
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Figure 4: 2004 and 2003 Worldwide Nonferrous Exploration Budgets by Stage of Development 2004 Worldwide Exploration Budgets by Stage
Worldwide Exploration Budgets by Stage, 2003-2004
(1,138 companies’ budgets totaling $3.55 billion)
(US$ millions)
fund exploration programs that will run well into 2005. In addition, we expect that the interest in underexplored areas of the world, such as the Former Soviet Union, China, India, and other countries in Asia and the Middle East, will continue to boost exploration this year. While we don’t expect to see significant increases in exploration budgets by major companies in 2005, we anticipate that growing spending by junior and intermediate explorers will increase overall spending again this year, perhaps in the range of 15%-25% worldwide.
three stages of development over the past decade have generally tracked the overall trend in worldwide budgets in terms of dollars spent, and as would be expected on the upward leg of an exploration cycle, allocations for all three stages have continued to rise in 2004. However, the 41% year-on-year increase in grassroots exploration spending last year has not kept pace with the 86% and 81% increases in late-stage and minesite allocations, respectively. Significant increases in late-stage and minesite work were anticipated in 2004, but the scale of these increases relative to grassroots work is somewhat surprising.
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The increased focus on minesite exploration in recent years is largely attributable to many of the major companies spending more on nearmine exploration in order to replace (and increase) reserves, and also to develop new reserves more quickly and inexpensively by using existing infrastructure to support and increase production rates. Companies at all levels of the industry, however, are focusing on their existing later-stage projects, encouraged by current metals prices and other global factors. In addition, a number of known, previously uneconomic late-stage projects that had been dormant during the bottom of the commodities price cycle are now being reevaluated in hope of achieving near-term development. Many of these projects were originally abandoned because of high development and production costs, often due to a combination of low grades, complicated metallurgy, and other technical obstacles. While some of these projects may now appear economic in today’s higher commodities price environment, the technical issues that plague many of them remain. If these projects are developed based solely on strong metals prices, they will likely be at the high end of the
cost curve and will remain vulnerable to the eventual downside of the metals price cycle. The lesser recovery in grassroots exploration comes on the heels of drastic cuts in earlystage allocations from 1998 through 2002, which have contributed significantly to the decline in the number of discoveries in recent years. The resulting lack of major new discoveries entering the pipeline, however, is unlikely to affect global production in the short term since improved economics and potential technological advances are likely to make some previously uneconomic deposits viable, thus filling the near-term void. Nevertheless, the pool of “viable” high-cost and dormant deposits will eventually be drawn down, making the discovery and development of new low-cost projects essential for the longterm health of the industry.
metals economics group expects exploration to rise in 2005 Although metals prices are expected to experience increased volatility in the near term and may drop from recent highs, continued low inventories and a lack of significant new production in the pipeline, combined with China’s continuing appetite, should provide adequate support to keep base metals at attractive levels for the near future. In addition, most analysts expect that the U.S. dollar will remain soft in the near term, which, combined with other global uncertainties, should continue to support the gold price. If metals prices remain relatively high in the current cycle, the increased rate of junior financings will likely continue. While junior explorers have spent a substantial portion of the money raised on last year’s programs, many have already replenished their coffers to
The many factors that impact global exploration budgets—metals prices being the most influential—make projecting exploration trends beyond 2005 unreliable at best. Nevertheless, if metals prices remain at attractive levels for several more years, as most analysts expect, and if junior explorers continue to draw the attention of investors, we expect worldwide exploration allocations to stabilize and remain firm for the foreseeable future. The continued interest in underexplored areas of the world, together with the hopes of Canada’s super flowthrough program becoming permanent and the potential of a similar program being introduced in Australia, could keep junior explorers operating at a high level for several years. However, without a string of significant new exploration successes, it may become increasingly difficult to convince investors to continue to finance exploration, even if metals prices remain high. Furthermore, if metals prices move against popular opinion and significantly weaken in the near term, the resulting dampened interest in junior explorers would produce sizeable cuts to worldwide exploration by this sector. Although major mining companies will likely resist the urge to cut exploration budgets as ruthlessly as in the previous downturn, a decline in metals prices would result in lower exploration allocations by the majors as well. Jason Goulden Director, Corporate Exploration Strategies
Metals Economics Group Metals Economics Group is recognized as a world leader in mining industry intelligence. Founded in 1981, Metals Economics Group is the primary source of information and analysis on global nonferrous metals exploration, development, and production; strategic planning issues; and acquisition activity. Metals Economics Group’s clients include most major global mining companies, smaller mining companies focused on growth, financial firms, governments, and service and equipment providers. Use Metals Economics Group services to • Generate acquisition targets • Track competitor intelligence • Benchmark • Identify potential buyers • Generate client lists • Maintain watching briefs • Perform “what if” scenarios • Produce in-depth, detailed analysis Metals Economics Group’s information advantage is based on many years of work in database development, a commitment to thorough coverage of the global mining industry, excellent relations with mining companies at both operating and management levels, an unbiased approach to reporting and analysis, and a painstaking commitment to accuracy. Metals Economics Group thus provides both unparalleled access to comparative data on projects, companies, and markets, and unique research capabilities for specific client needs.
The trusted source for accurate and comprehensive strategic information since 1981.
Metals Economics Group Services MineSearch The MineSearch database, available to subscribers on the Internet, compiles available information on more than 8,500 worldwide precious and base metals, diamond, and iron ore developing projects and mines. View a demonstration of our powerful MineSearch search engine at: http://www.metalseconomics.com/ms_flash/ main.html Corporate Exploration Spending and Strategies Corporate Exploration Strategies, available to subscribers on the Internet, is now in its fifteenth edition. This annual study is the industry’s standard reference on competitors’ exploration spending and strategies, and worldwide exploration trends. View our Corporate Exploration Strategies demonstration at: http://www.metalseconomics.com/ces_flash/ main.html Junior Services Our analysts help you make sense of the hundreds of junior company news releases each week by identifying and summarizing all the significant new discoveries; resource and reserve announcements; exploration agreements, mergers, and acquisitions; and financings. View our Junior Services demonstration at http://www.metalseconomics.com/jr_flash/ main.html Acquisitions Services The Gold Acquisitions Service and the Base Metals Acquisitions Service web sites give Metals Economics Group clients a competitive edge in gold and base metals acquisitions by reporting and analyzing all current and historical transactions in late-stage projects, operating mines, and companies.
Strategic Report Since 1982, the Metals Economics Group Strategic Report has provided its subscribers with original research and analysis of mineral exploration, development, and production issues. Strategies for Copper Reserves Replacement Strategies for Copper Reserves Replacement, to be published in May 2005, presents a detailed and practical look at how major companies are replacing their copper reserves. This study includes reserves and production profiles for major copper producers since 1994 (as available), copper discoveries, exploration budgets, acquisitions, and the copper project pipeline. So that subscribers can do their own analysis, the underlying information will be available online for downloading. Consulting Metals Economics Group offers accurate, timely, market-sensitive consulting through our inhouse industry experts and databases and our extensive network of associates. ACIS® for Mining Creating competitive advantage for mining companies, ACIS®, from Coemergence Inc., is an integrated software solution built to address critical information challenges faced by mining industry professionals in areas including business development, exploration and strategic planning, as well as competitive intelligence, and knowledge management. ACIS® seamlessly integrates with MEG’s MineSearch database. Metals Economics Group is Coemergence’s strategic partner and value-added reseller of ACIS® to the mining industry. See more at www.coemergence.com
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For more information on how we can be of service to you, please visit our web site at www.metalseconomics.com, or call 902-429-2880 for more information. Metals Economics Group P.O. Box 2206 Halifax, Nova Scotia Canada B3J 3C4 Phone: (902) 429-2880 Fax: (902) 429-6593 www.metalseconomics.com Copyright 2005 by Metals Economics Group. All rights reserved. Reproduction in whole or in part without prior written permission is prohibited.
Metals Economics Group represents that the information contained in this report has been collected and compiled in good faith from a variety of sources but makes no warranty as to the accuracy of the information from those sources.
World Exploration Trends
Corporate Exploration Strategies The PDAC was pleased to work with Metals Economics Group to make this special report on World Exploration Trends available to our members and PDAC Convention 2005 delegates. The PDAC uses Metals Economics Group’s Corporate Exploration Strategies (CES) as an essential tool for obtaining information on global exploration trends. CES is acknowledged as the primary source of information on exploration and mining statistics worldwide. Tony Andrews, Executive Director, PDAC
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riefly, Corporate Exploration Strategies examines the nonferrous exploration activities of all mining companies worldwide. Volume I provides a ten-year summary of trends in exploration spending and an industry-wide analysis of allocations by location, target, stage of development, and more. Volume II reports in detail each company’s exploration budget and its breakdown by country, target, and stage of development. Companies planning to spend more than US$5 million are given special attention—each company’s current exploration program, strategy, and most advanced exploration projects are profiled in detail. The study also includes an appendix of companies that do not have exploration budgets but which do have significant exploration projects for which they are seeking financing or joint ventures.
Subscribers to Corporate Exploration Strategies include most major mining companies, national and provincial governments, mining service and equipment companies, and financial institutions. Mining companies typically use Corporate Exploration Strategies for benchmarking their exploration programs, developing competitor intelligence, strategic planning, and corporate and board presentations. Governments and mining industry associations use the CES in a similar way—benchmarking country exploration budgets and gathering intelligence on national competitors for exploration spending—as well as analyzing trends to develop mineral policy. Mining service and equipment companies perform market and strategic-trend analysis as well, but also use the CES to shift resources to emerging markets, target specific clients, and develop competitor intelligence. Financial groups commonly use the CES for investment decision support and mining-market and strategic-trend analysis.
Overview World Exploration Budgets 2004 Worldwide exploration budgets rebound to highest level since 1997 peak. According to Metals Economics Group’s 15th annual edition of Corporate Exploration Strategies, worldwide allocations for commercial nonferrous metals exploration have risen for two straight years, rebounding to a level just slightly above the 1998 total. The $3.8 billion 2004 total is up 58% over the previous year and is double the worldwide nonferrous total seen at the bottom of the cycle in 2002. (All figures in this report are in U.S. dollars.)
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orldwide nonferrous exploration budgets steadily increased through the early 1990s to a crest of $5.2 billion in 1997, before falling for five straight years to a 12-year low of $1.9 billion in 2002—an overall decline of more than 63%. Since that time, exploration budgets have risen for two straight years, rebounding to a level just slightly above our 1998 estimate of $3.7 billion. Metals Economics Group’s 2004 analysis of 1,138 companies’ exploration budgets (using a $100,000 budget cutoff) totals $3.55 billion, covering about 95% of worldwide commercial nonferrous allocations. Therefore, including the additional 5%, 2004 exploration budgets total almost $3.8 billion, double the worldwide total seen at the bottom of the cycle in 2002. Prior to last year’s increase from the bottom of the cycle, substantial cutbacks by the majors, the negative impact of industry consolidation, and a loss of funding for a great number of junior companies together contributed to five straight years of declining exploration budgets by the companies covered by our studies, from a high of $4.57 billion in 1997 to a low of $1.73 billion in 2002—an overall decline of almost 63%. The initial increase in worldwide exploration allocations in 2003 was in large part due to the combination of increased spending by the majors as they recognized the dearth of new projects moving up the pipeline, a significant reduction in the negative influence of industry consolidation on exploration from the peak consolidation levels seen in 2000 and 2001, and two consecutive
years of increased spending by junior companies on the back of increased gold prices and rising investor interest. As the rise in gold prices took hold and prices for other commodities strengthened in late 2003 and early 2004, continued budget increases by most major companies and increased availability of capital to the juniors continued to push worldwide exploration allocations higher in 2004.
Junior exploration budgets doubled in 2004 Exploration budgets by junior companies included in our study rose 103% to $1.58 billion in 2004, accounting for almost 60% of the overall increase in exploration allocations by all surveyed companies. This was the third
consecutive yearly increase for the junior sector, building on a nominal 2% increase in 2002 and a 25% increase in 2003. Junior allocations account for almost 45% of the 2004 worldwide exploration total, well above the average of about 33% seen over the past few years and the first time above 40% since the 1997 peak. The current revival of junior exploration spending is largely being driven by commodity prices, as the recovery in the gold price that began in late 2001 and the subsequent recovery in other commodity prices beginning in late 2003 have substantially improved investors’ sentiment toward the mining industry. The collapse of the dot.com market at the beginning of this period has also
Estimated Total Worldwide Nonferrous Exploration Budgets, 1994-2004 (year-by-year changes from 1994 through 2004, including about 5%-10% not covered by this study in any given year)
Year 2004 2003 2002 2001 2000 1999 1998 1997 1996 1995 1994
MEG Estimated Total Budgets (US$ billions) $3.8 $2.4
% Change from Prior Year +58%
$ Change from Prior Year (US$ millions) +$1,400
$1.9
+26% -14%
+$500 -$300
$2.2 $2.6 $2.8 $3.7 $5.2 $4.6 $3.5 $2.9
-15% -7% -24% +29% +13% +31% +21% +16%
-$400 -$200 -$900 -$1,500 +$600 +$600 +$600 +$400
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Figure 1: 2004 and 2003 Worldwide Nonferrous Exploration Budgets by Region 2004 Worldwide Exploration Budgets by Region
Worldwide Exploration Budgets by Region, 2003-2004
(1,138 companies’ budgets totaling $3.55 billion)
(US$ millions)
and as a result acquisitions have had a far less negative impact on exploration over the past two years—a trend we anticipate will continue in 2005.
contributed, freeing up additional capital that had flowed away from mining. The resulting increased interest in the sector led to a sharp rise in the availability of capital to juniors, allowing much of the sector to raise the funds necessary to restart exploration and also encouraging a flurry of IPO activity during the past two years. Canada’s exploration tax incentives (flow-through and super flowthrough share programs) have also significantly contributed to the scale at which junior spending has risen. Since the super flow-through program has been extended through 2005 (with an expenditure deadline of December 2006), we expect Canadian companies to remain well funded in the near term. An ongoing lobbying effort to make Canada’s super flow-through program permanent, coupled with the hopes of a similar incentive program in Australia, could provide continued support for a strengthened junior exploration effort for several more years. 2
Recent acquisition activity has less of a negative impact on exploration Metals Economics Group’s Gold and Base Metals Acquisitions Services have reported and analyzed all the significant nonferrous project and corporate transactions worldwide since 1993. During the period of declining exploration spending from 1997 to 2002, the value of substantial gold and base metals acquisitions vacillated around an average annual total of about $8 billion, rising to a record high of more than $14 billion in 2001 before cooling to slightly more than $5 billion in 2002. Since that time, the value of significant gold and base metals acquisitions has increased to a little more than $7 billion in each of the past two years. If we look at the effects of industry consolidation on exploration spending over
the recent past, we see that large portions of the acquired companies’ budgets effectively disappeared in the years following the acquisition, as the surviving companies’ budgets either remained the same as before the acquisition or were reduced further, despite incorporating an expanded exploration portfolio. While cost savings through overhead synergies certainly contribute to the decline in a surviving company’s exploration budget, our analysis shows much of the declines attributable to consolidation over the past few years is the result of actual cuts to exploration programs. From 1997 through 2003, the industry saw the demise of 39 significant mining and exploration companies, effectively erasing a cumulative $433 million from worldwide exploration efforts during this period. While major company consolidations have had a negative effect on subsequent exploration in each of the years since 1997, industry consolidation at the peak of acquisition activity in 2000 and 2001 cumulatively cut $246 million in exploration budgets, together accounting for more than 40% of the overall decrease in exploration from 2000 to 2002. Although the value of acquisition activity in general has risen from 2002’s low, major company consolidations have remained muted since the 2001 peak. While the acquisitions in 2000 and 2001 were largely driven by the growth strategies of senior companies, a large portion of the activity since then is the result of other factors, such as fulfilling South African black-empowerment ownership, substantial divestments by senior companies, and government-owned projects coming to tender. While annual acquisition values have risen since the 2002 low, the rate of industry consolidation at the top levels has dropped,
Although several large companies with substantive exploration budgets are in play (negotiations to acquire Noranda, Gold Fields, and WMC are continuing as we go to press), because of the time required to complete an acquisition of this magnitude, we do not anticipate that these acquisitions will impact overall exploration allocations in 2005. If these three companies succumb to consolidation in the near future, either with current suitors or with other interested parties, we would likely not see the effects on global exploration until 2006 at the earliest. As well, if the current industry environment persists, we would expect at least a measurable portion of their respective annual exploration budgets would survive within the newly merged companies.
Latin America continues to lead Figure 1 above illustrates the regional distribution of the $3.55 billion in exploration allocations by the 1,138 companies included in our 2004 study compared with the $2.19 billion budgeted by 917 companies in 2003. Exploration allocations by surveyed companies have increased in each of our identified regions of the world for the second consecutive year. In dollar terms, budgets increased the most this year in our rest-ofworld category (up by almost $304 million), led by sharp increases in Russia, Mongolia, and China; Latin America (up by $256 million), led by increased spending in Peru and Mexico; and Canada (up by $226 million). Latin America continues to be the most popular destination for exploration led by increased allocations in Peru and Mexico, increasing its lead over second-place Canada to more than $76 million this year from the $46 million margin in 2003. Africa remains in third place by region, having surpassed Australia for the first time in 2003. The substantial increase in allocations in our restof-world region (encompassing Europe, the Middle East, and most of mainland Asia), led by sharp increases in Russia, Mongolia, and China, moved it to fourth place by region, outstripping a more moderate recovery in Australia, which slipped to fifth position. Before beginning its gradual slide in recent years, Australia had firmly held second place
Figure 3: 2004 and 2003 Worldwide Nonferrous Exploration Budgets by Target 2004 Worldwide Exploration Budgets by Target (1,138 companies’ budgets totaling $3.55 billion)
Worldwide Exploration Budgets by Target, 2003-2004 (US$ millions)
Gold accounts for 50% of spending
lifted global diamond exploration to its highest level since we initiated this series of studies in 1989. Since the discovery of the Ekati diamond pipe deposits in the Lac de Gras area of Canada’s Northwest Territories, which sparked a diamond exploration boom in the early 1990s that is continuing today, Canada has increasingly vied with Africa as the most popular destination for diamond exploration allocations.
by region from 1994 to 2001, when Canada displaced it for the first time. The United States and the Pacific/Southeast Asia region remain in sixth and seventh place, respectively, positions they have held since 2001. Despite multiple layers of regulatory involvement and strong environmental activism, exploration in the United States has shown surprising strength, led by increased activity in Nevada and Alaska, whereas growth in the Pacific/Southeast Asia region remains somewhat muted amidst uncertainty of tenure and continued political and social unrest. Figure 2: 2004 Exploration Budgets for the Top Ten Countries (Budgets total $2.54 billion, 72% of 2004 total budgets of $3.55 billion)
Figure 2 above shows the distribution of 2004 exploration budgets for the top ten individual countries, which account for about 72% (almost $2.54 billion) of the overall budget total, well within the 70%-73% range seen in the previous five years. The traditional big three—Canada, Australia, and the United States—head the list, with Canada continuing to widen the gap, followed by Peru, which moved ahead of South Africa into fourth place last year. Mexico and Russia both jumped ahead of Brazil into the sixth and seventh slots, and Chile dropped back to ninth place. Mongolia, where Ivanhoe’s $78 million 2004 budget accounted for almost 79% of the country’s total, joined the top ten last year, bumping Argentina from the list for the first time in a decade. Also worth noting is a surge in the number of surveyed companies active in China, resulting in a 350% increase in allocations from $19 million in 2003 to about $86 million in 2004, giving it the eleventh-place ranking.
Figure 3 above shows the distribution of the $3.55 billion in exploration allocations by target for the 1,138 companies included in our 2004 study compared with the $2.19 billion budgeted by 917 companies in 2003. Gold, which consistently attracts more exploration expenditure than any other metal, accounted for 50% of 2004 allocations after four consecutive years of receiving less than half of the overall budget total. Gold allocations rose 68% in 2004 to a total of almost $1.8 billion, but are still well below the 1997 peak, when gold allocations reached almost $3 billion and represented 65% of overall spending. During the past three years, geopolitical uncertainty on a global level, a weaker U.S. dollar, a spiraling increase in the U.S. deficit, and continued producer dehedging have all contributed to strengthening the gold price, which in turn is both sparking and supporting the resurgence of gold-related exploration spending. We expect the current trend of increased gold exploration to continue in 2005, with a strong gold price and continuing investor interest in junior explorers underpinning a high level of activity. Base metals allocations have increased over the past two years as prices for copper, nickel, and zinc are at their highest levels in many years. Exploration budgets for base metals totaled $937 million in 2004, up about 60% over 2003’s total, led by a substantial rise in copper allocations. Despite two years of increased spending, the dollar amount devoted to base metals exploration in 2004 was still down 23% from the peak of $1.2 billion in 1997. Diamond allocations rose 47% to $471 million in 2004, below the 62% average increase for all commodities; however, substantial increases in dollar terms over the past two years have
Exploration for platinum group metals had the smallest increase (18%) in 2004, compared with a 54% increase in 2003, while PGM exploration as a percentage of overall spending dropped to 4% this year from 6% in 2003. Platinum prices are at historic highs, and the traditional parallels with gold (as a fellow precious metal) and palladium (as an industrial metal) seem to be severed, as each market is responding to its own forces. In platinum’s case, the positive fundamentals of growing demand and slower increases in supply have resulted in production deficits for five straight years. Budgets for other targets (mainly silver, mineral sands, cobalt, and industrial minerals) experienced the largest increase of all target categories in 2004, rising 114% from $103 million in 2003 to almost $222 million. As a percentage of the overall exploration budget, allocations for other targets increased to 6% in 2004 from 5% in 2003.
Companies are focusing on late-stage exploration Figure 4 on the next page illustrates the distribution of the $3.55 billion in exploration allocations by stage of development for the companies included in the 2004 study compared with the $2.19 billion budgeted in 2003. Yearly exploration allocations for all
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Figure 4: 2004 and 2003 Worldwide Nonferrous Exploration Budgets by Stage of Development 2004 Worldwide Exploration Budgets by Stage
Worldwide Exploration Budgets by Stage, 2003-2004
(1,138 companies’ budgets totaling $3.55 billion)
(US$ millions)
fund exploration programs that will run well into 2005. In addition, we expect that the interest in underexplored areas of the world, such as the Former Soviet Union, China, India, and other countries in Asia and the Middle East, will continue to boost exploration this year. While we don’t expect to see significant increases in exploration budgets by major companies in 2005, we anticipate that growing spending by junior and intermediate explorers will increase overall spending again this year, perhaps in the range of 15%-25% worldwide.
three stages of development over the past decade have generally tracked the overall trend in worldwide budgets in terms of dollars spent, and as would be expected on the upward leg of an exploration cycle, allocations for all three stages have continued to rise in 2004. However, the 41% year-on-year increase in grassroots exploration spending last year has not kept pace with the 86% and 81% increases in late-stage and minesite allocations, respectively. Significant increases in late-stage and minesite work were anticipated in 2004, but the scale of these increases relative to grassroots work is somewhat surprising.
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The increased focus on minesite exploration in recent years is largely attributable to many of the major companies spending more on nearmine exploration in order to replace (and increase) reserves, and also to develop new reserves more quickly and inexpensively by using existing infrastructure to support and increase production rates. Companies at all levels of the industry, however, are focusing on their existing later-stage projects, encouraged by current metals prices and other global factors. In addition, a number of known, previously uneconomic late-stage projects that had been dormant during the bottom of the commodities price cycle are now being reevaluated in hope of achieving near-term development. Many of these projects were originally abandoned because of high development and production costs, often due to a combination of low grades, complicated metallurgy, and other technical obstacles. While some of these projects may now appear economic in today’s higher commodities price environment, the technical issues that plague many of them remain. If these projects are developed based solely on strong metals prices, they will likely be at the high end of the
cost curve and will remain vulnerable to the eventual downside of the metals price cycle. The lesser recovery in grassroots exploration comes on the heels of drastic cuts in earlystage allocations from 1998 through 2002, which have contributed significantly to the decline in the number of discoveries in recent years. The resulting lack of major new discoveries entering the pipeline, however, is unlikely to affect global production in the short term since improved economics and potential technological advances are likely to make some previously uneconomic deposits viable, thus filling the near-term void. Nevertheless, the pool of “viable” high-cost and dormant deposits will eventually be drawn down, making the discovery and development of new low-cost projects essential for the longterm health of the industry.
metals economics group expects exploration to rise in 2005 Although metals prices are expected to experience increased volatility in the near term and may drop from recent highs, continued low inventories and a lack of significant new production in the pipeline, combined with China’s continuing appetite, should provide adequate support to keep base metals at attractive levels for the near future. In addition, most analysts expect that the U.S. dollar will remain soft in the near term, which, combined with other global uncertainties, should continue to support the gold price. If metals prices remain relatively high in the current cycle, the increased rate of junior financings will likely continue. While junior explorers have spent a substantial portion of the money raised on last year’s programs, many have already replenished their coffers to
The many factors that impact global exploration budgets—metals prices being the most influential—make projecting exploration trends beyond 2005 unreliable at best. Nevertheless, if metals prices remain at attractive levels for several more years, as most analysts expect, and if junior explorers continue to draw the attention of investors, we expect worldwide exploration allocations to stabilize and remain firm for the foreseeable future. The continued interest in underexplored areas of the world, together with the hopes of Canada’s super flowthrough program becoming permanent and the potential of a similar program being introduced in Australia, could keep junior explorers operating at a high level for several years. However, without a string of significant new exploration successes, it may become increasingly difficult to convince investors to continue to finance exploration, even if metals prices remain high. Furthermore, if metals prices move against popular opinion and significantly weaken in the near term, the resulting dampened interest in junior explorers would produce sizeable cuts to worldwide exploration by this sector. Although major mining companies will likely resist the urge to cut exploration budgets as ruthlessly as in the previous downturn, a decline in metals prices would result in lower exploration allocations by the majors as well. Jason Goulden Director, Corporate Exploration Strategies
Metals Economics Group Metals Economics Group is recognized as a world leader in mining industry intelligence. Founded in 1981, Metals Economics Group is the primary source of information and analysis on global nonferrous metals exploration, development, and production; strategic planning issues; and acquisition activity. Metals Economics Group’s clients include most major global mining companies, smaller mining companies focused on growth, financial firms, governments, and service and equipment providers. Use Metals Economics Group services to • Generate acquisition targets • Track competitor intelligence • Benchmark • Identify potential buyers • Generate client lists • Maintain watching briefs • Perform “what if” scenarios • Produce in-depth, detailed analysis Metals Economics Group’s information advantage is based on many years of work in database development, a commitment to thorough coverage of the global mining industry, excellent relations with mining companies at both operating and management levels, an unbiased approach to reporting and analysis, and a painstaking commitment to accuracy. Metals Economics Group thus provides both unparalleled access to comparative data on projects, companies, and markets, and unique research capabilities for specific client needs.
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Metals Economics Group Services MineSearch The MineSearch database, available to subscribers on the Internet, compiles available information on more than 8,500 worldwide precious and base metals, diamond, and iron ore developing projects and mines. View a demonstration of our powerful MineSearch search engine at: http://www.metalseconomics.com/ms_flash/ main.html Corporate Exploration Spending and Strategies Corporate Exploration Strategies, available to subscribers on the Internet, is now in its fifteenth edition. This annual study is the industry’s standard reference on competitors’ exploration spending and strategies, and worldwide exploration trends. View our Corporate Exploration Strategies demonstration at: http://www.metalseconomics.com/ces_flash/ main.html Junior Services Our analysts help you make sense of the hundreds of junior company news releases each week by identifying and summarizing all the significant new discoveries; resource and reserve announcements; exploration agreements, mergers, and acquisitions; and financings. View our Junior Services demonstration at http://www.metalseconomics.com/jr_flash/ main.html Acquisitions Services The Gold Acquisitions Service and the Base Metals Acquisitions Service web sites give Metals Economics Group clients a competitive edge in gold and base metals acquisitions by reporting and analyzing all current and historical transactions in late-stage projects, operating mines, and companies.
Strategic Report Since 1982, the Metals Economics Group Strategic Report has provided its subscribers with original research and analysis of mineral exploration, development, and production issues. Strategies for Copper Reserves Replacement Strategies for Copper Reserves Replacement, to be published in May 2005, presents a detailed and practical look at how major companies are replacing their copper reserves. This study includes reserves and production profiles for major copper producers since 1994 (as available), copper discoveries, exploration budgets, acquisitions, and the copper project pipeline. So that subscribers can do their own analysis, the underlying information will be available online for downloading. Consulting Metals Economics Group offers accurate, timely, market-sensitive consulting through our inhouse industry experts and databases and our extensive network of associates. ACIS® for Mining Creating competitive advantage for mining companies, ACIS®, from Coemergence Inc., is an integrated software solution built to address critical information challenges faced by mining industry professionals in areas including business development, exploration and strategic planning, as well as competitive intelligence, and knowledge management. ACIS® seamlessly integrates with MEG’s MineSearch database. Metals Economics Group is Coemergence’s strategic partner and value-added reseller of ACIS® to the mining industry. See more at www.coemergence.com
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