(917 Companies' budgets Totaling $2.19 Billion)
(724 Companies' Budgets Totaling $1.73 Billion)
Metals Economics Group
P.O. Box 2206
Halifax, Nova Scotia B3J 3C4
CANADA
Phone: (902) 429-2880
Fax: (902) 429-6593
meg@meginformation.com
www.metalseconomics.com
(all dollar figures are US$)
According to Metals Economics Group’s recent edition of Corporate Exploration Strategies, worldwide allocations for commercial nonferrous metals exploration are up by about 26% from 2002, representing the first increase in worldwide spending since 1997’s exploration peak. Worldwide nonferrous exploration spending steadily increased through the early 1990s to a crest of $5.2 billion in 1997, before falling for five straight years to a ten-year low of $1.9 billion in 2002—an overall decline of more than 63%. MEG’s 2003 analysis of 917 companies’ exploration budgets (using a $100,000 budget cutoff) totals $2.19 billion, which covers about 90% of worldwide expenditures; therefore, including the additional 10%, 2003 exploration expenditures total about $2.4 billion.
Prior to this year’s increase, substantial cutbacks by the majors, the negative effects of industry consolidation, and a loss of funding for a great number of junior companies contributed to five straight years of declining exploration spending by the companies covered by our studies, from a high of $4.09 billion in 1997 to a low of $1.73 billion last year—an overall decline of almost 58%. This year’s increase in worldwide exploration allocations is in large part due to the combination of increased spending by the majors as they recognize the dearth of new projects moving up the pipeline, the significant reduction in the negative effects of industry consolidation on exploration from the peak consolidation levels seen in 2001 and 2002, and two consecutive years of increased spending by junior companies on the back of increased gold prices and rising investor interest. If the gold price remains buoyant and demand for both copper and nickel remains strong, we expect that exploration budgets will continue to rise in 2004, aided by a sustained reduction in high-level industry consolidation and increased junior spending.
Junior company exploration budgets are up by about 25% this year, building on last year’s 3% rise in junior spending that followed four consecutive years of substantial declines. The upturn in exploration activity by junior companies over the past two years is primarily due to an increase in investor sentiment towards gold equities, which corresponds with the recovery in gold prices that began in late 2001. The bulk of the overall increase in junior spending this year is allocated to Canada, as many Canadian juniors have taken advantage of the combination of an improvement in mining equity investment and Canada’s super flow-through share program to boost domestic exploration. We anticipate that Canadian domestic exploration spending will continue at a high level over the next two years. Several Australian organizations are lobbying the Australian government to adopt either a flow-through share program similar to Canada’s or some other type of new tax-rebate scheme for exploration expenses to address the decline in Australian domestic exploration. If one of these programs is instituted, we could see a near-term rise in Australian domestic exploration contributing to an overall continued rise in junior exploration spending over the next few years.
Although acquisition activity so far this year is up from 2002’s low, it is still considerably lower than the record level of 2001, and it is interesting to note that a large portion of current consolidation and acquisition activity within the industry is being driven not by high-level consolidation but by external factors, such as fulfilling black-empowerment ownership requirements in South Africa. Through 2000 and 2001, the industry saw the demise of several significant mining and exploration companies to consolidation, effectively wiping out the acquired companies’ exploration budgets in the year following the acquisition as the surviving companies’ budgets either remained essentially unchanged or were reduced even further, despite incorporating an expanded exploration portfolio. In 2002 and so far in 2003, high-level consolidation within the mining industry slowed considerably as major companies face far fewer attractive targets and several majors have announced their intention to return to internal reserves growth rather than pursuing acquisitions. The deceleration of industry consolidation in 2002 has had a far less negative effect on 2003 exploration, and although total acquisitions activity is up again in 2003, high-level consolidation within the industry remains somewhat muted so far this year and will not have the negative impact on overall exploration spending in 2004 that it had in the years leading up to 2002.
The graph below illustrates the regional distribution of the $2.19 billion in exploration allocations by the 917 companies included in this year’s study compared with $1.73 billion budgeted by 724 companies in 2002.
| 2003 and 2002 Worldwide Exploration Spending by Region | |
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2003 (917 Companies' budgets Totaling $2.19 Billion) |
2002 (724 Companies' Budgets Totaling $1.73 Billion) |
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The downward trend in exploration spending that had been apparent in almost every region of the world since 1997 has finally reversed, as all regions are experiencing an increase in exploration allocations this year. In dollar terms, allocations increased the most in Canada (up by $154.3 million) and Africa (up by $117.3 million) and increased the least in the Pacific/Southeast Asia region (up by only $7.8 million) and the United States (up by $28.2 million). Canada and Africa also experienced the largest exploration increases in terms of percentage of worldwide allocations, while the percentages for Latin America and Australia each fell by more than 2%, and smaller percentage decreases (less than 1% each) are apparent for the Pacific/Southeast Asia region, the United States, and our rest-of-world category.
Although Latin America is still the most popular destination for exploration this year, its lead over second-place Canada’s surging level of activity is only $46.5 million in 2003, compared with a $130.8 million margin over Canada in 2002. For the second year in a row, Canada is in second place regionally and first place by country, after surpassing Australia in 2002, which had held these positions since 1994. Canada’s flow-through share tax deduction and its super flow-through share exploration investment tax credit for minerals exploration are large factors in the improved investment climate and significant increase in domestic exploration in Canada. The sustained search for diamonds in Canada is also seen as a contributing factor to the increase in Canadian exploration spending this year.
Africa, led by a surge of spending in South Africa, has surpassed Australia for the first time, moving into third place by region, and Australia has slipped to fourth place by region this year while maintaining second place by country. The large increase in allocations reflects Africa’s enormous geologic potential, but its many problems continue to impede investment in exploration and development. Contributing to the surge in South African spending is the reaction to changes to the country’s Mining Charter, which will see privately held mineral rights gradually transferred to 100% state ownership, with mineral properties licensed to operators by the government. Many companies have increased their exploration spending in South Africa to evaluate their large landholdings ahead of this transfer of mineral rights so they can retain their most prospective ground.
These are some of the conclusions drawn from Metals Economics Group’s fourteenth edition of Corporate Exploration Strategies, published in October 2003. This 647-page, two-volume study is now available (on the internet and in print) for US$11,000 from Metals Economics Group, P.O. Box 2206, Halifax, Nova Scotia, B3J 3C4, Canada. Phone (902) 429-2880; Fax (902) 429-6593; Email: meg@meginformation.com; Web site: www.metalseconomics.com.
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