November 8, 2006

Metals Economics Group
P.O. Box 2206
Halifax, Nova Scotia B3J 3C4
CANADA
Phone: (902) 429-2880
Fax: (902) 429-6593
meg@metalseconomics.com
www.metalseconomics.com

Worldwide Exploration Budgets Reach New High-Water Mark

(currency is in U.S. dollars)

Metals Economics Group’s analysis of 2006 exploration budgets from the 17th edition of Corporate Exploration Strategies (CES) shows that budgets have increased to almost $7.13 billion this year—the fourth consecutive yearly increase since the bottom of the cycle in 2002 and the highest total since the study series began in 1989. This year’s edition analyzes the 2006 budgets of 1,624 companies (using a $100,000 cutoff), which we estimate covers about 95% of worldwide commercially oriented nonferrous expenditures. When we add in the remaining 5%, expenditures for commercial nonferrous metals exploration reach $7.5 billion, surpassing the previous high of $5.2 billion in 1997 to set a new high-water mark for global nonferrous exploration. This year’s estimated total is up 47% ($2.4 billion) from last year and nearly 300% ($5.6 billion) cumulatively since the bottom of the cycle.

Metals Economics does not adjust its historic exploration figures for inflation to attempt “constant dollar” comparisons, but doing so would certainly show that there is more being invested in exploration today than a decade ago. However, the increased demand for services such as drilling and assaying and rising input costs on everything from fuel to geoscientists have significantly increased the costs of exploration in the current cycle beyond that of overall inflation. While there is ample anecdotal evidence of a substantial rise in exploration activity in recent years, as a result of rising costs it is unlikely that the rise in activity has paralleled the substantial increase in exploration budgets over the past few years.

Summary of exploration spending trends by surveyed companies

While the major and intermediate groups of companies have both substantially increased their exploration budgets in recent years, the upswing in exploration spending since the bottom of the cycle in 2002 has been led by the junior explorers. Since the 2002 low, junior exploration spending has increased a remarkable 600%, accounting for the majority of the overall increase in exploration allocations by all companies from 2002 to 2006. The substantial increase in junior exploration budgets relative to the other groups over this time frame allowed the juniors’ combined budgets to surpass the majors’ budgets for the first time in 2004 (albeit by only about $7 million), before continuing to outstrip increases by the other groups in the following two years. The juniors now account for more than half of this year’s worldwide exploration total—the highest proportion allocated by this sector since the inception of the CES in 1989.

Examining allocations by target shows that gold, base metals, diamonds, platinum group metals, and other targets (primarily silver, but also molybdenum, cobalt, mineral sands, and industrial minerals) all reached record levels in 2006. Gold consistently attracts more exploration expenditure than any other target, but, with prices for copper, nickel and zinc at or near their all-time highs, the percentage of overall exploration spending attributable to base metals (which has maintained an inverse relationship to that of gold over the past decade) has increased substantially in recent years.

Exploration allocations have increased in each of our regions of the world for the fourth consecutive year. As shown in the figure below, Latin America continues to be the most popular destination for exploration—a position it has held for well over a decade—followed by Canada. The push into new exploration regions continued this year, highlighted by increased allocations to our rest-of-world region (including Europe, the Former Soviet Union, Asia, and the Middle East), led by substantial increases in Russia, China, and Mongolia, lifting the region into third place ahead of Africa, which had held third place since 2003. Despite the slowest year-on-year growth among the seven regions shown, Australia remains in fifth place in 2006, followed by the United States and the Pacific/Southeast Asia region in sixth and seventh place, respectively.

Late-stage exploration has become increasingly important in the current exploration cycle, and the above-average increases in late-stage budgets over the past three years have far outstripped the rise in grassroots budgets. As the figure below shows, total late-stage budgets now exceed total grassroots budgets by a substantial margin, after narrowly surpassing grassroots allocations (by less than $3 million) for the first time in 2005. By comparison, in the decade prior to 2004, total grassroots budgets averaged over 50% more than total late-stage budgets.

Looking Forward…

Years of stagnant and declining metals prices in the late 1990s and the resulting lack of exploration and mine development, coupled with a resurgence in worldwide industrial growth led by China and India, have driven the markets into an imbalance that is taking time to correct.  While the sharp recovery in exploration spending in recent years has produced significant anecdotal success, the deep cuts to exploration spending from 1998 to 2002 have resulted in a decline in the rate of substantial discoveries in recent years.  Although the existing pipeline includes a handful of substantial projects slated for development within the next five years, the lack of new large-scale projects entering the pipeline will continue to pressure global supply.  Even if the recovery in exploration spending produces a number of new large-scale projects, the time required to take a project from discovery through to production ensures that any new discoveries will not benefit global supply for many years.  Although metals prices may come off their recent long-term and record highs, they will likely remain strong as long as demand remains high enough to maintain the market imbalance that the industry has so far been unable to meet.

The continuation of the current junior-led boom in exploration relies entirely on the junior companies’ ability to raise capital, which has yet to show signs of slowing. Many juniors already have the cash to at least partially fund exploration programs that will run into 2007, and continued strong metals prices will help them maintain investors’ interest for the short term. In addition, the reserves replacement requirements and growth aspirations of the major and intermediate companies—coupled with the rising costs of replacing reserves through acquisitions—assures that exploration will continue to be an important part of these companies’ overall strategy. Although the wave of consolidation so far in 2006 has the potential to negatively impact exploration spending (typically, a large part of an acquired company’s exploration budget disappears within the acquirer’s budget in the year following the acquisition), this should be outweighed by the continued rise of exploration costs as companies spend more just to maintain current exploration levels. As a result, we expect to see a continued increase in worldwide exploration spending in 2007—albeit at a more moderate rate than seen in the past few years—led mainly by the juniors, but also including net increases by the majors and intermediates.

Jason Goulden

Director, Corporate Exploration Strategies

These are some of the conclusions drawn from Metals Economics Group's 17th edition of Corporate Exploration Strategies—the industry’s benchmark on exploration budgets, strategies, and exploration trends—published in October 2006. Our study is used by mining executives, strategic planners, marketing executives, and mineral policy analysts for competitor and marketing intelligence, and strategic trend analysis. It is available on the internet and in print from Metals Economics Group, P.O. Box 2206, Halifax, Nova Scotia, B3J 3C4, Canada. Phone: (902) 429-2880; Fax: (902) 429-6593; Email: meg@metalseconomics.com; Web site: www.metalseconomics.com.

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