Editor’s Note: The Intelligence Division of the Development Research Center of the China Geological Survey recently compiled and published in its "Geological Survey Dynamics" an analytical article prepared by international organizations on the global solid mineral exploration situation in 2009. The article reached the following key conclusions:
1. 2009 was the year with the largest decline in global investment in solid mineral resource exploration, and for the first time in seven years, exploration spending declined across all regions.
2. From 2004 to 2008, the continuous increase in exploration investment did not fundamentally lead to a proportional increase in effective exploration efforts.
3. In terms of the share of exploration investment globally, Peru and Russia are receiving increasing attention, while China’s position has risen slightly—from tenth to eighth place.
4. Industry observers generally agree that most metal prices will remain relatively stable in 2010, which will in turn drive an increase in global exploration investment.
The data and conclusions of this analytical article hold significant reference value for understanding the current status of mineral exploration and assessing the outlook for mineral exploration efforts. Therefore, we will publish this analytical article in this issue, hoping it will be beneficial to the advancement of China’s geological and mining work.
2009 became the year with the largest decline in global exploration investment in over two decades.
In its recently released 2009 “Corporate Exploration Strategy Report,” the Canadian Mining Economics Group (MEG) reported that non-fuel solid-mineral exploration investments by 1,846 companies fell from a record-high of US$12.6 billion in 2008 to US$7.32 billion in 2009, making 2009 the year with the largest decline in exploration investment in more than two decades. The report indicated that investments by companies—each with budgets exceeding US$100,000—accounted for over 95% of total global solid-mineral exploration spending. If the remaining 5% is included, global solid-mineral exploration investment is estimated to reach US$7.7 billion.
In addition, the strategic report has included uranium mining since 2007. The 2009 report showed uranium exploration investments totaling over 660 million U.S. dollars (compared to 1.15 billion U.S. dollars in 2008). If uranium exploration is taken into account, the total number of companies surveyed rises to 1,998, and total exploration investments—including the aforementioned 7.32 billion U.S. dollars—exceed 7.98 billion U.S. dollars. If we also include investment data that the Canadian Mineral Economics Group did not obtain, global solid-mineral exploration investments in 2009 (including uranium) would surpass 8.4 billion U.S. dollars.
According to the tracking statistics on global solid mineral exploration investment conducted by the Canadian Mining Economics Group, exploration investment exhibits cyclical patterns, and there is typically a one-year lag in the relationship between overall metal prices and exploration investment.
In the early 1990s, investment in solid mineral exploration steadily increased, reaching a peak of $5.2 billion by 1997. However, metal prices plummeted in the following years. As a result of the combined effects of continued production cuts by most companies, negative impacts from mergers and acquisitions among mining firms, and a severe lack of funding among many junior companies, exploration investment declined for five consecutive years, hitting its lowest level in 12 years—$1.9 billion—in 2002. Compared to 1997, total exploration investment had fallen by more than 63%.
This round of mineral exploration cycle hit its bottom in 2002. Subsequently, driven by higher gold prices and growing investor interest, junior companies increased their exploration expenditures. As major companies began to realize that there were no new projects offering significant potential for boosting returns, they too started ramping up their exploration investments. Coupled with the rapid decline in corporate mergers and acquisitions following their peak in 2000 and 2001, these three factors together triggered the initial surge in global mineral exploration spending. The sustained rise in gold prices, combined with a multi-year bull market, pushed the prices of most other metals to their peaks in early 2007 and 2008. The increasing annual exploration investments by major companies and the sharp rise in exploration spending by junior companies propelled global mineral exploration investment—excluding uranium mining—to a record high of US$13.2 billion in 2008.
However, as the world plunged into its worst economic downturn in nearly a decade and financial markets slumped, the mining boom that had characterized the past few years came to an abrupt halt in September 2008. Although mineral exploration programs declined significantly, investment in solid-mineral exploration in 2009 still remained higher than pre-2006 levels.
Rough calculations indicate that in recent years, annual exploration investment has far exceeded the peak levels seen in the late 1990s. However, due to stronger demand for services such as drilling and laboratory testing, as well as rising costs across a range of inputs—from fuel to geologists—exploration costs have surged dramatically. Consequently, from 2004 to 2008, the sustained increase in exploration investment did not lead to a corresponding proportional rise in effective exploration efforts.
Initial company exploration investments initially declined, but have since shown signs of rebounding.
After six years of growing exploration investment—during which the average annual growth rate reached 60% over five of those years—in 2009, total exploration spending by junior companies declined by more than half. At the beginning of 2009, junior companies’ investments in solid minerals led the decline, accounting for roughly 60% of the overall drop. Part of the decline in investment was due to a loss of exploration funding among junior companies; some of these companies halted their exploration activities altogether and instead used the cash they had on hand to keep their operations running during this period. However, from 2008 to 2009, the number of junior companies actually conducting exploration activities fell by only 6 percentage points. The decline in exploration investment among mid- and large-sized companies in 2009 was also significant, though less severe. As a result, for the first time since 2004, large companies accounted for the largest share of exploration spending.
Relying on equity financing for exploration investments has made the junior mining sector the most volatile segment of the mineral exploration industry. In the second half of 2008, critical financing for junior companies involved in both precious and base-metal exploration declined sharply, despite an overall increase during 2006 and 2007. However, after hitting a trough in January 2009—the lowest level since mid-2003—critical financing completed by junior companies began to rebound rapidly, continuing to climb through year-end.
However, when we compare the total funds raised annually by junior companies for key activities related to both precious and base-metal exploration with their total annual exploration expenditures, it becomes clear that, in most years, junior companies rarely manage to spend all the funds they’ve raised under the guise of exploration. Instead, the funds raised in a given year tend to be carried over into the following year. The lower-than-expected rate of fund attrition observed among junior companies in 2009 suggests that many of them heeded the advice—during the boom years from 2006 to 2007—to “prepare for a rainy day” and plan ahead early on. In early 2008, the funds raised by junior companies for mineral exploration were significantly lower than their actual exploration expenditures. If, starting from the low point in early 2009, the utilization rate of these funds begins to recover, we can anticipate that junior companies’ exploration budgets for 2010 will no longer continue to decline.
For the first time in seven years, exploration spending has declined across all regions of the world.
In its “Corporate Exploration Strategy Report,” the Canadian Mineral Economics Group analyzed the regional distribution of exploration investments in solid minerals (excluding uranium) by 1,846 companies, totaling US$7.32 billion. The report also compared the regional distribution over the past five years and detailed the annual share of each region in global exploration investment. Specifically, the distribution of investments was as follows: the United States—7%; Australia—13%; Africa—15%; Canada—16%; the Pacific/Southeast Asia—6%; Latin America—26%; and other countries and regions—17%.
All regions experienced a decline in funding in 2009. In dollar terms, the largest reductions were seen in Canada and Latin America, while the smallest declines were observed in the Pacific/Southeast Asia region and the United States. Latin America remains the most popular destination for exploration investment—a trend that has persisted since 1994. In 2009, 82% of exploration investments in Latin America were directed toward the region’s five traditional major countries: Peru, Mexico, Chile, Brazil, and Argentina. The decline in investment across 23 Latin American countries was less than 42% of the global average, enabling the region to account for over 26% of total global exploration spending—the highest level since 2001. Canada experienced the largest decline among all regions in 2009 (a drop of more than 50%), yet it still held a 16% share of global exploration spending, causing its ranking to slip to third place. Since overtaking Australia to become the second-ranked country in 2002, Canada had consistently maintained its position as the world’s second-largest explorer.
In this strategic study, exploration spending in other regions and countries around the world rose to second place for the first time. These include Russia, China, and Mongolia—collectively accounting for nearly two-thirds of exploration investment in the region. In addition, there are 37 other countries distributed across Europe, the Asian continent, and the Middle East. Compared to 2008, planned expenditures in this region declined by only one-third, yet its share of global exploration investment increased to 17%. In 2009, Africa’s share of global exploration spending fell from third to fourth place, though it still accounted for 15% of the total. Africa’s key exploration destinations include South Africa, the Democratic Republic of the Congo, Angola, Ghana, and Tanzania. Australia remained firmly in fifth place, with a global share of 13%. The United States continued to occupy seventh place, accounting for 7% of the global total—a figure that represents its lowest share to date. In 2009, the Pacific/Southeast Asia region experienced the smallest decline in spending (32%), with its global share exceeding 6%, just a few million dollars behind the United States. The three traditional major players—Indonesia, the Philippines, and Papua New Guinea—accounted for three-quarters of the region’s total funding.
Canada, Australia, Peru, the United States, Russia, Mexico, Chile, China, Brazil, and South Africa were the top ten countries in terms of exploration investment in 2009. Judging from their share allocations, Peru and Russia have been gaining increasing prominence. These ten countries accounted for 67% of global exploration investment. Although both Canada and Australia saw their global shares decline, they still ranked at the top: Canada at 16% and Australia at 13%. Canada has now surpassed Australia for the third consecutive year. In 2009, Peru secured third place with a global exploration investment share of 7%, a decline of only 29% compared to 2008. By a narrow margin, Peru edged out the United States, pushing the U.S. out of the top three for the first time. Russia climbed from sixth to fifth place; Mexico dropped from fifth to sixth; Chile remained in seventh position; and China rose from tenth to eighth, reaching a 4% share, while Brazil and South Africa fell to ninth and tenth, respectively.
Gold has once again regained its status as the most attractive investment prospect.
The distribution of exploration investments among different mineral commodities in 2009, as reported by surveyed companies, showed that after at least six years of growth in exploration investment across nearly all solid minerals, in 2009, exploration spending on gold, non-ferrous metals, diamonds, platinum-group elements, and other mineral types declined in all regions worldwide. In 2008, exploration investment in non-ferrous metals (copper, nickel, and zinc) reached its peak, accounting for 41% of total exploration spending. However, in 2009, exploration investment in non-ferrous metals plummeted by nearly half, dropping to 36% of the total share among all mineral types.
In 2009, exploration spending on gold mines also declined, though the drop was relatively small, causing its share to rise from the historic low of 39% in 2008 to 48% in 2009. Over the more than 20 years this study has been conducted, nonferrous metals first surpassed gold as the most attractive exploration target in 2008; however, in 2009, gold once again regained that position. The three traditional major geographic regions—Canada, Australia, and the United States—attracted nearly 40% of global gold exploration funding in 2009. Ten countries—Mexico, Russia, China, Peru, Brazil, Chile, Colombia, Ghana, Argentina, and South Africa—accounted for one-third of total investment, while the remaining investments were spread across more than 100 other countries.
In percentage terms, diamond exploration investment in 2009 saw the largest decline compared to the same period in 2008, dropping by 59%. This marked the lowest level of planned investment since 2003, causing the share of diamond exploration investment in total investment to fall from 8% in 2008 to 5% in 2009. For six consecutive years, Africa has remained the most popular destination for diamond exploration, with its share rising to nearly 50%, of which Angola and South Africa accounted for the largest portions. Canada’s share of diamond exploration investment declined significantly, dropping from 32% to 18%.
In 2009, exploration for platinum-group metals declined to 2%. Since reaching a peak of 6% in 2002 and 2003, the share of platinum-group metal exploration in global exploration spending has been steadily decreasing. In 2009, nearly half of all platinum-group metal exploration investments were concentrated in South Africa, while Canada and Russia attracted 20% and 13%, respectively. In 2009, total exploration investment in other minerals (excluding gold, non-ferrous metals, diamonds, and platinum-group metals) fell by 47% compared to 2008, accounting for almost one percentage point less of total exploration investment—dropping to 9%.
During this downturn, investment in mine exploration has performed relatively well.
In 2009, the global economic crisis and the sharp decline in prices of nearly all mineral commodities led to a drop in investment across all three stages of mineral exploration compared to their peak levels reached in 2008. Grassroots exploration experienced the largest decline, falling by 48%, followed by late-stage exploration, which declined by 43%. These two stages accounted for 32% and 41% of global exploration investment, respectively. Mine-site exploration saw a more moderate decline of 29%, causing its share of global exploration investment to rise to over 27%. For five consecutive years, late-stage exploration has outpaced grassroots exploration. Meanwhile, the share of early-stage exploration in total investment has steadily declined—from a high of 53% in 1996 down to its lowest level in 2009. By contrast, mine-site exploration has continued to rise since reaching a peak of 22% in 2008, climbing to 27% by 2009—the highest level on record. The share of late-stage exploration has remained relatively stable at between 40% and 43% ever since it surpassed that of grassroots exploration in 2005.
Different companies have cut their grassroots exploration expenditures, with junior companies accounting for the largest share of the reduction. The proportion of grassroots exploration spending by junior companies dropped from 55% in 2008 to 41% in 2009. On average, the decline in grassroots exploration spending by junior companies exceeded half. During economic downturns, it’s hardly surprising that grassroots exploration investment by junior companies declines—after all, most junior companies rely on equity investors to fund their exploration activities. When funds become tight, equity investors tend to reduce their support for speculative grassroots exploration and instead shift their investments toward later-stage exploration projects.
Since early-stage companies surpassed large companies in early 2002, they have accounted for the largest share of late-stage exploration expenditures and have exceeded half of all late-stage exploration spending every year since 2003. However, after reaching a peak of 65% in 2005, the share held by early-stage companies began to decline annually, falling to 53% by 2009.
Mine exploration experienced the smallest decline among all exploration stages compared to the same period last year, with a drop of 29%. Since 2006, large, mid-sized, and junior companies—though by definition most junior companies are not producers and thus do not make mine-site investments—have all increased their share of total investment devoted to mine exploration, starting with early-stage exploration and more recently shifting toward later-stage exploration. As evidenced by the proportion of total investment that producers allocate to mine exploration, they have placed particular emphasis on this area: in the 2009 study, nearly 300 mine explorers directed 64% of their total investments into mine exploration, whereas when all companies are considered together, this proportion drops to 27%.
Outlook: Global exploration investment may grow in 2010.
In the second half of 2008, the world plunged into the worst economic and financial downturn in a decade, and the severity of the global crisis continued to intensify for the remainder of the year. The prices of all metals except gold plummeted to their lowest levels in several years. Although some had predicted that metal prices would decline, most were still astonished by the speed and magnitude of the price drop. At the same time, the market capitalization of virtually all companies suffered a severe blow. Similarly, while most analysts anticipated a prolonged global economic slump and a bleak outlook for global demand, few had ever forecast that metal prices—and industry as a whole—would rebound so quickly.
??? Metal prices are the primary driver of exploration investment. While they did not reach their peak in late 2007 and early 2008, after hitting bottom in early 2009, they have since remained steadily upward and have entered a long-term trading trend. Although metal prices—and the economy at large—still remain vulnerable to the threat of economic downturns, and the economy showed some fragile signs early in 2010, the general consensus among industry observers is that most metal prices will remain relatively stable and even see a slight increase in 2010. An early indication of this consensus is that many large, mid-sized, and junior companies plan to increase their exploration investments to varying degrees in 2010. Unless metal prices experience a severe reversal before mid-year, most explorers are expected to follow this trend, ultimately driving healthy growth in global exploration investment in 2010.