Is Australia’s exploration sector preparing for a turnaround?

After several years in the doldrums there are signs that Australia’s exploration sector is heading for an improved year in 2017.

Exploration expenditure fell almost continuously between 2012 and 2016 but is now starting to show signs it is stabilising. Expenditure targeting coal suffered the biggest fall during this span, while exploration activity for iron ore also dropped significantly.

After declining by about 10 per cent year-on-year since late 2012, the falls in exploration expenditure have slowed considerably in recent quarters, according to the Department of Industry, Innovation and Science. In the September 2016 quarter, expenditure was only 3.7 per cent lower (at about $380 million), which occurred as commodity prices rallied.

Gold and copper have been the best performing minerals in recent times, in terms of exploration expenditure. Gold exploration expenditure increased by 19 per cent year-on-year in the September 2016 quarter to $159 million, while copper was up 15 per cent to $35 million.

Off the back of promising figures like these, research consultancies have indicated that exploration activity may be ready to rise again.

According to Resources Monitor, the outlook for exploration looked better than it had for several years at the end of 2016.

“Will exploration expenditure continue to increase in 2017?” it pondered.

“Gold exploration may be adversely affected if prices do not pick up in coming months. By the same token, iron-ore and coal exploration will be stimulated if recent price increases hold.

“In addition, for both BHP Billiton and Rio Tinto, copper is an important part of their exploration programs.”

BDO Australia, which focusses on exploration undertaken by junior companies, believes the sector is now transitioning away from a mindset of cash preservation and is instead focussing on investing in exploration and advancing projects.

Research from BDO found that the average amount of cash junior companies spent on exploration increased quarter-on-quarter for just the second time in more than two years in the three months to September 2016.

Although the spend was still less than half that of the amount recorded in March 2014, BDO national leader for natural resources Sherif Andrawes said it was a strong indication that positive market sentiment was funnelling cash through to juniors.

“Gold, oil and gas stocks received significant financing cash flows, with 10 gold companies and four oil and gas companies raising in excess of $10 million during the September 2016 quarter,” Andrawes said.

He added that interest in gold stocks, which had already increased after the Brexit decision earlier in the year, continued through the September quarter due to the uncertainty in global markets following the US election win by Donald Trump.

BDO found that net operating cash flows increased during the September quarter to $707 million, an increase of about 34 per cent on the $527 million recorded in the June 2016 quarter

“The increase in funds committed to exploration and development reaffirms the improvement in industry sentiment,” Andrawes said.

“Total net financing cash flows decreased by almost a third for the September 2016 quarter, having increased by more than 300 per cent during the previous quarter.

“However, the ability of explorers to secure debt and equity funding remains significantly higher than in periods prior to the June 2016 quarter, which indicates that there is still investor appetite for companies demonstrating strong fundamentals and reasonable valuation levels.”

However, not all observers are expecting the exploration sector to bounce back just yet.

Despite renewed optimism elsewhere, the Department of Industry, Innovation and Science remained cautious about the future of exploration in its latest resources and energy quarterly report.

“The generally subdued long term outlook for growth in commodity prices makes substantive increases in exploration expenditure over the outlook period unlikely,” the report stated.