Mining Australia tomorrow begins with exploring Australia today

Australian exploration has slipped behind other global exploration destinations, a new report has found.

Trends towards lower exploration activities has been blamed on decreasing discovery rates, a focus on brownfield exploration rather than greenfield operations, difficulty raising equity, and a shift to offshore projects.

Australia’s share of global exploration for non-bulk commodities has almost halved from its peak of 21 per cent in 2002, coming in at 12 per cent in 2012; yet international competitors such as Canada have experienced increases in exploration activities of 4 per cent, rising from 14 per cent to 18 per cent over the same ten year period.

According to the Australian Bureau of Statistics Australian exploration expenditure also fell during the March 2012 quarter, across all states and all commodities.

Historically the March quarter has been adversely affected by extreme weather conditions, but even accounting for heavy rains in the country’s north the figures still portray a general downturn in exploration investment.

According the report Where are Australia’s Mines of Tomorrow? commissioned by MinEx and the University of Western Australia’s Centre for Exploration Targeting, [CET] a significant contraction in the exploration sector “will have a material impact on employment and service providers in the broader economy”.

While the research found that original exploration expenditure rebounded in the June 2012 quarter, when seasonably adjusted, the declining trend continued with an overall fall of 4.9 per cent “largely attributable to Queensland (12.6%) and to a lesser degree Western Australia (1.6%)”.

The amount of drilling also fell in 2012, particularly when it came to “new deposits”, this is concerning because “if you don’t drill, you won’t discover”.

Reducing the rate of discovery will gradually deplete the national mineral inventory, the report stated.

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Another issue the report flagged was the difficulty juniors are having raising finance.

“Given that juniors now account for over half of all the exploration spend in Australia, difficulties in raising finance will directly translate into reduced exploration activity particularly greenfield exploration,” the research stated.

Sucking up funds in recent years has been the GFC, European instability, and concerns around Chinese growth and how that affects the demand for Australian metals.

In 2011 the amount raised by small cap IPOs on the ASX increased by 10 per cent to 98 listings, 78 of them were from junior mining companies. The report found that the average level of funds raised by small caps was at its lowest level in five years, sitting at $6.8 million.

Late last year Grant Thornton released its annual JUMEX report which examines junior mining and exploration companies with a market cap of less than $500 million.

The JUMEX report found junior miners and explorers were facing a number of constraints, including the availability and instability of equity capital, market volatility, and government red tape and policy with the introduction of the carbon tax and MRRT.

Gooley said the availability and difficulty of sourcing funding are major challenges with 68 per cent of companies’ surveyed saying they expect to raise capital in the next 12 months.

“It’s very challenging conditions and has been for the last 12 months, we don’t see that dramatically changing in the next 12 months, given where we are in terms of the market.

“The underlying message is that companies need to focus on the opportunities in the market, there’s going to be a lot of corporate action, a lot of acquisition opportunities, and there are still a lot of opportunities out there,” Gooley said.

Murray Hutton, technical manager at Geos Mining stated that most juniors are struggling for funding at the moment and that “reports of short term doom and gloom lose sight of the bigger picture”.

“Many [juniors] have very good exploration projects, but the general feeling is that ‘we can’t hope to get funding in this market’ and so they have been forced to look overseas for investors,” Hutton said.

As mining investor confidence shrinks those who need a strong financial backing, explorers and junior miners – those willing to go out and uncover the new prospects and mining regions, are now unable to achieve this.

Only recently mining junior Gold Road Resources uncovered what may be a completely new gold bearing region, the Yarmana greenstone belt, yet if the situation proceeds it is unlikely we will be seeing another discovery like Gold Road any time soon. This was supported by the Queensland Resources Council which stated that “history has shown that the small explorers are the best at making discoveries, the best at juggling the risks. They have the best track record of delivering discoveries of new deposits".

With the likelihood that unfavourable market conditions will continue into the mid term future remains high, the CET report predicts exploration companies will revert to a cash conservation mode which will cause exploration activities to experience contraction.

Greenfield vs brownfield exploration and mining’s future exploration.JPG

A shift away from greenfield to brownfield exploration is also evident, particularly for bulk commodities like iron ore, copper and coal.

While this strategy may be profitable in the short term, it is a worrying long term plan, especially as resource depletion sets in.

“It is estimated that in the absence of new discoveries and mine extensions, based on current reserve and resources, about half of Australia’s non-bulk commodities mines will be exhausted in between 7 and 18 years,” the report stated.

Add to this the fact that on average it takes abut seven years to move a project from discovery to operation and it becomes clear why it is important to continuously build up a strong pipeline of projects in order to sustain a successful mining sector in Australia.

The research shows Australia’s mineral exploration industry is facing increasing technical and financial pressures and attractive conditions in overseas exploration areas like Africa, Canada and parts of South America are heightening the financial strain as exploration budgets are repeatedly being diverted away from Australia, the report found.

What is interesting to see is the fast and large increase of iron ore exploration expenditure, growing from about 9 per cent in 2000 to approximately 52 per cent of Australia’s total exploration expenditure in 2012.

Mining service providers have been kept busy by the growth of iron ore mining and looking ahead their future is largely driven by the health of the bulk mineral sector.

According to the report, exploration expenditure in Australia reached its peak in the December 2011 quarter and is now in a period of contraction.

This downward trend has been attributed to the maturing of Australia’s mining sector which has made discovery increasingly difficult, especially in comparison to less mature regions like Africa, South America and parts of Asia.

But while Australia does have a good track record for moderate and major mineral discoveries; such discoveries are becoming more expensive.

In the last ten years the proportion of Australian exploration companies’ funds invested domestically has fallen from an estimated 62 per cent to 51 per cent, and according to CET research this trend is tipped to continue.

As the number of historically known deposits are mined, ore body grades decline, and commodity prices slide and stabilise at lower levels we need explorers willing to take the risks and enter unknown regions to uncover new deposits.

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When looking at exploration trends, drilling is an important measure to analyse, as drilling is fundamental to the discovery of new resources.

The report found that Australian exploration is still conducted at relatively shallow depths which is a concern for future mining as search space is further depleted.

According to figures released by the ABS in March 2012 the total 2.272 million metres actually drilled during the quarter (equal to 9.088 million metres on an annual basis) represent a 23.1 per cent decrease when compared to the December 2011 quarter.

Contract drilling juggernaut Boat Longyear supported the data, reporting that while its drill rig utilisation remained steady its products order backlog for drilling consumables (which are sold to the general exploration industry) peaked in July 2011 and experienced a 30 per cent fall in the June 2012 quarter alone.

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Although current reserves and resources in Australia are healthy, for the mining industry to sustainably carry on into the future new mineral discoveries, at a minimum, need to cover what is being extracted.

To a certain extent greenfield exploration is the key here as brownfield operations can only reinvigorate existing areas for so long; they will eventually run out, the report stated.

But as Australia’s mining sector matures greenfield discoveries will also inevitably decline, becoming smaller and of lower grades.

Either way, the decisions that are made, or not made now will affect the future success of Australia’s mining sector. It’s really is either boom or bust.

“There is no room for complacency,” the report concludes.

In other words, mining is in flux.

We have witnessed what may be the last great commodity boom for decades; the implementation of multiple mining taxes at federal and state levels; and a massive culling of mining CEOs over the last two years which has now seen Australians installed at the helm of two of the largest mining houses in the world.

The mining industry is now under siege from all angles: the government, investors, environmentalists, and the man in the street – all of whom see the industry as a cash cow from the worker at the face through to the seats in the boardroom, all the while ignoring the high costs of doing business.

But all these hardships have never really threatened the future of these mining giants, companies which are able to simply pack up and look elsewhere overseas where prospects, and operating costs, are better.

Those who have been truly affected, the mining juniors, have seemingly been forgotten in the turmoil of these past two years.

But if the industry and the government continues to ignore the issues facing junior miners they do so at their own peril, and put the future of Australia's mining industry in jeopardy.

Mining needs exploration, and if support dries up in Australia we are unlikely to see anything similar to the discoveries of Chuck Fipke – who uncovered Canada's Diavik diamond mine after ten years of exploration, as the support for explorers willing to take a risk simply does not exist.

Australia's mining future is being shackled by poor governmental decisions and unless support is provided – both in terms of approvals as well as to a degree monetarily, then our mining future is at risk.

Confidence needs to be brought back to the sector, and with that confidence comes investment and future growth.

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