Resources companies are tentatively increasing exploration budgets in response to firmer commodities prices, but they are still favouring brownfields studies around known deposits rather than high-risk greenfields activity.
In a downturn, exploration budgets are among the first to be slashed. If the resources sector does not invest in exploration, known deposits will be exhausted in the next few decades or even earlier, causing shortages and price spikes. For several years analysts have warned the number and size of new unexplored diamond and gold deposits have been dwindling.
In S&P Global Market Intelligence’s latest Corporate Exploration Strategies report, presented at the annual Prospectors and Developers Association of Canada conference in Toronto in March, it said 2016’s global budget for exploration for nonferrous metals fell to $7.2bn. It was the fourth successive year of decline and represented a third of the $21.5bn spent in 2012.
S&P said that since March 2016, when commodities prices picked up, exploration companies started to find it easier to raise funds. But there had been a shift away from grass-roots exploration to later-stage, lower-risk activity.
S&P forecast the biggest mining companies would slightly increase their exploration budgets in 2017, but budgets for smaller companies would continue to fall, so the overall picture would be flat.
It said among companies, the biggest budget cuts were by Freeport McMoran and Vale but the largest increase in spending was by Gold Fields.
Gold Fields CEO Nick Holland said in the group’s latest annual report it spent $76.3m in brownfields exploration at its St Ives and Granny Smith mines in Australia in 2016 and has budgeted $65m in 2017 at these projects and the Gruyere gold project. But it has stopped all early greenfields exploration.
S&P found the region with the biggest exploration budget cuts in 2016 was North America, followed by Africa.
Sentula’s subsidiary Geosearch International, which operates about 50 exploration drill rigs across Africa, said activity in southern Africa gathered pace in the second half of 2016.
"Geosearch has delivered its first profit during this interim period since 2012 on the back of newly awarded contracts in Botswana and SA as well as the reactivation of exploration activities at Vale’s large coal mine in Tete, Mozambique," it said. "Operations in all three jurisdictions are well positioned to take advantage of any further acceleration in mining exploration activities". Most exploration activity in 2016 was for gold while exploration for base metals, in particular copper, nickel and zinc-lead, reduced the most, S&P said.
While Gold Fields stood out, JSE heavyweight AngloGold Ashanti conformed more to general trends. In 2016 it expensed $144m in exploration and evaluation costs (including equity-accounted investments), slightly up from 2015’s $140m but well below the $492m it spent in 2012.
Anglo American said this week it spent $20m on exploration in the March quarter, down 31% on 2016, but $30m on feasibility evaluation, a 76% increase.
There has also been concern about sharp cuts in exploration budgets by the world’s biggest oil companies after the oil price fell from more than $100/barrel to below $50/barrel.
BHP Billiton president of petroleum operations Steve Pastor said in a presentation at Ceraweek in Houston in March the outlook for deepwater oil exploration was different from gas exploration. Billiton has assets in both sectors.
Pastor said the oil market was likely to return to balance in 2017 for the first time in three years and by 2025 the world would need one-third more oil than at present.
Projected oil production from shale and the Organisation of the Petroleum Exporting Countries would not be enough to meet demand.
But Pastor said North American gas markets were expected to be well supplied for decades.
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