At the Randgold Resources Q3 results presentation in London, the company’s CEO, Mark Bristow, made a scathing comment about the recent moves by a number of major and mid-tier mining companies to cut back on mineral exploration as a part of their new found austerity programmes.
While cash strapped juniors are cutting back, or ceasing exploration activity altogether, this is of necessity as they move into cash preservation mode to try and stay alive.
Many juniors have thus ceased exploration drilling altogether, laid off staff, reduced head office costs, and cut executive salaries to the bare minimum, but Bristow sees no reason for companies with good balance sheets and ample cash to do the same, largely as a sop to increasingly active institutional shareholders who look to short term bottom line figures rather than the long term future of the companies.
As we noted here a few days ago in reporting on the Randgold results, Bristow commented that shareholders can be ‘brutal’ when the companies in which they are invested are seeing falling profits and cashflow.
It should perhaps be remembered by the companies, and their shareholders, that past cyclical downturns have seen enormous changes in industry make-up with less farsighted companies being replaced at the top of the tree by those with better forward plans.
Take copper for example – where are Asarco, Kennecott and Phelps Dodge nowadays? Once these big historic mining names dominated the sector, but all have since been swallowed up by more successful competitors – Grupo Mexico, Rio Tinto and Freeport McMoran.
But Bristow commented, mining companies should be looking to the long term, not short term bottom line massaging to keep critics happy, and exploration cutbacks could be seen as extremely counter-productive in this context.
Mining is very much a cyclical industry, and the cycles are exacerbated by such exploration cutbacks. When the cycle starts to pick up again, as it inevitably will, the lack of exploration when the cycle is down leads to the mining companies being unable to meet rising demand given the long lead times in bringing new projects on line.
But have all these exploration cutbacks reached their lows yet? Exploration drilling reports monitored by Intierra actually show a month on month increase in September from the extremely discouraging August figures, but whether this indicates the start of a pickup in exploration activity is too early to tell.
On the basis of the past two years exploration has tended to be a little higher in September than August, so the likelihood is that the trend still remains negative in comparison with the already very low 2012 figures – a trend we reported earlier when the same organisation published its rather depressing State of the Market report at the beginning of the month.
As can be seen from the latest IntierraRMG chart displaying month-by-month exploration drilling activity, gold has tended to be the principal target for explorers, but is going through a depressed price stage and this is having a particularly strong impact on exploration activity.
It is notable, perhaps that exploration peaked in H2 2011 just after the yellow metal hit an all-time high, and has been on a downward trend since then. The gold bull market from 2000 to 2011 had led to a steady climb in activity, and at its peak drilling costs hit new highs, while availability of drill rigs was extremely limited, putting up exploration costs quite sharply.
Month by Month Global Drilling Activity
Chart from IntierraRMG
But currently the boot is very much on the other foot. There is now plenty of drill rig availability in many parts of the world and exploration costs are thus being driven down. This is of great benefit to those juniors who have the cash to continue operating – and should be of benefit to the majors and mid-tiers too if they weren’t so intent in cutting costs across the board.
But whether this is enough to reverse the fall in drilling activity in the short term is perhaps unlikely. Cuts in exploration expenditure by the bigger companies tend to take time to be fully effective so there is a good chance that, on the mineral exploration front, matters may get worse before they start to get better. However the downward trend is at least flattening out.
IntierraRMG notes, in its snapshot of its latest Exploration Report that Investors remain risk averse, and funding is scarce for early stage mining projects. This is reflected in the consistent metals prices and low predictions for metals demand next year. OECD data does however, indicate a mild recovery in the global economy., which could represent the early stages of a decent global recovery.
This leads the consultancy to suggest that exploration activity is at least flattening out and that, in Europe at least, there are signs of an improvement in sentiment amongst investors. Debt funding in the UK, for example, is becoming available for mining, even for early-stage projects.
Arguably too there should perhaps be a greater exploration focus on metals and minerals other than gold. IntierraRMG research has pointed out that coal, iron ore and copper are more important to the global mining sector in terms of profitability and size of market given their continuing importance to the industrial sector demand, yet exploration for these is dwarfed by that for gold.
However this may well not change given the lure of gold which, somehow, makes it easier to raise money to explore for, although a couple more years of falling gold prices could change all this. However the activity would quickly return if, and when, the price starts to pick up again.
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