In spite of Australia's strength as a resource exporter, there are clear signs that exploration is declining, and this is something that will significantly impact the sector in the short, medium and long term.
The Australian Bureau of Statistics 2008 Yearbook reveals that Australian mineral exploration expenditure in 2006-07 was A$1.7billion – the highest in more than 30 years. But these figures disguise the fact that Australia's share of global aggregate exploration expenditure has been declining since 2002 and that the discovery of new deposits in this country, especially large, world-class deposits, has been meagre over the past decade.
Australian miners are currently enjoying historically high commodity prices, with the price of coal alone doubling between 2002-03 and 2005-06. These kind of prices have led to growing profits for the whole sector. In 2005-06, for example, profits increased by 74 per cent. Over the same period, however, mineral exploration expenditure increased by only 24 per cent.
Much of the current exploration spend is on brownfield developments that expand capacity at existing sites. Across APEC countries, brownfield exploration accounted for 41 per cent of exploration expenditure in 2006, up from 25 per cent five years earlier.
Greenfield exploration on the other hand seems to be lagging. Over the past five years, greenfield expenditure declined by 18 per cent, to account for just 40 per cent of total exploration expenditure.
Statistics clearly show that it is Australia's major miners who are not pulling their weight when its comes to sufficient investment in new exploration projects – between 2002 and 2006, junior miners increased their share of global exploration expenditure from 26 per cent to over 50 per cent. The majors fell from over 50 per cent to around 30 per cent.
Where major players are benefiting from rising commodity prices and the exploration heavy lifting is otherwise being left to junior players, mergers and acquisitions activity is inevitable. Recent deals such as Xstrata's A$2.9 billion acquisition of Jubilee Mines and Zinifex/Oxiana's A$780 million quest for Allegiance Mining have demonstrated that.
These kind of deals make sense in an environment where major players can earn US$1 billion of cash every month because of current commodity prices.
In aggregate terms, Australia is being out-spent on mineral exploration by Canada, Latin America and Africa. Given the 8-12 year lead time from discovery of a new site to its development, it is critical that the Australian resources sector face the challenge of current under-investment in new exploration projects. Otherwise the future is destined to be one of rapid consolidation.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
