thought this was a great article in the australian.
sums it up for junior explorers. I have been assured though that ABU has got big backers who will ensure funds will be raised as necessary.
Australia's exploration efforts`must be supported' Sarah-Jane Tasker From: The Australian February 06, 2010 12:00AM
AUSTRALIA'S exploration sector was savaged during the global economic downturn, with budgets slashed and miners switching their focus to acquiring existing projects, rather than discovering new finds.
The past 18 months has seen some junior explorers disappear and others barely hang on. But with demand being driven from the powerhouse of China, future supply is desperately sought.
Andrew Michelmore, chief executive of China Minmetal's Australian arm, Minerals and Metals Group, is a strong advocate for exploration and the important role it plays in the resources cycle. But he thinks it is a good year away from recovering from the pain suffered during the downturn.
In 2008, world exploration was worth around $US12.6 billion, covering more than 2000 mining and exploration companies.
While the numbers are not in for 2009, Michelmore says there was about a 45 per cent drop in exploration budgets last year and fewer companies exploring.
"The number of companies spending over $US20m ($23m) dropped from around 41 to 24 companies," he says. "As we have gone through the later half of the 2000s, we started to see the sector pick up, but it's not back to the original levels of spending."
Association of Mining and Exploration Companies chief executive Simon Bennison says many of the junior exploration companies "really bolted down" on the back of the global financial crisis.
"For many of them, it was a matter of survival," he says.
"Exploration expenditure, which is seen as discretionary, is often the first to be cut."
Bennison supports the view that the recent pick-up in demand will result in an increase in expenditure for exploring but he warns that the sector is at risk if new exploration is not supported.
"The junior exploration end of town is relied on to take the risk and spend the money to identify new deposits and new mines that either will be farmed into or sold to current operators," he says.
"Without this exploration there will be a serious gap between the existing brownfield exploration projects and those due to come onstream sometime down the track. You can't let greenfields exploration go for too long, because it is very difficult to play catch-up."
For Graeme Wallis, managing director of Perth-based Wallis Drilling, the drop off in activity was not necessarily a bad thing for the contractor.
"We were going flat out up until December 2008 and then in early 2009 we hit a brick wall. But it came as a slight relief for our support people," he says. "You don't like having downturns but booms in this industry are weary."
He says business dropped off about 30 per cent last year, but he didn't believe at the time it would last long.
"In reality, I wasn't overly concerned, because we didn't really believe it could be that bad," he says. "Previously we had been through an eight-year drought. We were hoping China would be strong and for us, we are in Western Australia, Africa and the coal seam gas sector in Queensland, so we are in strong markets."
Wallis says the strong demand from China is starting to drive new activity and he is warning his long- term clients to grab a rig now, because he expects them to be in short supply.
Junior companies are still struggling to tap markets for cash injections for exploration and the big miners are only slowly increasing their exploration budgets, but projects that were slowed down last year are now being ramped up. "As the demand continues and supply gets tighter, exploration will come back strongly over time," Michelmore says.
He says the decline in exploration has also been fuelled by the majors focusing on acquiring projects rather than finding new ones.
"During the 1990s and into the 2000s, the big companies came to the conclusion that with the demand in the market increasing and the timetable for finding an orebody and building a mine taking up to 15 years, for them to be able to grow at the rate they wanted to grow and also to replace the reserves and resources they were consuming, it was easier to buy companies that had already found them," he says.
Michelmore says exploration success rates were around 50 times higher in the 1960s and 1970s than they are today.
"In the 1960s and 1970s companies were using technology to find orebodies that outcropped and all the relatively easy and big ones were found," he says. "Now that the technology around the world is to go underground to find the ones that don't outcrop, technology has become far more important, which is why the success rate of finds has dropped." The next challenge for the sector is to ensure that regulatory processes do not stall projects in development, Bennison says .
He says that while there have been some improvements, there is still a long way to go. "We are just at the beginning of creating a far better regulatory environment for the sector compared with what we have had in the past," he says.
"The states are improving their roles, but what we don't want to see is duplication and the federal government getting involved in another level that it is going to complicate the environment for companies."
The resources sector has focused on an expected resources rent tax for miners in the Henry Tax Review. But Bennison says the association is hoping there is a recommendation on a flow-through share scheme, which the Rudd government promised during the election campaign.
"It could easily have been done by now and it was a political exercise to throw it into the Henry Tax Review," he says.
Flow-through shares are an up-front tax deduction for investors to encourage them to pour money into drilling and exploration.
But with the Henry review yet to be tabled, and the government only having one more budget to hand down before an expected election, it is unlikely the sector will see some tax relief soon.
Bennison says it is crucial for junior explorers that it is introduced, as the flow-on benefits would far outweigh any costs.
"The stalling tactics that have been employed have not instilled confidence in the sector that it will come through in this term of government," he says. "It is not a complicated exercise and not without precedent, so it is very frustrating and disappointing it hasn't been introduced."
ABU Price at posting:
3.0¢ Sentiment: LT Buy Disclosure: Held
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