Exploration drilling and budgets increasingly focused on existing mines

By Carrie MacDonald and Christopher Galbraith | 30 June 2017

According to data compiled for S&P Global Market Intelligence's quarterly Industry Monitor report, the number of distinct precious, base and specialty metals projects with reported drill results has followed a downward trend globally since 2012. Spurred lower by declining metals prices, poor investor appetite and limited financial bandwidth, exploration companies have continued to refocus their efforts, leading many companies to abandon lower probability projects and to concentrate on their core holdings.

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Apart from occasional quarterly jumps in drilling activity, the number of early stage and late-stage projects drilled has been on a declining trend since the start of 2012. However, in a data set which is heavily weighted toward junior companies, minesite drilling has seen a consistent upward trend. The number of minesite projects drilled reached a multiyear high in the first quarter of this year.

This implies that an increasing number of juniors are focusing on minesite projects. This emphasis could be through acquisitions, where past-producing assets are brought back to production for relatively little CapEx and so become economic as metal prices recover, especially the case for gold projects. The change could also be organic, with the juniors being able to raise funds to bring late-stage projects to production. In the latter case, this would also apply if a major company joins as a strategic partner, but the junior continues reporting the exploration results.

In 2016, the downward trend in early and late-stage drilling was curbed, as early stage drilling picked up in the June quarter and late-stage activity picked up in the September quarter. Early stage drilling reached a seven-quarter high in the three months to end-2016, with late-stage drilling hitting a 14-quarter high in the same period. However, both early stage and late-stage drilling fell in the March quarter, as did total activity.

Given the seasonality of exploration programs, the drop recorded in the first quarter of 2017 was largely expected, although reported early stage drilling hit an all-time low, as recorded, of 83 projects during the quarter. In contrast, reported minesite drilling actually increased in the March quarter to 84 projects, representing both an all-time high for minesite drilling, and the first instance where minesite drilling surpassed early stage drilling.

The downward trend in early stage drilling is concerning. However, as financing activity by juniors cooled off during the second half of 2016, the positive results from those early stage drilling programs should provide encouragement in refreshing investor interest in the exploration sector.

Budgets also point to minesite efforts

Exploration budgets are collected by S&P Global Market Intelligence as part of the Corporate Exploration Strategies study. Since reaching an all-time high in 2012, exploration budgets have been on the decline. As outlined in the Exploration Budgets by Stage report, budgets across all stages have been falling for over four years. However, the overall share of minesite exploration budgets has consistently increased year-over-year since 2012. In contrast, the share of early stage budgets has decreased from 2013 onwards, and the share devoted to late-stage, although flat in the past two years, remains at about its lowest share since 2004.

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Medium-term supply pipeline impacts

More than four years of depressed exploration activity has contributed to a sharp decline in the number of new deposits being found globally. As companies continue to focus on their least risky assets, early stage exploration activity is not expected to see a significant improvement until metals prices begin to climb consistently, spurring renewed market interest in the sector.

Although companies might be finding sufficient ore at their existing operations to replace near-term production, the medium- and long-term supply chain will require significant investment in the discovery of new grassroots deposits.

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Exploration drilling and budgets increasingly focused on existing mines

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