Within the region, top copper producer Chile remains the leading country for copper exploration with a budget of US$384.7 million, though 6% lower than 2017's US$408.1 million.
Most of the decline was due to a 23% year-over-year fall in copper allocations by Antofagasta PLC, Chile's biggest exploration spender since 2014, to US$101 million. The company significantly reduced its late-stage exploration after completing the study phases at several projects, including Centinela Sulfide and Los Pelambres.
State-owned Codelco, the world's biggest copper producer in 2017, budgeted US$33 million for exploration in Chile, down from US$44 million in 2017. Like Antofagasta, the decrease was due to lower planned late-stage exploration spending, partly due to the completion of studies for the Los Bronces underground mine.
As such, while the decline in Chilean copper budgets may sound like a negative indicator for the sector as a whole, we are less bearish. As properties progress through the pipelines, the completion of drill programs and studies can have a material impact on a single country's total budget. Early-stage/grassroots exploration showed significant strength in 2018, rising 28%, which led us to believe that a positive global trend is very much present in the country.
In Peru, 38 companies collectively budgeted US$209.5 million for copper exploration, a 36%, or US$55.7 million, increase over 2017. Hudbay Minerals Inc.' allocation of US$24 million to the country — mostly for minesite exploration — was the largest increase, followed by Teck Resources Ltd. with a US$22.5 million increase. Conversely, Rio Tinto reduced its Peru allocation by more than half, to US$22 million from US$47 million in 2017.
Outside of Latin America, the U.S. budget of US$207.4 million was 61% higher than 2017's US$128.9 million and is the third largest after Chile and Peru. Allocations by major copper producers Freeport-McMoRan Inc. and BHP Billiton Group accounted for a large portion of the U.S. increase. In particular, Freeport's U.S. copper budget grew by 159% year over year to US$52 million, including an additional US$30 million for minesite exploration.
Although Australia slipped to fourth place, its US$199 million budget was still 43% higher than in 2017. OZ Minerals Ltd. and Rio Tinto increased their copper allocations the most: OZ Minerals' budget more than doubled year over year to US$40.0 million, and Rio Tinto's budget grew by 31% to US$31.0 million.
Junior companies drive copper budget growth
Junior copper explorers saw the largest budget increases in both dollar and percentage terms in 2018. Their combined US$452.9 million copper allocation was 85%, or US$208.7 million, higher year over year and accounted for 57% of the global copper budget growth. Consequently the juniors' share of the copper budget rose to 22% from an all-time low of 14% in 2017.
While major copper companies still account for the majority of copper exploration spending at US$1.31 billion, the rate of growth was smaller, with just an extra US$148.5 million year over year. Intermediate producers' budgets were essentially flat year over year, rising by less than one percent.
Focus shifts to late-stage and feasibility work
While copper budgets have increased for all stages of exploration, planned late-stage/feasibility spending has risen the most in both percentage and dollar terms — 35 % and US$210.9 million, respectively. The increase came mostly from large producers, many with feasibility studies underway, such as Teck Resources and OZ minerals, and also from junior explorers with ongoing studies, notably Ivanhoe Mines Ltd.' Kamoa-Kakula in the Democratic Republic of Congo and SolGold PLC's Cascabel in Ecuador.
Grassroots budgets also increased year over year by US$99.1 million, and the US$755.2 million budget accounted for 36% of the global copper budget. Minesite budgets have posted slightly weaker gains, rising by US$59.3 million, or 13%, year over year to US$508.7 million, to make up 25% of the global total.
Fundamentals support expectation of higher copper budgets again in 2019
The copper supply/demand balance is expected to be tight in 2018 and 2019, with a narrow yet increasing deficit expected out to 2020. Demand growth is set to slightly outpace supply growth, with increasing copper prices and a market narrative of a constrained project pipeline.
The majors will likely continue raising their budgets as the longer-term supply/demand fundamentals and year-over-year improved cash flow encourage them to increase investment in organic growth. That said, the poor performance by copper prices to-date in the second half of 2018 will provide a headwind when budgets are set. While we expect copper prices to improve in 2019, this is the time of year when juniors seek financing for their programs in next year's field season. As juniors are almost wholly reliant on the markets for funding, we expect their budgets to increase by less in 2019 than in 2018.
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