So, the industry remains highly fragmented. Looking at the data in aggregate, out of the total population of companies for which we try to gather data for our annual survey, 73% of companies planned exploration in 2012. In 2018, over 50% of the companies in the population had no planned spend in 2018. So while everyone is spending less, there are now more inactive companies than in 2012, and the industry remains highly fragmented.
As a product of the growth in exploration to 2012, followed by the subsequent slowdown to 2016, we can see the effects on the global reserve base. Plotted here are the total reserves, excluding resources, for the copper and gold industries within our asset database. For copper, you can see a large increase in the reserve tonnage and the tonnage of contained copper within that reserve from 2008, as the fruits of exploration and reserve delineation add significant tonnage to the reserve base. Subsequent to 2016 and 2017, however, the global reserve base starts to contract. This was a period of large scale projects coming onstream, and extraction rates of mined material from the reserve base led overall reserve tonnages to decline following the same trajectory — there were no perceptible grade effects, simply extraction outpaced additions at the aggregate level. For gold, we see large tonnages added from 2008 to 2012, as exploration spending ramped up. Then, as prices fell and exploration spending tailed off dramatically, we saw a change in trajectory for the trail on the chart, highlighted in green. Tonnage was still being added to the global reserve base to counter extraction rates. However, the grade of this material was noticeably lower, such that while tonnage remained constant, the volume of contained gold within that tonnage shrank. At the same time, industry average reserve grades fell; the line moved to the left on a flat trajectory.
Breaking down the data set to a frequency chart of contained gold organized by grade bands, we can see that between 2008 and 2012, the global reserve base was bolstered by large additions of low grade materials — 0-1 g/t Au bands in light blue and dark blue. Between 2012 and 2017, as prices fell away, we didn't see large reductions in those bands. We saw the distribution stay remarkably constant, with extraction bringing some deposits in the middle grade bands — 1-2 g/t Au — downwards in terms of contained gold.
To demonstrate that point more clearly, let's look at the number of deposits included in those grade bands. Between the three charts, as time passes, the number of deposits in each of the lower-grade bands is increasing, and we don't see a reduction in the number of deposits in the 1-2 g/t Au band. We see that rising to 2017. In essence, the reserve grade chart squashes leftwards as lower grade deposits grow to dominate. The majority of this trend can be explained by the addition of large reserve tonnages from low-grade, open-pittable deposits in the Americas.
And at the very early stage, initial resource announcement outcomes have followed a declining trend, both in terms of the number of deposits announcing their first NI-43-101 or Joint Ore Reserves Committee-compliant resource and the quantity of metal contained within those resources. We are a far cry from where we were in initial resource exploration outcomes in 2012, and this shows the lack of focus on the grassroots that we talked of earlier.
The same patterns can be seen in copper, with additions to the reserve base concentrated in the low-grade bulk-tonnage copper deposits.
And we will look at the copper frequency chart for a moment to see the similar story to gold: strong growth in the number of deposits in the low-grade reserve bands. Interestingly for copper, though, we don't see much change between 2012 and 2017.
Along with the declining budgets allocated to copper, we have seen an overall reduction in activity in initial resource announcements. Copper differs slightly to gold in that a few deposits announcing resources can sway the contained copper figures immensely due to the nature of the deposits. Instead, let's focus on the line chart, which shows a clear declining trend in the number of announcements and budgets tailed off. In 2018 year-to-date, that much higher volume of contained copper was contained within just six announcements, compared with close to 60 in 2012.
A key reason for the sharp drop in exploration budgets, the rise in inactive explorers and the consequent drop in exploration outcomes is the fact that industry funding dropped off sharply once prices began a downtrend. I've highlighted the lows in 2015 and 2016, the elevated levels as prices and sentiment recovered in 2016, 2017 and 2018, but look — importantly, we are nowhere near where we were back in 2012. Let's contrast the 20%-30% lower prices with the scale of difference in the levels of industry funding. This highlights the plight of the junior sector and the scarcity of capital.
What about the majors? Their budgets are driven by profitability and free cash flow. Plotted here are the total cash margins, the measure of short term minesite profitability for the gold industry. You can clearly see the reason behind the sharp fall in major budget dollar allocations by company when your margins have shrunk so significantly. And in 2016-2018, we see a recovery in margins, and the data shows a concurrent increase in major budgets.
The same trends are visible for copper: a marked decline in margins along with prices that matches falls in budget allocations, followed by a recovery in margins and budgets in recent
Lastly, I wanted to highlight work we have done on the population of major mining companies in copper and gold to quantify the cost of getting one unit of metal in reserves through either M&A activity or through organic exploration. It is 15 times more expensive to buy copper than it is to find it, at 45 cents per pound. For gold, it is less than five times more expensive to acquire a unit of reserves than it is to find it organically. On average, over the 10-year periods studied, around one-third of reserve growth in both commodities came from M&A and two-thirds from exploration.
So, to conclude, I've outlined a few positives and negatives to be aware of. On the plus side, industry financials, which we did not show, are improving. Exploration budgets are rising for the second consecutive year, and margins and cash flow have, on the whole, been increasing. This is added to growth year on year in some of the indicators that we track in our monthly industry monitor publication, such as drill results. On the negative side, we see depressed levels of grassroots activity, a declining reserve base for copper and gold, lower gold reserve grades, a lack of discoveries and initial resource announcements, a thin project pipeline for copper and gold and a fragmented exploration sector. So while there is cause for optimism looking at the activity in the pipeline feeding commodity supply, it's cautious optimism given the mixed indicators.
This article was published by S&P Global Market Intelligence and not by S&P Global Ratings, which is a separately managed division of S&P Global.
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