Junior explorers face 'cash drought'

In addressing Melbourne's Mines and Money conference on 14 June, MinEx managing director Richard Schodde said the number of significant mineral discoveries in Australia had fallen to among the lowest levels in five decades.In a reversal of roles, over 70% of significant discoveries in Australia are now coming from junior companies. The once dominant contribution of the largest and best-financed companies in the sector, according to Schodde's detailed analysis of exploration trends, has steadily fallen.Similar trends are evident outside Australia. Schodde's data show a worldwide tendency for large companies to abandon their quests for new mineral deposits.Are big discoveries now rare?The falling contribution of large companies should not surprise anyone. There are fewer of them. Mergers and acquisitions over the past several decades have removed some of the industry's formerly highest-profile names.Many of those now absent companies had managed global exploration programs, including through support for junior partners in their more localised mineral searches.Companies like MIM Holdings and Western Mining were driven, at least in part, by a belief and expectation that discoveries could impact the size and trajectory of their overall businesses. Although the remaining industry leaders are generally larger and more financially secure than their predecessors, they face challenges which limit their impacts on mineral discovery rates. Discoveries big enough to make a meaningful financial impact on today's industry leaders are exceedingly rare. Meanwhile, their capital-hungry existing operations are prone to rising costs. And, without clear growth paths, shareholders are keen to claw back a larger allocation of operational cash flows.While the annual number of discoveries is no higher than 50 years ago, the number of companies seeking new mineral deposits has risen dramatically. Cash drought likely for juniorsDespite hundreds of companies displaying sometimes outrageous optimism, as they pitch for funds, the track record is extremely poor. Schodde puts the number of significant Australian discoveries at just 12-15 a year currently. With around 800 surviving ASX-listed companies and many dozens more having given up, the chance of success is barely 1-2% a year. With rising interest rates and high inflation sapping the spending power of retail investors, the primary source of the industry's exploration capital is increasingly reluctant to proffer support. Schodde foresees a "cash drought" for local junior explorers.In any case, a disproportionate amount of exploration funding still flows into the search for gold and not the critical minerals needed to facilitate the global energy transition.The Australian Bureau of Statistics has estimated 2022 Australian exploration expenditures at A$4.1 billion, with about one-third spent on new deposits, compared to an inflation-adjusted A$4.6 billion in 2012. Schodde's industry cash flow analysis shows the amount of capital raised in the December quarter of 2022 has fallen to among the lowest levels experienced in the past 20 years and hovering around the rates of completed capital raisings at the turn of the century.Expenses now much higherSchodde estimates that the average cost of a significant discovery is now around US$200 million, four times more than 20 years ago, after adjusting for inflation.Operating expenses are now outstripping capital inflow leaving the industry in a precarious financial position more generally associated with cyclically weak conditions.The Schodde analysis points to a deep-seated structural problem. The trends leading to the present position have been tracking in much the same direction not just for a few months or even several years but for decades.At current and prospective rates of discovery, global energy transition targets will become impossible challenges. Billions of dollars supposedly on the sidelines ready to support critical metals production are not helping to boost discovery numbers as fund custodians eye lower-risk mine developments and the safety of downstream production as preferred destinations for their investible capital.Last year, BHP adopted a new approach to accelerate flagging discovery rates, using a series of strategically directed but modest capital injections. That effort, however commendable, remains tiny in the context of what is needed. It does, however, recognise that a different approach was needed.Government support for the industry has done little directly to change prospective outcomes. Most government-led initiatives in Europe, the US and Australia focus on metal demand creation not supply support.Companies have been trumpeting the prospect of surging commodity prices, as metal needs outstrip what can be supplied, to lure investors. Without that marketing spin, the industry would be lagging still further behind in meeting global needs.Climate change policies not popularIn any event, previously announced official climate targets impacting metal use are by no means locked away as public opposition to decarbonisation policies grows.Against all expectations, the British Conservative Party retained the seat of former Prime Minister Boris Johnson at a by-election last week as voters pushed back against the environmental policies of London Lord Mayor Sadiq Khan. The result has opened a debate about whether climate change targets should be moderated to recognise their impact on daily lives.Governments elsewhere in Europe also face stronger opposition to their climate change policies from voters already fighting intensifying cost of living pressures.In Australia, farmers are aggressively protesting loss of land access due to power transmission lines passing over their properties to connect city-based consumers to remote renewable power sites. Governments are edging toward some tough choices between adherence to climate change targets and longevity in office. Policy objectives will have to adapt, in any case, as evidence mounts that the required number of development-quality mineral discoveries remains elusive. The rewards for exploration are simply not strong enough to support the needed funding or meet the energy transition needs. A 1980s business model is not fit for purpose. Schodde himself urges more spending on exploration to facilitate a low carbon future. But, if something is impossible, chances are it will not happen.*John Robertson is a director of EIM Capital Managers, an Australia-based funds-management group. He has worked as a policy economist, business strategist and investment-market professional for nearly 30 years, after starting his career as a federal treasury economist in Canberra, Australia

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