MEG survey predicts junior explorer ranks will decline this year As junior equity financing declined by $6 billion in 2008, a special Mineral Economics Group survey for PDAC has found junior explorers account for less than half of today's exploration spending. Author: Dorothy Kosich Posted: Wednesday , 04 Mar 2009 RENO, NV - A special report by the Metals Economics Group for the PDAC meeting in Toronto reveals that, while the mining industry's aggregate planned exploration budget reached an all-time high last year, actual spending will probably be lower. Nevertheless, although severe cuts were made to many mining and junior explorer exploration programs during the fourth-quarter 2008, MEG still expects the total amount actually spent on nonferrous exploration during the year to have reached an all-time high. Explorers had planned to spend a total of US$13.2 billion on nonferrous exploration last year. However MEG advised "the substantial increase in exploration budgets over the past few years has not resulted in a proportionate rise in actual activity on the ground." Companies responding to MEG's survey expected an average year-on-year inflationary increase of 15% last year "with most companies predicting an increase of 10%-30%." Slower growth in junior exploration budget, combined with increased spending by major companies, "decreased the juniors' share of worldwide exploration total to less than 50% in 2008, from more than half the worldwide total in each of the previous two years," MEG said. While junior companies' exploration budgets surely peaked in 2008, MEG noted "dismal equity markets and tumbling commodity prices have severely diminished most of the group's near-term access to capital." MEG estimated that junior equity financings for exploration declined by $6 billion last year. "The juniors' dependence on equity financing to fund exploration makes them the most vulnerable sector in the industry; with the evaporation of easy access to capital now affecting many junior explorations, 2009 will not be an exception." Nevertheless, the survey noted, "juniors rarely spend all the money raised in the name of exploration on actual exploration in a given year. ...Most juniors with cash will likely cut exploration and development plans to conserve funds in an effort to survive until conditions improve, focusing on their most promising projects," "Those without cash will simply disappear." Meanwhile, although MEG expects the aggregate budgets of major and intermediate explorers to decline in 2009, "the inevitable contraction in the number of active junior explorers this year, coupled with a reduction in the individual budgets of those that do have the cash to spend, will result in the juniors accounting for most of the cuts to the industry's total exploration spending in 2009." After several years of strong exploration growth in higher-risk countries, the survey found the growth rates in some of these nations "decreased markedly in 2008-especially in a number of countries in Africa and our rest-of-world region." "While this easing of growth may be attributable to increased resource nationalism (both real and perceived) in some countries, it is also likely that some companies anticipated a downturn in the industry and elected to focus more on traditional stable and mining-friendly regions like Canada, Australia, and some countries in Latin America. " "Given the ongoing economic crisis and sharp decline in equity financing available to junior companies, which tend to focus on riskier areas," MEG anticipates this year's exploration spending normally allocated to higher-risk regions will decline more steeply than in more stable countries. The survey also revealed that for the first time since 1989, companies budgeted more on exploration for base metals than gold last year. Copper expenditures accounted for at least half of the base metals total for more than a decade. Only diamond exploration budgets declined last year for this first time since 2001. "As a result, the percentage of total 2008 exploration allocated devoted to diamonds decreased from 10% to less than 8%." Africa and Canada accounted for 80% of total worldwide budget exploration in 2008. Nonetheless, "due to the precipitous fall in prices for every metal but gold, exploration allocations will decline in dollar terms in 2008," MEG predicted. "With gold forecast to continue to fare better than other metals in the near term, we expect that the percentage of exploration budgets allocated to gold will increase in 2009, and that gold will regain its position as the top exploration target-primarily at the expense of base metals." Uranium exploration also increased last year with 383 companies collectively spending $1.15 billion, up 23% from 2007 and representing more than 8% of $13.75 billion spent worldwide for mining exploration as a whole. Minesite budgets increased 37% last year, followed by late stage (up by 29%) to account for 22% and 42% of the worldwide budget respectively, while grassroots budgets rose by only 18% to a total share of exploration to just over 36%. "This represents the fourth consecutive year that late-stage spending outweighed grassroots spending, and continued the steady decline in the proportion of budgets allocated to early-stage work, from a peak of 53% in 1996 to its current nadir." MEG suggested that when and where metals prices eventually stabilize and begin to recover "will ultimately define the depth and breadth of the current exploration downturn." However, the lack of available financing will generate a contraction in the number of active junior explorers and a significant reduction in the budgets of those juniors that do have cash to spend. "As a result, we expect juniors to account for the largest share of cuts to the industry's total planned exploration spending in 2009," MEG predicted.