Exploration companies tightened belts in 2001

With prices for base and precious metals sagging, funding for exploration has become scarce, a fact borne out by Halifax-based Metals Economic Group’s latest study of exploration budgets for 679 companies worldwide.

The MEG study indicates that spending on exploration fell in 2001 for the fourth consecutive year. At US$2.2 billion, estimated expenditures were 15% lower than in 2000 and 58% lower than at their peak of US$5.2 billion in 1997. Year 2001 budgets were also the lowest since the US$2.5 billion estimated in 1993 (as far back as the study goes).

MEG says it expects the trend to continue as the wave of consolidation continues to sweep across the industry. In 2000, five major mining companies vanished as a result of mergers or takeovers, among them: Rio Tinto (RTP-N), which swallowed Australia’s North; Battle Mountain Gold, which merged with Newmont Mining (NEM-N); Alcan (AL-T), which combined with Switzerland’s Algroup (though political pressure put the kibosh on a 3-way merger with France’s Pechiney); and London-based Billiton, which acquired Rio Algom.

The trend continued in 2001: Barrick Gold (ABX-T) agreed to snap up Homestake Mining (HM-N) and become the world’s second-largest gold producer; Goldfields and fellow Aussie miner Delta Gold inked a deal to merge; Billiton joined with Australia’s BHP (BHP-N); Teck (TEK-T) scooped up its 50%-owned subsidiary, Cominco; and most recently, Newmont and AngloGold (AU-N) battled it out over Australia’s Normandy Mining (NDY-T).

Another trend is the move by major mining companies away from early-stage exploration in favour of relying on juniors to dig up discoveries. Problem is, the smaller companies are having difficulty raising money. Since June 30, 1998, the market capitalization of mining companies valued at less than $200 million has slipped by about 28%.

Base metal discoveries by junior explorers remained mostly flat from 1998 and dipped significantly in early 2001. The number of gold discoveries is worse, having declined steadily since 1997. MEG says that though the decline in discoveries has not affected existing production, it could cut into future mine development, especially if metal prices remain low.

No region of the globe was immune to shrinking budgets. In two regions — the U.S. and the Pacific/Southeast Asia — estimated spending during 2001 plummeted by 33% from year 2000 levels.

U.S. spending shrank to US$158.2 million from US$234.5 million, partly reflecting more stringent mining laws aimed at increased environmental protection. The U.S. Bureau of Land Management (BLM) admits that the new laws might take a $877-million bite out of annual production and threaten the loss of more than 6,000 jobs. The changes, which are slated to take effect Dec. 31, were imposed by former President Bill Clinton just before he left office. Congress is currently challenging the revisions.

In the case of the Pacific and Southeast Asia, spending dropped to US$133 million from US$199.2 million. The dwindling budgets reflect the political instability and civil unrest in the region. Much of the turmoil is centred on the mining industry in Indonesia, the world’s most populous Muslim country, where allocations have been on the slide since 1997.

In early 2001, Newmont’s nearly depleted Minahasa gold operation in North Sulawesi province was briefly overrun by locals who claimed they had not been properly compensated for their land. Newmont holds an 80% interest in Minahasa through its subsidiary, P.T. Newmont Minahasa Raya. In early 2000, the North Sulawesi government briefly halted production at the mine and looked to extract additional revenue from the company by imposing a tax on overburden. Newmont was able to avert an expensive situation by reaching a settlement with the Department of Mines and Mineral Resources.

In Iriana Jaya, Freeport-McMoRan Copper & Gold (FCX-N) says its giant Grasberg copper-gold mine in Indonesia is operating “exceptionally well” in spite of political tensions. The company says it has improved relations with the indigenous community by establishing a trust for the benefit of the original tribal people around the mine site.

Canada and Africa saw the smallest drops in spending between the two periods, thanks in large part to a boost in exploration for diamonds and platinum group metals. Budgets in Canada slipped just 4% to US$332.9 million from 2000 levels, whereas Africa saw budgets slide about 6% to US$276.9 million.

Interest in Canada’s diamond scene has been spurred by the success of the nation’s first diamond mine, Ekati, in the Northwest Territories. During the 16 months ended May 31, the mine, owned 80% by BHP, cranked out 3.6 million carats worth an average of US$165 per carat. The remaining 20% of the mine is split between geologists Charles Fipke and Stewart Blusson.

About 30 km southeast of Ekati is the $1.3-billion Diavik mine, which is slated to start up in April 2003. In the first half of its projected 20-year life, production is expected to average 7 million carats annually, representing more than 5%, by value, of the world’s diamond production. The mine is 60%-owned and operated by Rio Tinto. Toronto-based Aber Diamond (ABZ-T) holds the remaining 40%.

Of late, diamond exploration has heated up in Quebec, where Ashton Mining of Canada (ACA-T) and Quebec government-owned Soquem are working on their Otish Mountains project in north-central portion of the province. Also in Quebec, Majescor has hooked up with BHP Billiton, Canabrava Diamond (CNB-V) and, most recently, Iriana Resources (ir-t) to explore the nearby Portage, Mistassini and Portage Extension projects, respectively. Twin Mining (TWG-T) is finding commercial-size gem-quality diamonds on the Torngat diamond-bearing dyke system in the Alluviaq Fjord area of northern Quebec.