Canadian exploration spending expected to halve in 2009

Vancouver – For a junior to spend even half as much on exploration in Canada this year as compared to last may now be considered pretty normal, if not pretty good.

Northern Freegold (NFR-V) CEO Bill Harris, for example, sounds oddly upbeat about slashing $4 million from Freegold’s year over year exploration budget. He says Freegold spent $10 million on exploration in 2008, $9 million of which went towards the Freegold Mountain property in the Yukon, but that it plans on spending about $6 million in 2009.

In fact, though Freegold is cutting back 2009 exploration expenditures, the extent to which it is slashing – by a third – is significantly less than most other majors and juniors, according to a Natural Resources Canada (NRCAN) survey of 2009 exploration spending intentions.

The NRCAN survey, filled out by 795 mining and exploration companies, fleshes out the breathtaking scope of cuts to Canadian exploration budgets. The central finding: Overall it looks as if Canadian companies will spend about half as much on exploration in Canada in 2009 as they did in 2008 – $1.5 billion instead of $2.8 billion.

Highlighting the bearishness of Canadian exploration budgets this year, NRCAN notes 100 companies surveyed that spent at least $1 million in 2008 were “reluctant to provide any intentions for 2009.” Likewise, 30 major spending companies, NRCAN says, declared no spending intentions for the year at all.

“Companies are generally re-evaluating their project partnerships and/or spending strategy as financing is suddenly very difficult to obtain,” NRCAN’s Ginette Bouchard, a lead author of the study, says in an e-mail.

The study also underscores a tectonic shift in the pecking order of juniors and seniors as regards spending on exploration in Canada. For the first time since 2004 it appears that the exploration spending of Canadian juniors will fall to match that of the majors.

In 2008 the juniors’ share of exploration spending in Canada was 63% or $1.8 billion as compared to $1 billion for the majors. In 2009, however, NRCAN predicts the spending of juniors will plummet $1 billion to about $800 million.

While the spending of majors will decline, it will be a softer landing. NRCAN forecasts the spending of majors will drop to about $750 million.

Capstone Mining (CS-T, CSFFF-O) president Stephen Quinn agrees that at the moment it is generally easier for producers – at least profitable ones – to fund exploration than juniors.

Capstone, in large part due to steady revenues from precious metals, fairly low costs of copper production and a favourable hedge on copper prices, has not had to cut its exploration budget in Canada. “So I would say the impact of the economy has very little to do with (exploration expenditures at Capstone),” he says.

In 2008 Quinn says Capstone spent about US$6.5 million on exploration in Canada at its Minto copper mine in the Yukon and at the Kutcho property in northern B.C. In 2009 Capstone expects to spend about the same amount, he says.

And, in comparison to other producers, Quinn says Capstone has been fortunate. “In the sense that even at the beginning of the year when things looked a lot more miserable than they do today we were still going to do exploration because we had our downside protected by our hedge,” he says. “So we knew we were going to make money.”

For other producers, however, money has been a much bigger issue. “There are some producers around that have been very tightly squeezed and have cut their exploration expenditures,” Quinn says.

Teck (TCK.b, TCK-N) is one of those producers that has not been so fortunate. With debts to restructure and low commodity prices eating into its bottom line, it has had to essentially quarter its exploration expenditures.

In an e-mail Teck spokesperson Dario Alvarez says: “Current global economic conditions dictate that we take all prudent steps available to us to reduce spending.”

Though not specific to Canada according to Alvarez Teck’s global exploration expenditures in 2008 were $137 million. In 2009 $37 million is the forecast (excluding mine, coal and development project exploration).

As for once flush juniors now feeling the squeeze of depressed markets the immediate effect of lighter pocket books is to force them to prioritize drill targets.

At Freegold, even if in a relatively comfortable position, Harris says whereas it spent $1 million last year on its Burro Creek project in Arizona, and it drilled several targets at Freegold Mountain, this year it will focus all of its drilling resources on the Nucleus zone where it has hit as much as 1 metre grading 410 grams gold per tonne in hole 99.

Instead of drilling those other Yukon targets, Harris says, Freegold will conduct a large – and cheaper – sampling program across the Freegold Mountain property. The sampling, he hopes, will lead to future drill programs in a resurgent market. “And we’ll be talking 25,000 metres (drilled) like we used to,” he says.

Looking to 2010 and beyond, Harris’ advice is as good as it gets for junior and major alike. “What we’re going to try and do is tuck a few more dollars into our jeans,” he says.