Higher metal prices to push exploration budgets up in 2022, says S&P Global

S&P Global Market Intelligence’s pipeline activity index points to mineral exploration budgets increasing by 5% to 10% in 2022, metals and mining analyst William Mason told a recent online conference.

The increase is not as significant as in previous years, as a projected moderate softening of most metal prices from current levels weigh on the outlook.

“From 2023 to 2025, we expect budgets to pull back slightly as the Covid-19 pandemic economic recovery subsides and global economic growth returns to a more moderate pace,” Mason said during S&P’s recent State of the Market: Mining Q2-21 webinar.

The pipeline activity index levelled off in the second quarter as gains in significant drill results and positive project milestones were offset by a decrease in substantial financings, with the number of initial resource announcements unchanged.

According to Mason, exploration budgets generally move with metal prices, often with a one-year lag.

The pandemic-induced price falls of the March quarter of 2020 have been followed by solid metal price rebounds, with gold and copper hitting record highs at various points since then.

“The improving commodity prices were insufficient or too late, however, to offset other pandemic-related challenges to the exploration sector, resulting in lower budgets for 2020,” said Mason.

The exploration price index rose 31% year-over-year in 2020, leading S&P to project an estimated 25% to 35% increase in exploration budgets in 2021.

A similar budget increase was driven by the metal price rally in 2010, where the price index rose 27% year-over-year, and exploration budgets jumped 44%. In the next two years, substantial budget increases followed by 50% in 2011 and 19% in 2012, supported by a continuing rally in commodity prices, fueled by rising demand from emerging markets, S&P data showed.

Mason also noted that the mergers and acquisitions deal value in the most recent quarter was level with the previous quarter. “We found that strong metal prices deterred high-value deals as only five deals were over $100 million,” said Mason.

The most notable deals within this period were the Regis Resources (ASX: RRL) US$696 million transaction to acquire IGO’s (ASX: IGO) 30% stake in the Tropicana mine, and the acquisition of Roxgold by Fortuna Silver Mines (TSX: FVI) in a US$635 million deal.

Gold made up 80% of the deals in the second quarter and the deal value for nickel was higher than copper for the first quarter in over a year, as First Quantum Minerals (TSX: FM) agreed to sell a 30% stake in its Ravensthorpe nickel mine to South Korean Steelmaker POSCO (NYSE: PKX) for US$240 million.

Canadian buyers still dominated deals in the first half of the year, with Australia and South Korea following behind.

The number of financings was down in the second quarter by 41%. Fundraising activity started slowly compared to the first quarter seeing two months of declines in April and May, where the appetite picked up with an increase in June.

Although lower than the previous quarter, year-to-date financing has now totalled US$20.17 billion, an 8.5% increase on the same period last year.

Gold financing declined throughout the quarter. Despite this, the year-to-date fundraising for gold remains above 2020 averages.

S&P also offered a sweeping outlook across several metals relevant to driving the modern economy forward.

Principal analyst Ronnie Cecil said a ramp-up in green policies globally to foster the renewable energy transition boded well for copper, nickel, lithium and cobalt demand over the medium to long term.

After reaching a record US$10,725 a tonne in May, London Metal Exchange copper cash prices dropped to US$9,377 per tonne as of August 16, dampened by inflation concerns, a firming U.S. dollar, rising stock levels and weaker imports of refined Chinese products in China.

“The tightness in the copper concentrate market is also showing signs of relief with treatment and refining charges rising over recent months, following healthy growth in Latin American mine output. Our average LME three-month copper price forecast for the third and fourth quarters come in at US$9,236 a tonne for the third quarter and US$8,919 a tonne for the fourth quarter,” said Cecil.

Copper prices are expected to be supported by the potential for near-term supply disruptions in Chile, a recovery in ex-China demand and indications of continued Chinese government support for the economy and employment.

Global mine supply growth is expected to weigh on copper prices in 2022 and 2023, with prices dropping to US$8,453 per tonne. By 2024 and 2025, however, more profound deficits and more substantial prices are expected to emerge as copper suppliers struggle to keep up with development growth.

Mixed trends on the supply side have added to some of the price volatility for zinc.

In June and July, seasonal power rationing and curbed smelter production in China’s Yunnan region offset a strong rebound in Peruvian mine output over recent months.

With refined zinc demand growth expected to outpace supply through to 2025, the prospect of diminishing market surpluses has prompted price upgrades to US$2,852 per tonne on average in 2021 to US$2,930 a tonne on average for the year in 2025.

“That said, zinc supply will be boosted by Boliden’s recently announced plans to expand its Odda smelter in Norway, and that looks like that will impact supply by around 2025,” Cecil said.

Meanwhile, nickel prices have hit a seven-year high in late July at US$19,892 per tonne.

Strong fundamentals drove stocks down, said Cecil.

The global economic recovery’s buoying of demand for consumer goods is having a positive impact on nickel prices, which are up from the low US$16,000 per tonne mark in late April.

Robust Chinese stainless-steel production, coupled with recovery-related fiscal stimulus in Europe, is driving nickel demand. Meanwhile, supply disruptions resulting from strike action at Vale’s (NYSE: VALE) Sudbury operations in Canada, which appear now more recently to have been resolved, and local progressat Glencore’s (LSE: GLEN; US-OTC: GLNCY) Koniambo smelter in New Caledonia had helped to reduce the surplus in the nickel market.

Bolstering the positive market sentiment was news of Tesla (Nasdaq: TSLA) recently signing an agreement with BHP (NYSE: BHP; LSE: BHP ASX: BHP) to supply electric vehicle battery-grade nickel.

“We expect the 2021 global primary nickel market surplus to fall to 12,000 tonnes, and that’s from 102,000 tonnes surplus in 2020. This is forecast to drive the average LME three-month nickel price up by 29% to US$17,936 a tonne this year,” said Cecil.

Meanwhile, iron ore prices had fallen from an average of US$212 per tonne in July to US$153 per tonne in the third week of August.

This follows a booming second quarter that saw record prices on the back of record Chinese steel production in May, at an all-time high of US$233 per tonne.

S&P said the Chinese government had ratcheted up pressure on domestic steel mills in recent months to cut output after a recent flood in heightened sentiment towards China’s decarbonization drive.

Iron ore prices are expected to trend lower, averaging US$180 a tonne in the third quarter and dropping to US$166 a tonne in the fourth quarter. Prices are expected to average above US$100 a tonne out to 2025.

On the lithium front, S&P expects the average third-quarter lithium price to edge down to US$10,500 a tonne due to improvements in spodumene supply. By year-end, lithium prices could trend back to the June level of US$11,000 per tonne, buoyed by seasonally strong growth in EV sales in Europe as automakers seek to lower fleet-wide emissions and mitigate penalties.

“Market tightness is expected to support a high lithium carbonate price through to 2022 before prices edge down over 2023 and 2024 as the market moves into surplus before rising back above US$11,000 a tonne in 2025 amid an emerging deficit,” said Cecil.

Supply disruptions for cobalt have helped to support prices, which hit a four-month high in July before stabilizing somewhat as demand waned into early August.

S&P expects cobalt metal prices to increase to US$23 per lb. in the third quarter before falling towards US$19 per lb. in the fourth quarter as bottlenecks in South Africa ease.

“We forecast the cobalt price to decline in 2022 as Glencore’s Mutanda mine restart lifts supply before prices surge back above US$21 per lb. in 2024 and 2025 as the cobalt market moves back into deficit,” said Cecil.