FACTS ‘N’ FIGURES — Drops in spending level off

Although base metals and gold prices are showing signs of strength, budget increases usually lag behind improved metal prices by a year.

Exploration spending will continue to drop in the near term, but not as sharply as in the past two years, according to a report from Halifax, N.S.-based Metals Economics Group (MEG).

The latest edition of the annual publication Corporate Exploration Strategies estimates that in 1999 spending on worldwide non-ferrous metals exploration will have dropped 23%, to $2.7 billion, from $3.5 billion in 1998. Spending last year fell 31% from a record high of $5.1 billion in 1997.

The sharp declines over the past two years are blamed on the lingering effects of the Asian financial crisis, poor metal prices, difficulty in raising capital and cutbacks by major mining firms. As a result, exploration spending in every region of the world is down this year. The latest report is based on 132 companies with a minimum exploration budget of $2.9 million, accounting for an estimated 80% of all exploration spending worldwide, or a total of $2.2 billion. (MEG calculates that an additional $500 million was spent this year by companies ineligible for the survey, for an estimated world total of $2.7 million.) This is down from the 182 companies that last year spent a total of $2.8 billion. (Including the budgets of ineligible companies, the overall total in 1998 is estimated at $3.5 billion.)

Exploration budgets are expected to remain flat in the short term, but they will cease to fall as sharply as in 1998 and 1999. Although base metals and gold prices are showing signs of strength, budget increases usually lag behind improved metal prices by a year. In addition, lost liquidity of junior explorers in sour equity markets is not so quickly reversed.

The latest study shows that budget cuts by major firms were accompanied by a dramatic increase in acquisition activity as cheap share prices spawned mergers and a feeding frenzy for cash-strapped companies with promising projects.

The number of companies with budgets above $2.9 million (the minimum for inclusion in the study) dropped 53% between 1997 and 1999, from 279 to 132, while the number of companies with budgets below $2.9 million increased proportionately as juniors struggled to raise funds.

In 1999, most of the world’s exploration dollars were spent in Latin America — more than $630 million (down $184 million from 1998). Australia attracted the next highest amount of exploration spending, at $404 million (down $90.2 million), followed by Africa at $323 million (down $170 million), Canada at $234 million ($73.9 million), the U.S. at $216 million (down $26.6 million), and Southeast Asia at $175 million (down $90.3 million). Spending in the rest of the world was $181 million, off by $27.7 million.

In terms of the percentage of exploration dollars spent throughout the world, the U.S. showed the greatest percentage increase, up to 10% in 1999 from 8.6% last year. Australia had the second-largest gain, attracting 18.7% this year, up from 17.5% last year. Latin America’s share rose slightly to 29.1% this year from 28.8% in 1998.

The largest percentage decline this year occurred in Africa, where levels dropped to 14.9% from 17.5% in 1998. Southeast Asia showed the next-largest percentage decrease, dropping to 8.1% of 1999’s overall total, compared with 9.4% in 1998. Canada’s share of overall spending dropped slightly to 10.8% from 10.9% last year.

The percentage of 1999’s total exploration budget of $2.2 billion spent throughout the rest of the world rose a full point, to 8.4% from 7.4% in 1998.