PwC: Exploration spending, costs soar

Exploration spending in the 12 months leading to June 30 increased 115% year-on-year, while total production costs have more than quintupled since 2006, rising more than 23% between 2010 and 2011, consulting firm PwC concludes in its annual study of the top 100 mining companies listed on the TSX Venture Exchange.

But the significant drop in capital raising and initial public offering activity during the third quarter could spell trouble, Junior Mine 2011 warns. “The current decline of IPO activity and capital raises is similar to 2008 conditions,” says John Gravelle, PwC’s mining leader for North America and South America. “If what happened in 2008 holds true, then exploration spending could come to a grinding halt if things don’t pick up by the start of 2012.”

The good news for juniors is that larger mining companies are reducing their exploration expenditures, essentially outsourcing to the juniors. “Investing less of their money in exploration means the major mining companies must acquire junior mining companies,” the study says. “Acquisitions will play a key role in mid-sized and senior mining companies’ expansion plans.”

Another positive factor is that Chinese companies are continuing to invest in the mining industry, which the study says “demonstrates that North Americans [outside of the mining industry] are much more worried about the state of China’s economy than Chinese companies are.”

PwC also notes that production costs continued to rise for the sixth year in a row. This year production costs rose 23% year-on-year. Since Junior Mine‘s first edition in 2006, production costs for the top-100 companies on the venture quintupled, from $162 million to $865 million. Among the drivers are rising electricity prices, royalties, taxes and oil prices, which have grown faster than base metals since 1999.

Among the junior companies interviewed about their top challenges, nearly 50% are concerned about labour shortages. According to PwC data, half of the workforce in mining is eligible to retire by 2021.

Interestingly, 50 of the top-100 companies on the Venture Exchange are exploring for, developing or mining gold, showing a 5% drop from the same period last year. 

The study also notes that the number of junior companies operating primarily in Africa has grown to nine, from just one in 2009. But when the survey asked mining executives which region had the most exploration potential over the next five to 10 years – Africa or the Arctic – the most  popular answer was the Arctic.