Exploration sector's recovery continues but still a way to go

At the end of last year, the Queensland Exploration Council published the 2018 edition of their excellent Queensland Exploration Scorecard, which they have entitled "Optimism Abounds". In the same week the Australian Bureau of Statistics (ABS) released their latest data for mineral exploration expenditure, which showed a 26 percent increase on the preceding 12 months.

In this insight, we drill (pun intended) further into these two important sources of information about the state of the mineral exploration sector in Australia to assess whether everything is as rosy as the headlines suggest.

An uneven recovery across the States and commodities

A 26 percent lift in mineral exploration expenditure and a 22.5 percent lift in metres drilled are not results to be sniffed at. For example, the trend estimate of 2.6 million metres drilled in the September quarter 2018 is a strong result in historical terms, being eclipsed only by the 2.8 million metres per quarter in 2011-12 and the 3.3 million metres per quarter back in 1996-97.

The beginning of the recovery in total Australian mineral exploration expenditure can be pinpointed to around the September quarter in 2016, with quarterly expenditure over the subsequent two years lifting by $206 million to just over $561 million in the most recent quarter (in trend terms).

However, to put this recent recovery in perspective, at the last peak back in 2011-12, mineral exploration expenditure for Australia was averaging $980 million per quarter.

So what has been happening around the States and the commodity mix?

New South Wales
It might surprise that quarterly exploration expenditure has doubled in New South Wales over the past two years and is now running at similar levels to that of the previous peak in 2011-12. The lift in New South Wales exploration activity can be attributed to nickel/cobalt and copper which have replaced the previously dominant coal. Certainly it would seem that the battery and electric vehicle revolution has been good news for exploration in New South Wales – read more about expanding opportunities for "New Energy Minerals" in Australia here.

Queensland's exploration expenditure of $75 million in the most recent quarter compares with the $242 million per quarter average in 2011-12, with coal alone accounting for $180 million of the total back then.  The recovery in Queensland exploration in the past two years has been due to base metals and some pick-up in coal, but the latter at a fraction of its peak. This coal result possibly reflects the challenges facing potential new and expanded thermal coal projects in the Surat Basin (the lack of a rail connection to the Port of Gladstone) and in the Galilee Basin, where first-mover Adani's challenges are well-documented.

McCullough Robertson has though seen plenty of client action in the coking coal sector over the past twelve months, with new asset owners' growth plans possibly translating into more exploration activity in 2019.

Western Australia
Even WA's impressive exploration expenditure of $345 million in the September quarter compares with an average of over $520 million per quarter in 2011-12, half of which was in iron ore.  In recent quarters iron ore exploration has been running at below 30 percent of the 2011-12 level. This could of course reflect that there is already very good knowledge of iron ore deposits. Once a strong performer in the West, uranium exploration has fallen to negligible levels. This result is not surprising given the then new State Government's announcement in June 2017 that it would not approve any future uranium mining lease applications, while honouring four mining lease approvals granted by the previous government.  There has been a recent recovery in base metals exploration but still well short of 2011-12 levels. The star performer in Western Australia in 2018 has been gold exploration, accounting for about half of all exploration expenditure.

South Australia
Once regarded as the exploration pacesetter, trend exploration expenditure in South Australia was just $24 million in the September quarter compared to the $83 million per quarter recorded as recently as 2011-12. Whereas South Australia was previously a strong performer in exploration for copper, iron ore and uranium, in 2018 iron ore and uranium exploration has been negligible and copper is showing signs of recovery but well short of the halcyon days of 2011-12. That may change following BHP's announcement in late 2018 of early stage exploration results which point to a potentially significant copper-gold deposit quite close to their existing Olympic Dam operation.

From a very low base, there has been a strong lift in exploration in Victoria, almost entirely due to gold exploration. Indeed, exploration expenditure in Victoria in recent quarters is well above the previous peak in 2009-10 which was also a strong period for gold exploration.

Northern Territory
2018 has also seen a recovery in exploration activity in the Northern Territory (NT).  In the NT, the recent recovery has been led by gold but activity is still well below the previous peak. Once a strong performer, uranium exploration in the NT is now virtually non-existent, with the only operating uranium mine in the NT, the Ranger mine, to close in 2021 and the nearby Jabiluka deposit will not proceed without Traditional Owner consent. While there has been some recovery in the uranium spot price, there remains considerable uncertainty about the future of nuclear power in the post-Fukushima era.

Key takeaways

To sum up, overall mineral exploration activity is still well down on the previous peak in 2011 – 2012 due to the sharp reduction in bulk mineral (coal and iron ore) and uranium exploration, partially offset by a strong lift in gold and base metals exploration.  While Western Australia continues to dominate mineral exploration activity in Australia, the surprise packets have been New South Wales and Victoria, with the latter having moved ahead of South Australia. For the foreseeable future we expect that base metals/battery minerals and gold will be the bright spots in mineral exploration.

An upbeat scorecard

The 2018 Queensland Exploration Scorecard takes a very upbeat view of the recent recovery in exploration activity in the State.  The Scorecard reports the results of a survey of explorer expectations for expenditure over the next 12 months. The survey found that about one-third of respondents expected to increase their expenditure by more than 25 percent. In addition, another nearly 30 percent of respondents expect to increase expenditure by 10-25 percent.

The Scorecard quotes minerals industry analysts, Austex, as reporting that listed junior resource companies lifted their exploration expenditure in 2017-18 by 50 percent and that they targeted base and precious metals plus so-called "strategic minerals" such as cobalt, lithium and tungsten.  However, the Scorecard also cites ABS data that shows that nearly three-quarters of exploration expenditure in Queensland in 2017-18 was on existing deposits, rather than in greenfields areas.

The Scorecard's annual sentiment survey continues to report that the most positive factor about exploring in Queensland is its resource prospectivity. That should come as no surprise given that in the most recent Fraser Institute mining survey, Queensland was ranked third in the world for its resource prospectivity.

The sentiment survey also gives positive scores for the quality of geoscientific data, departmental assistance, community perceptions and, for the first time since the survey commenced in 2010-11, access to investment capital. Notwithstanding the upbeat headline for the Scorecard, Queensland's apparent exploration under performance may possibly be explained by the sentiment survey's negative scores for factors such as land available for exploration, cultural heritage and native title regulations, conduct and compensation agreements, policy uncertainty and environmental regulation (The Fraser Institute ranked Queensland at number 31 for "policy perceptions").

Closing thoughts

McCullough Robertson's dedicated Resources Project Approvals team regularly advises resources clients in these areas, and are available to provide expert guidance in environment approvals, regulation, stakeholder management, and native title and cultural heritage considerations.

The Queensland Exploration Council is to be congratulated on another warts and all analysis of exploration in Queensland.They can be forgiven for taking a glass half full approach this year given the pummelling exploration had taken in recent years. Hopefully the lift in activity by listed juniors and the positive expectations for exploration expenditure for the year ahead are pointers to a continued recovery in the State's exploration sector.

However, the message coming through from the ABS data is that Queensland cannot expect coal to return exploration to the glory days and Queensland needs to take seriously the competition being presented by New South Wales.

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