Mining companies cutting $10bn heralds boom

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IronOreStacker Reuters.

Perth - Mining companies are extending massive cuts in exploration budgets for a second year, setting up the next price boom as China continues its relentless pursuit of metals and energy.

Exploration spending plunged by 30 percent or $10 billion last year, squeezing budgets to search for minerals and sustain supplies, according to MinEx Consulting Pty, whose clients include BHP Billiton Ltd., the world’s biggest miner.

Payments may drop another 10 percent this year for geologists, drilling exploratory holes and analysing mineral specks to unearth the next copper, iron ore or gold El Dorado, MinEx said.

Investors in mining companies and metals may welcome the cuts because they’ll help propel a rebound in prices.

Platinum, aluminum, silver, nickel, zinc, lead and uranium all are forecast to rise by 2017, according to the median of analyst estimates compiled Jan. 16 by Bloomberg. The losers will be buyers of cans, cars and all the goods made from metals.

“Companies are doing the right thing by cutting back on exploration,” said Daniel Sacks, who helps manage $107 billion at Investec Asset Management in Cape Town.

“It’s a cyclical industry.”

Budgets Tumble

Rio Tinto Group yesterday said it more than halved exploration and evaluation spending to $948 million last year from $1.97 billion in 2012. OZ Minerals Ltd., an Australian copper producer, this week cut its 2014 exploration budget by 62 percent.

Rio Tinto rose 1.1 percent to A$66.33 at 3:18 p.m. in Sydney, while BHP climbed 2.8 percent, as the materials sub- index of the MSCI Asia Pacific Index advanced 0.9 percent, leading gains in the Asian benchmark.

The austerity has been triggered after a decade-long mining boom peaked in 2012.

That forced producers including BHP, Rio Tinto and Glencore Xstrata Plc to slash spending and sell assets to bolster earnings as more than $60 billion of writedowns mounted and shareholders demanded changes.

Although China, the biggest metals consumer, has slowed its rapid economic expansion, it’s still forecast to grow 7.5 percent this year and 7.2 percent in 2015, the fastest in the world, according to data compiled by Bloomberg.

The Asian nation will be the major driver of world economic growth and could increase demand for some commodities as much as a 75 percent over the next 15 years, BHP Chairman Jac Nasser said on November 20 at a shareholder meeting in Perth.

Enthusiasm Missing

“Are we actually finding enough deposits to replenish what we mine? The answer is, we struggle,” Richard Schodde, managing director of Melbourne-based MinEx Consulting, whose clients also include Barrick Gold Corp., the largest gold producer.

“Enthusiasm or financial capability to fund exploration is fairly limited,” he said in a phone interview.

Today’s slower growth rates in mine output increasingly are being priced into metals, Macquarie Group Ltd. analysts led by Colin Hamilton said in a January 8 report.

The market’s focus may shift toward potential deficits of supply in 2015 and 2016, they said.

“The irony is that the biggest investment cycle in history hasn’t produced enough capacity,” said Markus Bachmann, chief executive of Craton Capital, which manages about $80 million, in a telephone interview from Johannesburg.

Aluminum is forecast to rise 22 percent to $2,204 a metric ton in 2017 from the first quarter this year, according to the median estimate. Uranium is seen 69 percent higher at $66.03 a pound.

The drop in exploration now may create supply shortages because it can take between 10 and 12 years to develop a mine from when a deposit is discovered, MinEx’s Schodde said.

BHP Halved Spending

Companies were pressured to retrench as metals prices tumbled about 12 percent from last year’s high in February, according to the London Metals Exchange Index, a measure of six primary metals.

Iron ore has declined about 16 percent from a year ago. Shares fell even more.

The Bloomberg World Mining Index lost 26 percent in 2013.

BHP, the world’s third biggest producer of nickel, iron ore and copper, almost halved its exploration spending last financial year from a peak of $2.45 billion in the 2012 fiscal year, according to its annual report.

“We simply can’t expect to push forward with every opportunity at the same time and so have prioritised and sequenced our spend on longer-dated evaluation projects,” Rio Tinto’s Chief Financial Officer Chris Lynch said on December 2.

“We are always looking at our overall cash position and you taper the expenditure to what your expectation is,” Dan Lougher, managing director of nickel producer Western Areas Ltd. said by phone from Perth.

His company reduced its exploration budget by 25 percent for this financial year.

Strong Demand

Lougher assesses his budget quarterly and will boost exploration spending should the nickel price increase, he said.

Prices, currently at about $6.67 a pound, would need to gain to at least $7.50 a pound before spending would rise, he said.

The company has two nickel mines and a concentrator at its Forrestania operation in Western Australia.

“It is a challenge for these mining companies because they have to balance the still strong demand that is coming out of Asia -- and particular China in relation to our iron ore -- but with cash flows from operations decreasing from lower commodity prices,” PricewaterhouseCoopers LLP partner Justin Eve said in a phone interview from Perth.

Investors are demanding improved profits this year and further retrenchment in project spending as Citigroup Inc. and Goldman Sachs Group Inc. predict the current commodities slump will deepen in the next few years.

“Anyone who is wisely investing in exploration because they have a long-term picture, they are smart but extraordinarily rare,” said Tom Price, a commodities analyst at UBS AG in Sydney. - Bloomberg News


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