African mineral exploration set to drop as sources of funding dry up

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Dineo Faku

Mineral exploration activity in Africa was likely to decline by 15 percent to 20 percent this year as funding sources had dried up amid the tough global economic challenges, SNL Metals Economics Group senior sales executive David Cox told investors at the 20th Investing in African Mining Indaba in Cape Town yesterday.

Cox said market uncertainty continued to weigh heavily on the industry this year. Without renewed investor interest, the majority of junior companies would be forced to further limit their exploration activities, Cox said.

“It is clear there is an inverse relationship between juniors and majors; the juniors are driven by access to equity and when those markets are favourable, their profits double, and when they don’t they decline,” said Cox, adding that more sovereign funds were going into exploration.

Mining majors have reduced their exploration budgets by 40 percent, and intermediate companies made cuts of 50 percent to their exploration budgets last year, Cox noted. In addition, juniors were now focusing on projects they could advance as funding dried up.

Despite economic challenges, countries had a responsibility for promoting exploration opportunities.

“Every $1 (R11) of exploration will eventually lead to $10 of capital spend, and $88 of revenue, or $6 to $12 in wages. With those numbers it is clear that increasing the exploration within a country is important for driving wealth.”

In order to do that, investors had to have confidence in regulatory regimes as well as security of tenure, Cox said.

Exploration in Africa had dropped between 2004 and 2010, but in the past two years it had picked up again due to gold exploration in west Africa and activity on the Copper Belt.

The Democratic Republic of Congo (DRC), followed by Burkina Faso and South Africa, are the top three exploration destinations on the continent, with the DRC attracting 15 percent of Africa’s exploration funding.

According to Cox, exploration budgets steadily fell to a low of $2 billion in 2002, but with demand from China, and metal price increases in 2008, it scaled a new peak of $13bn.

Due to a fresh metal price spike, there was a 50 percent increase in 2011, and a 19 percent increase in 2012, Cox said. Later, the uncertainty in Europe and the US, together with the fear of a slowdown in China, created challenges of raising equity for junior mining companies.

Last year, global exploration spending fell 30 percent to $14.4bn, Cox said. But South Africa was likely to be on the lower end of the expected 15 percent to 10 percent cut in exploration as some of the juniors had listed on the JSE.

The indaba is being held against the backdrop of labour strife within the platinum sector. Production at Anglo American Platinum, Lonmin and Impala Platinum mines has ground to a halt as a wage strike enters a second week.

In terms of global mining, over the past decade, China had a growing workforce and infrastructure spend. In the next decade there would be a slowdown in urbanisation but the country is still in the middle of a growth process.


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