When I joined the mining industry in 1975, most of the global exploration effort was conducted by the major mining companies. This started to change in the early 1980s, with junior companies increasingly taking up the initiative. This made sense; men in suits ensconced at head offices in big cities were not (and are not) ideal decision-makers for what is an art as well as a science.
As I explained in a recent interview with Proactive Investor, for much of the past three decades the grass-roots search for metals and minerals has been led by companies without producing assets, and which are, often as not, based in Vancouver or Perth. These companies were (and are) frequently led by skilled geologists, who could operate outside the big-company culture and take risks that the majors wouldn't.
In general it was a model that worked, although investors had to be aware of the 'promoters' (we had an adage at Mining Journal that the more gold on the CEO, the less the company was likely to have in its deposit). These junior companies could not fund their exploration from cash flow, but the model worked because risk-finance was readily available to them as, back then, mining was an attractive sector to a wide range of investors.
This has changed over the past few years, with general investors becoming averse to risk — which is especially problematic for a sector whose assets are buried and subject to the vagaries of nature. With accurate evaluation so difficult, it is hardly surprising that non-specialist fund managers have focused on producers rather than explorers.
S&P Global Market Intelligence (SPGMI) estimates that financing in April was at its highest in seven months at US$1.2 billion. Funding for precious and base metals, however, was down, with the overall increase being attributed to much higher financing for speciality metals — and even that was due to a single financing (Mineral Resources Ltd's US$700 million lithium funding).
SPGMI confirmed that the dearth of exploration finance has started to impact the search for metals and minerals. Projects reporting drilling activity in April fell to a 32-month low of 170 projects, compared with 310 projects in October 2018. Canada and Australia continue to perform relatively well (with 49 and 48 projects, respectively, announcing drill results in April) but the numbers elsewhere are meagre.
The problem is made even worse by the producers themselves starting to invest in producing assets rather than in the explorers and developers of the mines of the future.
SPGMI reported recently that the value of mergers and acquisitions in 2018 more than doubled to a six-year high of US$24.9 billion. This expenditure was almost equally divided between base-metals and gold M&A, with the latter rising 82% year-on-year to US$11.7 billion — this increase was entirely due to a single deal (Barrick's US$6.1 billion merger with Randgold), and the price paid for insitu gold rose four-fold to an eight-year high of US$89/oz.
Most of the M&A activity last year was for producing rather than developing assets, and the gap is widening between the mineral resources being discovered and what will be required for future consumption.
The looming supply shortfall is made worse by an apparently inevitable rise in demand for mined products. There is a well-demonstrated, and hardly surprising, direct relationship between metals consumption and industrial production. The latter is a key constituent of gross domestic product, and GDP is soaring.
In its Maddison project, the World Bank published in 2016 an analysis of real global GDP over the past 2,000 years. Global GDP doubled (inflation adjusted) between the birth of Christ and 1500, and then again by 1750, and again by 1860, 1900, 1938, 1959, 1973, 1996 and 2015. This means that global GDP, in real terms, has doubled every 14-23 years since WWII.
With world growth now exponential the mining industry needs to supply a huge future demand for its products. Expect metals prices to reflect, eventually, the lacklustre supply and burgeoning demand. The price of gold is driven by other metrics, and will be an exception to this supply-demand issue as it is not 'consumed' in the conventional sense. An estimated 94% of the 200,000 t of gold ever extracted is still identifiable, and annual mined production (3,280 t in 2018) accounts for barely 1.7% of this global stockpile.
The base, speciality and energy metals and minerals, however, are surely facing an inevitable global supply shortfall. Recycling, substitution and the more efficient use of metals will reduce the impact but the 'gap', like winter, is coming.
These supply-demand issues will be examined at Mines and Money London, November 25-27, 2019.