The importance of exploration 
 
Exploration activity is fundamental to the future success of the Australian mining industry.  Exploration is the process by which geological information is collected and analysed to identify mineral deposits as well as determining the economic feasibility of their extraction. 
 
For mining companies exploration is analogous to research and development expenditure; it is searching for business opportunities to develop in the future, and has no guarantee of success.
 

Exploration expenditure is required to not only to discover and initially measure ore bodies, but also to sustain mining activity once it has commenced – particularly for ore bodies that tend to be depleted quickly such as gold. 

In its report Top 10 business risks facing mining and metals 2017-18, EY identified resources replacement (via exploration) as one of the key risks to the future of the mining industry.  According to the report, ‘exploration was the first cost to be cut as prices declined but hasn’t been the first to be reinstated.  It is, however, essential for future sector growth’.  

Exploration in Australia
 

As shown in table 1, Australia has substantial mineral resources of many key mineral and energy commodities and these have been a key factor in the success of the mining industry. These resources have been identified through extensive exploration investment across Australia by both government geoscience agencies and the private sector. 

Over $23 billion has been invested in exploration in Australia over the last decade which has included expenditures of:

  • $6.1 billion on iron ore;
  • $5.8 billion on gold;
  • $4.9 billion on base metals;
  • $3.7 billion on coal;
  • $3.1 billion on other minerals including mineral sands, uranium and diamonds.

Table 1: Australia’s mineral resources, 2016

 

Unit

Economically Demonstrated Resources

World ranking for resources

Share of world Resources

World ranking for production

Share of world production

Bauxite

Mt

6,005

2

22%

1

31%

Black coal

Mt

85,753

4

10%

4

7%

Cobalt

kt Co

1,164

2

14%

5

4%

Copper

Mt Cu

88

2

12%

5

5%

Gold

t Au

9,830

1

17%

2

9%

Ilmenite

Mt

277

2

19%

3

13%

Iron ore

Mt

49,588

1

29%

1

38%

Lead

Mt Pb

35

1

40%

2

9%

Lithium

kt Li

2,730

3

18%

1

41%

Manganese

Mt

219

4

13%

4

9%

Nickel

Mt Ni

18.5

1

24%

5

9%

Rare Earths

Mt

3.4

6

3%

2

11%

Rutile

Mt

33

1

50%

1

42%

Silver

kt Ag

89

2

16%

5

5%

Uranium

kt U

1,270

1

29%

3

10%

Zinc

Mt Zn

64

1

28%

3

7%

Zircon

Mt Zr

64

1

67%

1

31%

Source: Geoscience Australia, Australia’s Identified Mineral Resources 2017, p.17.

In 2016-17, exploration expenditure in Australia totalled $1.6 billion but remains far below the peak levels recorded during the high-price phase of the mining boom.  While exploration expenditure remains at a level that is consistent with its long-term historical average level, this is mainly owing to exploration at existing mines (known as brownfield exploration) rather than exploration to identify resources at new sites (greenfield exploration). 

Brownfield exploration is an important part of mine development but increased greenfield exploration activity is essential to discovering the deposits that could become the next generation of tier one assets in Australia.

Greenfield exploration expenditure in Australia has declined in both absolute terms and as a share of total exploration expenditure.  This trend must be reversed for Australia to attract greater mining investment in the future and continue to receive the economic benefits delivered by the mining industry.

S&P Global estimates that world non-ferrous mineral exploration expenditure totalled US$8.4 billion in 2017, 15 per cent year than 2016. Australia’s share of this exploration expenditure was 13.6 per cent in 2017, placing it second behind Canada.  Despite the recent upswings in exploration expenditure in Australia our share of world exploration expenditure has been declining over the past 20 years.

Deteriorating perceptions of Australian resources policy
 
Australia’s declining share of world exploration expenditure corresponds with its deteriorating rankings in the Fraser Institute’s Annual Survey of Mining Companies, particularly in the perceptions of government policies. 
 
In order to attract greater exploration and subsequently mining investment, Australia must address the policy issues that are eroding its competitive position relative to other mining provinces. 
 
The Fraser Institute is a Canadian based think tank that conducts an annual survey of mining company executives on their perceptions of different mining regions around the world. 
 
It rates the overall investment attractiveness of a region based on its geological attractiveness and perceptions of government policies that influence exploration investment. Policy factors examined include uncertainty concerning the administration of current regulations, environmental regulations, regulatory duplication, the legal system and taxation regime, uncertainty concerning protected areas and disputed land claims, infrastructure, socioeconomic and community development conditions, trade barriers, political stability, labour regulations, quality of the geological database, security, and labour and skills availability.
 
Australian states have been rated highly on the Policy Perception Index in the Fraser Institute’s annual survey, particularly Western Australia.  However, this source of competitive advantage in attracting exploration and mining investment is diminishing with the latest survey responses showing some large drops in the Policy Perception Index scores for Australian states and their relative rankings against other mining regions.

Three Australian jurisdictions - the Northern Territory, Victoria, and Western Australia - had their Policy Perception Index scores decline by approximately 10 points in 2017.

Australian regions scored particularly low on ratings of taxation regimes with less than 9 per cent of respondents rating existing tax systems as ‘encouraging investment’.  This was far below the +30 per cent scores received by top rated regions such as Finland, Ireland, Saskatchewan and Sweden.

What government can do to encourage exploration activity

 

To increase exploration activity in Australia a broad series of policy reforms is required. 

Private sector investment in exploration will not occur if the prospects of developing an operational mine are poor because of excessive regulation, inflexible workplace relations practices and high tax rates.  

To maximise Australia’s investment potential, the Australian Government should engage in an extensive program of survey work that gathers new pre-competitive science data on areas of Australia that remain largely un-explored or under-explored.  Such data is vital for narrowing down the search areas for more advanced exploration activities that are costly and better suited to smaller target areas.  

Government programs such as Geoscience’s Australia Exploring for the Future should be expanded with increased funding to accelerate the survey work underway and extend the program to additional greenfield areas.  

The Australian Government should also increase funding to its industry partnership programs such as the Deep Exploration Targeting Cooperative Research Centre to foster the development of new exploration technologies and data analysis tools to address the declining success rate of exploration effort in Australia. 

Similarly, there should be increased funding to Commonwealth Scientific and Industrial Research Organisation (CSIRO) programs that are developing new mining and processing technologies that can improve the productivity and safety of new mines.  In some cases these technologies may unlock previously identified but sub-economic mineral deposits through more cost effective processing methods.

Exploration taxation incentives are useful for stimulating greater investment in exploration. Maintaining immediate deductibility for eligible exploration expenditure is vital to sourcing exploration expenditure in Australia. 

The Federal Government’s commitment to retaining an exploration incentive for junior explorers undertaking greenfields exploration through the Junior Minerals Exploration Incentive (JMEI) will help ensure that junior explorers without taxable income can claim exploration deductions and also stimulate greater exploration investment.