... is the nation’s 6th largest export earner ... earned $14 billion of export revenue in 2014-15 ... is the 2nd largest producer of gold in the world

The exploration challenge


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Exploration for gold has been a cornerstone of Australian mining history and is critical to securing the industry’s future success.  The rise in the gold price in recent years has seen renewed growth in exploration to the point where 44% of active exploration projects in Australia are primarily searching for gold.

However increasing expenditure also reflects rising costs and increased difficulty of discovery. Deposits have become harder to find and delineate. The number of significant discoveries each year has continued to fall and those that have been identified have tended to be at greater depth or of lower grade requiring significant capital investment prior to production. These trends, in combination with complex regulatory processes and other policy impediments, have increased the relative cost of gold exploration in Australia and increased the time required to bring new deposits into production at a time when other countries have taken steps to encourage exploration investment.

A comparison between discovery and production rates indicates that Australia is now struggling to replace the gold it mines. The exploration challenge is to reverse the decline in Australia’s share of global exploration expenditure in order to replenish the nation’s gold inventory.

Gold exploration in Australia

Minerals exploration is the process of finding commercially viable quantities of minerals to mine. It is lengthy, expensive, often conducted in remote and inhospitable environments and technically complex. It has been estimated that only one in one thousand exploration projects becomes a new mine.

Gold exploration occurs in every Australian state and the Northern Territory with Western Australia accounting for 75% of activity.  As at September 2012, there were more than 2,000 active gold exploration projects in Australia, plus a further 198 projects at the pre-feasibility or feasibility study stage.

Geological, technological and regulatory constraints are critical factors in determining whether an identified gold resource is able to justify the investment required from highly competitive global capital markets to advance to the development and production stages. The number of opportunities that progress to the next step decreases at each stage and the total process may take between 10 and 20 years.  [The exploration process within the lifecycle of a mine]

Investment in gold exploration is cyclical and closely related to the global gold price. Exploration expenditure follows price movements with approximately a one year lag. The higher gold price of recent years has resulted in a corresponding rise in gold exploration expenditure, as illustrated in Chart 1.

More than $740 million was spent searching for gold in Australia in 2012, narrowly exceeding the previous peak in nominal gold exploration expenditure in 1997. Of the total inventory of active exploration projects in Australia, some 44% are primarily focussed on gold as their primary target.

Chart 1: Quarterly gold exploration expenditure and gold price Source: Australian Bureau of Statistics (ABS), Reserve Bank of Australia (RBA)

In real terms, however, current expenditure is below peaks of earlier years. Chart 2 shows that real (inflation adjusted) gold exploration expenditure is below levels reached in the mid-1980s and mid-1990s. It also shows a more than commensurate reduction in the number of significant discoveries. Since 1975, there have been 229 significant gold discoveries of greater than 100 koz made in Australia, including 34 deposits with gold as a by-product. On average, however, only three significant discoveries each year have been made over the last decade.

Chart 2: Real annual gold exploration expenditure vs. discoveries Source: Metals Economics Group (MEG), MinEx Consulting

Higher gold exploration expenditure in recent years thus not only reflects high global demand and the consequent rise in the price of gold. It also signals the heightened challenges facing explorers in Australia and, specifically, the increasing cost and complexity of delineating and developing gold deposits.

Australia’s gold discoveries are being found at increasing depth while declining in size and grade. Since the 1950s, the average depth for greenfield discoveries has increased from zero to 43 metres. The average depth for brownfield discoveries has increased from 20 to 110 metres (Shodde, 2012). As well as resulting in increasing exploration and extraction costs, this has lengthened the time period between discovery and development.

Chart 3 points to the decline in the average size and grade of discoveries. Whereas the average size of gold discoveries was 2.2 Moz between 1980 and 1989, it was half that at just 1.1 Moz from 2000 to 2009. The average grade of discoveries similarly halved over the decade, in part reflecting changing styles of mineralisation that comprise the bulk of gold exploration targets. This includes porphyry style deposits where gold occurs in combination with other metals, principally copper and, to a lesser extent, silver and molybdenum. These deposits often require more costly and complex processing.

Chart 3: Trend in the average size and grade of primary gold discoveries in Australia 1980-2010Source: MinEx Consulting

Gold exploration in Australia has also faced more intense competition for investment capital from projects targetting other commodities. Chart 4 shows the decline in the share of quarterly gold exploration expenditure within total minerals exploration expenditure in Australia. From a peak of more than 65% in 1997, gold’s share fell to less than 20% in 2008 and again in 2011. This occurred in the context of substantially higher investment in coal and iron ore exploration, largely in response to China’s demand for steel-related bulk commodities. From around 20% in 2012, gold’s share of total exploration expenditure is expected to rise in the next few years (Shodde, 2011).

Chart 4: Gold’s share of total quarterly mineral exploration expenditure in Australia Source: Australian Bureau of Statistics (ABS)

One sign of increasing challenges facing gold exploration in Australia is the increasing emphasis on brownfield rather than greenfield exploration. Brownfield exploration involves searching more deeply or laterally for mineralisation related (or in close proximity) to a known deposit. Riskier greenfield exploration generally occurs outside areas of known deposits.  In 2012, brownfield exploration accounted for 73% of gold exploration expenditure, up from 55% in 2003. While brownfields exploration has the potential to add to the life of existing mining projects, the longer term consequence of the shift away from greenfield exploration is an eventual decline in national inventory.

A comparison between discovery and production rates indicates that Australia is struggling to replace the gold it mines. Increased gold exploration is critical to replenishing Australia’s gold inventory and securing the industry’s future. Economic Demonstrated Resources (EDR) is a measure of the resources that are demonstrated or assumed with reasonable certainty to be profitable for extraction or production under defined investment assumptions. Classifying a mineral resource as EDR reflects a high degree of certainty as to the size and quality of the resource and its economic viability (ABS, 2010). Australia’s gold EDR increased from 161 tonnes in 1976 to 8,410 tonnes in 2010. Most of this growth was associated with resource upgrades at existing mines. Moreover, some 70% of Australia’s gold resources are in 15 deposits. As these mines mature, Australia’s EDR will decline without significant new discoveries.

While most near-surface gold deposits are likely to have been discovered, it remains the case that exploration has taken place over only about 20% of Australia’s land mass. The remaining 80% of the continent, covered by regolith and sedimentary basins, is largely unexplored due to the depth of barren cover material lying above the rocks that are likely to host gold deposits. This represents an exploration opportunity of more than 7.5 million square kilometres (UNCOVER, 2012).

Australia’s exploration challenge in a global context

Australia is nonetheless perceived to be a mature place to explore with diminished opportunities for major discoveries. Australia’s share of global nonferrous exploration expenditure has fallen from 21% to 12% in the last 16 years. On this measure, Australia’s exploration effort is now surpassed by Latin America (25%), Africa (17%), Canada (16%) and Eurasia (14%) (SNL Metals Economics Group, 2013).

An examination of global discovery costs by region over the last decade underlines the challenges confronting gold exploration in Australia. Analysis by MinEx Consulting estimates that between 2000 and 2010 Australia’s cost per ounce of gold discovered (US$60 per ounce) was more than double the global average (US$26 per ounce). Though volatile, average unit discovery costs are well in excess of most major gold mining provinces, including other developed, mature producers such as Canada and the United States.

Table 1: Estimated gold discovery cost by target type and region 2000-10
Constant June 2012 US$/oz

Greenfield Brownfield Total
Australia $76 $41 $60
Rest of world $46 $17 $45
Pacific / SE Asia $34 $162 $44
USA $50 $29 $42
Europe $34 $42 $35
Eastern Europe / Former Soviet Union / China $27 $46 $31
Latin America $22 $25 $23
Canada $35 $6 $20
Africa $23 $9 $16
World average $31 $17 $26

Source: MinEx Consulting
Note: Primary gold discoveries only. Costs can vary significantly within a given region.

Complex regulatory burdens, including in areas such as land access and approvals, are among factors viewed as adding materially to the cost burden of exploration projects in Australia compared with other jurisdictions. Grant Thornton’s 2013 survey of global mining executives found increased regulation to be a major factor that had “dampened the enthusiasm” of international investors in the Australian mining sector (Grant Thornton, 2013). Similarly, the Fraser Institute’s 2012-13 survey of mining companies looked at 96 national and sub-national exploration jurisdictions and identified considerable scope for improvement in policy settings across Australian states and territories based on its headline composite Policy Potential Index. The Index measures the overall policy attractiveness of each jurisdiction by analysing survey responses to 15 policy factors that affect investment decisions. (Fraser Institute, 2013).

Table 2: Fraser Institute Annual Survey of Mining Companies Policy Potential Index

2008-09 2009-10 2010-11 2011-12 2012-13
WA 21st 19th 17th 12th 15th
Qld 25th 24th 38th 28th 32nd
NSW 23rd 20th 20th 32nd 44th
SA 16th 10th 11th 19th 20th
NT 20th 14th 27th 11th 22nd
Victoria 29th 30th 31st 44th 24th
Tasmania 31st 23rd 28th 30th 49th

Source: Fraser Institute

Access to capital is a major challenge facing gold explorers in Australia and taxation treatment is a key variable influencing exploration expenditure decisions. Exploration is 'footloose' and both the rate and form of taxation affect the relative attractiveness of different countries or sub-national regions for investment in mineral exploration and development (Eggert, 2010).  As well as the overall burden of taxation, predictability of fiscal regimes is a critical factor influencing commercial decision-making.

Other countries have implemented fiscal measures to encourage exploration investment. For example, Canada’s Flow Through Share Scheme effectively allows an explorer to transfer expenses to the investor who can claim these as an immediate tax deduction against other income. In 2012, 70% of the equity capital raised globally for mining companies was raised on the Toronto exchanges.

Australia’s mining industry continues to advocate for similar arrangements to allow junior exploration companies undertaking greenfields exploration in Australia to pass a percentage of unrealised tax deductions through to Australian shareholders.  This measure would address the tax asymmetry whereby junior explorers are unable to utilise immediate deductions for exploration expenditure due to their lack of taxable income. This asymmetry has previously been estimated to increase exploration costs of small exploration companies by around 7-8% (ABARE, 2003). One study found that a tax credits scheme broadly similar to the Canadian model would result in 10 to 30% increase in exploration expenditure in Australia (Synergies Economic Consulting, 2010).

Conclusion

Analysis of discovery and production rates suggests that Australia is faced with a challenge to replace the gold it mines and exports and that a renewed exploration effort is required to replenish the nation’s gold inventory and support future gold mine development and production. The key challenge is attracting the investment required to discover and examine deeper deposits. To attract this investment Australia must enhance its competitive position in capital markets. Other countries have taken steps to encourage exploration investment. A similar national effort is required in Australia.