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 similar to research and development expenditure – searching for business opportunities to develop in the future without any 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 on the Geoscience Australia website, 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.
Source: Geoscience Australia, Australia’s Identified Mineral Resources 2018.
In 2017-18, exploration expenditure in Australia totalled $2 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.
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 Minex 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.