(Kitco News) - The future remains grim for the metals mining sector as exploration activity continues its downward trend in a very tight investment environment, said a resource intelligence firm.
Chris Hinde, editorial director at IntierraRMG, recently published a report showing the mining industry’s exploration activity tumbled to a new low in March, making it 17 months of decline.
Hinde believes that the trend could continue “possibly for the rest of this year. I can’t imagine it coming down at the same rate, it’s kind of flattened out a bit. We’re now getting into uncharted territories; it’s never been this bad.”
In the report, Hinde wrote that drilling reports for metals fell to 355 prospects in March, down from 440 in February and 662 in January.
Hinde highlighted gold exploration among the worst performers of the metals with 172 prospects in March compared to 199 in February and 350 in January.
The junior mining sector has been hit the hardest.
“There are people that have just stopped completely, juniors who used to do quite a bit of drilling, but there’s not any finance for it and that’s the problem,” said Hinde. “(Juniors) have to get more and more imaginative and that’s finding partners who’ve got cash flow and no projects.
“Strategic alliances are growing more important in these markets and possibly finding some folks who have got money, like venture capitalists or the Chinese as they’re well aware that their cash is worth a lot at the moment,” he added.
IntierraRMG released a different report Tuesday stating that mining sector fundraising dropped 24% in the quarter to end-March, a steep drop-off after the sector was showing signs of a gradual recovery in the second half of 2012.
According to IntierraRMG’s database of nearly 3,500 companies, funds raised by the mining industry dropped to below $5.2 billion from $6.8 billion in the last three quarters of 2012, the report said. Exploration companies saw the worst of it as funds raised fell to $1.5 billion compared to $3.4 billion in the last three quarters of 2012.
IntierraRMG reported on March 25 that new gold discoveries declined by 45% over the last decade and has accelerated over the last four years.
New gold ounces discovered dropped in 2011 and 2012 to under 225 million ounces at a reduced grade of 1.17 grams per ton gold, the March 25 report said.
Mining companies with production at the moment are in better shape.
“If you’ve got production, even if gold prices come back a long way you’ve still got cash flow, so you can still drill which is why it’s bottomed out,” Hinde said. “There are still people with cash.”
Hinde points to metals prices reaching unsustainable highs a few years ago and the mining industry getting carried away in taking on new, expensive projects.
“The industry gets carried away with itself at times and they think these prices are here forever,” Hinde said. “They start factoring in those costs and building mines that are a bit too expensive and when times get a little worse, they have to start shutting down high cost mines. It’s a classic cycle in a cyclical industry.”
Resource nationalization has been an issue for miners for a few years as metals prices rose and governments sought to change taxation and royalty regimes with mining companies. Metals prices are down from the heights they saw a few years ago, but governments continue to seek their share, Hinde said.
“A lot of African governments see companies making quite a bit of money when prices are a bit higher than they are now and decide to take a bigger share of the profit,” Hinde said. “And of course it’s not popular publicly but by the time they come in with new regimes and taxes, prices have come down and everyone loses out.”
Québec recently implemented a new royalty regime for miners operating in the province, but were forced to scale back their demands as metals prices tumbled.
Hinde said not all the blame should be put on governments as miners could have been more responsible when negotiating contracts in their respective jurisdictions.
“To some extent it’s the miners own fault when times are good, not negotiating contracts that were flexible keeping in mind that they might be making these excessive profits and what to do about it, Hinde said.
For the latest mining news, updates and commentary, or to contact me regarding a story or feedback, please follow my Twitter account @alex_letourneau