exploration expenditure

It is important to recognise that the ability of Australia’s minerals and energy sector to sustain its strong recent growth and expand its contribution to national economic performance in the medium and longer terms depends critically on the amount of investment in minerals exploration. Most of the strong growth in the minerals and energy sector of recent years, and most of the expected growth implicit in ABARE’s list of planned projects, is underpinned by exploration that was undertaken over the past decade.

Australian minerals exploration expenditure, in real terms (2005-06 dollars), for the period 1980-81 to 2005-06 is shown in figure A. The 2005-06 data are estimates based on actual data from the Australian Bureau of Statistics for July—December 2005, combined with data from the ABS survey of expected expenditure for January—June 2006.

Total Australian minerals exploration expenditure in 2005-06 is estimated to have risen by 13 per cent to $2.3 billion. In real terms, estimated expenditure in 2005-06 was the highest since 1997-98 and around 6 per cent above average annual expenditure on minerals exploration over the past 25 years. While the substantial number of minerals and energy projects in ABARE’s latest projects list will ensure robust growth in the mineral resources sector’s productive capacity over the medium term, continued sectoral growth over the longer term will require levels of real average annual exploration expenditure around, or higher than, that in 2005-06.

In 2005-06, all major commodity categories recorded increases in estimated minerals exploration expenditure.

Expenditure on petroleum exploration is estimated to have risen by 5 per cent in 2005-06, to around $1.1 billion. However, this is still around 4 per cent lower than the annual average expenditure in real terms over the past 25 years ($1.15 billion). The increase in petroleum exploration expenditure in 2005-06 is likely to have been encouraged by further significant rises in world oil prices during the year.

However, short term oil prices are only one factor in determining exploration expenditure in any particular period. A range of other factors also have a significant bearing on exploration expenditure decisions. These include factors such as: longer term oil price trends; Australia’s relative prospectivity for petroleum; the prospect for Australia’s share of growing global LNG trade; the need for long term planning, particularly for relatively expensive offshore petroleum exploration; and shortages of skilled labor and the concurrent commitment of resources (funds, equipment and labor) to other activities such as project development.

abare’s list of major minerals and energy development projects the full list ABARE’s listings of major minerals and energy projects expected to be developed over the medium term are compiled every six months. Information contained in the lists spans the mineral resources sector and includes energy and minerals commodities projects and minerals processing projects. The information comes predominantly from publicly available sources but, in some cases, is supplemented by information direct from companies. The lists are fully updated to reflect developments in the previous six months. what’s in the list The latest projects list contains information on 256 projects, providing the following details: > project name > location > expected startup date > capital cost of the project > proponent company or joint venture > project status > additional output capacity > additional employment, where available. With one industry exception, ABARE’s listing provides details of announced projects for which total capital expenditure is expected to exceed $40 million. The exception is the gold industry, which typically has a relatively large number of smaller projects. For gold, the expenditure threshold for inclusion in the table is $15 million. In general, projects identified are at relatively advanced stages of planning. That is, for new projects, stage of planning categories range from ‘feasibility study underway’ through to ‘under construction’. Projects are listed by the principal mineral commodity to be produced, under the broad headings: ‘Mining projects – energy’, ‘Mining projects – minerals’ and ‘Minerals processing facilities’. The table includes new greenfields projects as well as expansions of existing projects. where to get the list This projects listing is released around May and November each year. The lists are available only as electronic products. The list can be downloaded from ‘Publications’ at www.abare.gov.au enquiries: abareproducts@abare.gov.au or phone +61 2 6272 2010.

After falling in 2004-05, gold exploration expenditure is estimated to have increased by 2 per cent in 2005-06, to $400 million. In real terms, however, estimated expenditure on gold exploration in 2005-06 was a little below the average of the past three years ($410 million). The nominal rise in estimated expenditure in 2005-06 is expected to have been influenced by increases in Australian dollar denominated gold prices. However, with most of the sharp increases in gold prices having occurred in the past few months — for example, Australian dollar gold prices increased from $738 an ounce in January 2006 to over $900 an ounce in early May 2006 — the full effect of recent gold price rises on gold exploration expenditure is not expected to be felt until 2006-07.
Base metals exploration expenditure is estimated to have risen by 38 per cent to $361 million in 2005-06. This increase is mainly attributable to strong rises in expenditure on copper and silver–lead–zinc, reflecting recent substantial rises in global prices for these commodities. For example, world prices for both copper and zinc more than doubled in the twelve months to April 2006. In real terms, exploration expenditure on base metals in 2005-06 was 45 per cent higher than the 25 year average ($249 million) and was the highest since 1981-82.
Apart from the main exploration sectors referred to above, three other commodities — iron ore, coal and uranium — are estimated to have had significant expenditure increases in 2005-06. Spending on iron ore exploration rose by an estimated 15 per cent in 2005-06 to around $159 million (after more than doubling in 2004-05), reflecting a positive outlook for Chinese demand for this commodity. Exploration expenditure on coal is estimated to have increased by 24 per cent to around $157 million in 2005-06, reflecting high global demand and recent strong price increases, particularly for coking coal. Uranium exploration expenditure is estimated to have more than doubled in 2005-06 (to $56 million). This reflects increased global interest in nuclear power as an alternative to fossil fuels as well as actual and expected substantial increases in world uranium prices.

box 1: rising costs of materials and skilled labor affecting sector development Together with the rest of the world, Australia’s mineral resources sector is experiencing significant difficulties in securing sufficient inputs including materials, equipment, skilled labor and professionals. This is an outcome of the recent acceleration in growth in Australia’s resources sector to meet growing global demand (but particularly from China) for mineral commodities. The pace and scale of current developments in Australia’s mineral resources sector is unprecedented. In the past eighteen months, 62 major minerals and energy development projects, valued at around $16.2 billion, were brought into production. ABARE’s current (April 2006) list of major minerals and energy projects includes a record 90 projects, valued at around $34 billion, that are currently committed or under construction, with a further 166 projects under consideration for development. In this environment, where demand from developers for labor, equipment and materials is rising faster than supply, the impact on project development is being manifested in delays to scheduled completion dates for projects and in increases in project capital costs. For example, of 22 advanced projects in ABARE’s April 2006 projects list that were also in the October 2005 list, 16 (or over 70 per cent) now show a later scheduled completion date compared with six months ago. In a few instances the delays are considerable. The estimated completion date for Western Areas’ proposed Flying Fox nickel mine development in Western Australia is now March 2007, a delay of around nine months compared with the estimate of six months ago. The company cites problems in sourcing suitable mining equipment and additional experienced mining personnel as the reason for the delay. In terms of capital costs, of 30 projects in the October list that were either completed in the six months ended April or still appear in the April 2006 list, 18 (or 60 per cent) show capital cost increases. Some of these increases are substantial. For example, the estimated capital cost of the Roc Oil operated Cliff Head oilfield development in the Perth Basin increased by around 25 per cent between March 2005 and project completion in April 2006. Stated reasons for the rise included increased costs for materials and services and unavailability of contractor personnel. The developer of the proposed Angas Zinc project in South Australia (Terramin Australia) announced in March that the final capital cost of the project is expected to be higher than that estimated as part of the recently completed prefeasibility study because of prevailing higher steel and labor costs. To some extent, major resource companies are better positioned than their smaller counterparts to overcome difficulties in securing labor and equipment because they are able to draw on their own internal resources. However, major companies are also being affected. BHP Billiton noted in its March quarter production report that strong competition for labor, as well as construction and drilling plant and machinery, has led to rising costs. The company indicated that these conditions continue to challenge its ability to deliver development projects to budget. In its 2005 annual report, Xstrata indicates that inflation specific to the mining industry and critical shortages of materials and skilled labor have also had a significant impact on major new capital projects. However, Xstrata indicated that specific measures had been taken so that projects remain within budget and on schedule. With an exceptionally large number of minerals and energy projects currently committed or under development in the next few years, competition for skilled labor and materials and the attendant cost pressures are unlikely to ease in the short to medium term. This makes it likely that the feasibility of many less advanced projects will need to be re-examined. It may also mean that, from a market perspective, some project developments may be deferred beyond their optimal startup dates.

In general, decisions to invest in mineral exploration depend on the probability of discovering an economic mineral deposit or extending the resource base of a known deposit. A range of economic and policy factors will also influence companies’ expectations of the likely return on investing in exploration. Such factors include: expectations and risks relating to mineral prospectivity; prevailing and expected mineral prices; existing mining and processing technologies; input costs more generally; land access; and government policies.
Over the medium term, exploration expenditure in each of the main exploration sectors is expected to be influenced by a different set of factors.

In the petroleum sector, Australia’s prospectivity for crude oil together with the long term outlook for global oil prices will be key factors in determining future levels of exploration activity and expenditure. With world oil prices forecast to remain high in the short term, further increases in exploration expenditure are likely.

Movements in the Australian dollar price of gold will be a key factor influencing gold exploration expenditure. However, expected future costs of exploration and development will also play an important role in determining the future expenditure. As previously mentioned, rises in the costs of labor, fuel and other inputs (such as steel) have increased development costs and may continue to be a negative influence on gold exploration expenditure over the medium term.

In the base metals sector, the price outlook will clearly be important, as demonstrated by the estimated rise in copper and silver–lead–zinc exploration expenditure. Other important factors are expected to be: expectations of the future strength of Chinese demand for base metals; assessments of the development potential of several known (but as yet undeveloped) base metal deposits in Australia; and Australia’s relative attractiveness for exploration.

capital expenditure

Data from the ABS surveys of new capital expenditure in the mining and metal products industries give an indication, in aggregate terms, of the pace and scale of development in the minerals and energy sector, both historically and in the short term (figure B).

Based on ABS Survey data, new capital expenditure in the mining industry is estimated to be $14.2 billion in 2005-06, 38 per cent higher than in 2004-05. In real terms (2005-06 dollars), new capital expenditure in 2005-06 was the highest on record and was 79 per cent higher than the average annual expenditure for the past 25 years ($7.9 billion).

There are good indications that capital expenditure on mining may increase further in 2006-07. Based on industry intentions canvassed in the March quarter 2006, ABS data indicate that capital expenditure on mining in 2006-07 may increase to around $15.7 billion. The scale of this expenditure and its order of increase are consistent with the development trends shown in the full list of major mineral and energy projects (see figure H).

Capital expenditure in the metals products sector, which includes the minerals processing activities covered in ABARE’s projects list, is estimated to have been around $4.5 billion in 2005-06, 33 per cent above expenditure in 2004-05. In real terms, estimated expenditure in 2005-06 is the highest since 1981-82 and almost double the 25 year annual average of $2.3 billion (in 2005-06 dollars). However, surveyed industry intentions suggest that metal products expenditure could fall by around 18 per cent in 2006-07 to about $3.7 billion.

In 2006-07, if the expenditure intentions for both the mining and metal products sectors are realised, total capital expenditure in the mineral resources sector could rise marginally, by around 1 per cent, in real terms.

Over the medium term, there is evidence to suggest that there is potential for further growth in resource sector capital investment. This assessment is based on the observation that there are a significant number of advanced projects in ABARE’s projects list (particularly a number of high capital cost petroleum and iron ore developments), and that there now exists a number of large scale, but less advanced projects, that may be developed in a longer timeframe.

recently commissioned projects

In the six months ended April 2006, 27 major minerals and energy projects with a combined capital expenditure of $8.9 billion were completed. These completed projects will add to the sector’s production and export capacity for a range of commodities, including coal, petroleum, gold, iron ore, base metals, mineral sands, alumina, aluminium and ammonia. Summary details of these projects are shown in table 1. The project completion rate in the six months to the end of April 2006 was significantly higher than in any similar period in the past eight years (table 2; figure C). In addition, the average value of projects completed in the period to April 2006 ($328 million, in nominal terms) was significantly higher than the average value in the past eight years ($244 million).

Looking ahead, ABARE’s project list indicates that the rate of project completions could accelerate in the short term, with around 40 projects (almost half of which are coal related developments) scheduled for completion in the final eight months of 2006. However, competition for skilled labor, together with equipment shortages, may mean that the announced scheduled completion dates for some of these projects are not met and actual completion does not occur until 2007.

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