Global economic crisis hits greenfields investment

The Australian Journal of Mining has previously reported on concerns within the industry over the disparity between the expenditure on greenfields exploration in Australia and on brownfields exploration, and the implications for the future of our minerals industry. In recent years, Australian Bureau of Statistics (ABS) data has shown that exploration expenditure had never been higher. What these figure disguise is the fact that Australia's share of global aggregate exploration expenditure has been declining since 2002 and that the discovery of new deposits in this country, especially large, world-class deposits, has been meagre over the past decade.
Clearly many things have changed in the last year. The current global economic downturn is having a real impact on Australia’s greenfields investment, and many in the industry believe that there is no time like the present for the introduction of a flow-through shares scheme.

Greenfields hit hard
According to ABS figures, while the seasonally adjusted estimate of mineral exploration expenditure rose by 6.4 per cent to $691.3 million in the June quarter for 2008, the same expenditure fell by $23.4 million (3.4 per cent) to $666.6 million in this year’s September quarter. Back in June, greenfields exploration increased by 36.6 per cent compared to brownfields exploration increasing by only 32 per cent. However ABS figures for September reveal greenfields exploration fell 11.4 per cent or by $33.8 million, while brownfields fell by just 1.3 per cent or by $5.6 million.
What these figures demonstrate is that current economic and global commodity changes are hitting greenfields investment hard. Junior companies are finding conditions tough and having to concentrate on cutting back exploration dollars generally, and focusing on cheaper types of exploration programs. Though, the same could be said for bigger companies, according to KPMG’s executive director for energy and natural resources, Helen Cook. She told the Australian Journal of Mining, “The global economic downturn has, understandably, been a growing and negative impact for the sector...junior miners with no operating assets are finding it much harder to access funds to progress their exploration projects [and] companies with brownfields exploration opportunities may seek to maximise the return in these locations rather than conduct larger risk greenfields exploration.
“This has the potential to restrict the horizon for the large mineral deposit finds which drive the future of the mining industry.”
Gavin Wendt, senior resources analyst at Fat Prophets sees the trend of falling mineral exploration expenditure, particularly in greenfields investment, as progressing for the next 12-18 months.
“Overall the trend we’ll see with the dollar falling is for the proportion of dollars in high risk exploration projects (greenfields), falling and the greater proportion of dollars going into brownfields, less riskier stuff,” he said.
“The last thing miners want to do with low prices is invest in new infrastructure and new mines,” Wendt said, “If you want prices to recover the first thing to do is cut back production and any new projects; take the supply out of the market and then demand and supply improves.”
Wendt foresees new exploration areas and development “knocked on the head” for the next couple of years.

Impediments to investment
While Australia is still seen as a first-class exploration target based on political risk, it has, in the last five years, slipped from second to fifth place for exploration spending by region.
Cook said that Australia is not keeping up with other mineral wealthy countries such as Latin America, Africa and Canada who are all competing for the global investment dollar. One of the reasons she cited is the lack of incentives for investment in exploration, something that other regions have had in place for some time.
Darren Brown from the Association of Mining and Exploration Companies (AMEC) said, “Given the long lead times involved in the development of a production facility, new exploration must be immediately encouraged in order to maintain a steady flow of income from royalties and trade into the future.”
AMEC members have reported many impediments to greenfields exploration including ‘red’ tape, ‘green’ tape, difficulty negotiating land access with representatives of traditional owners and most recently, falling investor confidence. Brown said these factors have damaged investor confidence and resulted in many projects being slowed and shelved due to lack of available capital.
AMEC submitted its Resource Exploration Acceleration Plan (REAP), to Western Australian members of Parliament in the lead up to the recent State election, outlining the need for Governments to recognise the long-term economic and social consequences of a declining share of mineral exploration.
Brown said the plan, “strongly encourages Governments to invest in greenfields mineral exploration as well as review and streamline the regulatory environment.”

SA and NT paving the way
Two regions which have successful track records in terms of attracting investment into greenfields exploration, are South Australia and the Northern Territory. Both States recently ranked second and fifth respectively in a world risk survey conducted by magazine Resource Stocks (related to best regions in the world to invest in minerals exploration).
Dr Paul Heithersay, executive director, minerals and energy resources for the SA Government told the Australian Journal of Mining that his region’s “one stop shop” approach is a large reason why South Australia rated so highly on the recent survey. “When companies come to South Australia they are dealing with one agency, not a number of them like in other jurisdictions,” he said, “We streamline the process and make it faster and easier for all concerned.”
ABS figures for the June quarter showed that the total exploration expenditure in South Australia in the last 12 months more than tripled the $100 million target set by SA’s State Strategic Plan. Exploration expenditure fell by $8.6 million or 10.2 per cent in the September quarter 2008 and of this, expenditure on greenfields exploration dropped from $63.5 million in the June quarter to $50.7 million in the September quarter of this year
Heithersay said that the SA Government is happy with the results of the past twelve months and it had anticipated some of the impacts that have been seen.
He said, “There are seasonal factors involved and we expected to see, with the current financial crisis, a drop in expenditure Australia wide. We are hoping to maintain and improve our percentage of Australia’s total exploration expenditure as there’s no doubt that worldwide exploration expenditure will drop next year.”
It could be suggested that the NT is leading the way when it comes to drumming up overseas exploration investment.
ABS figures show that the NT’s expenditure on new deposits increased from $16.7 million in the June quarter 2008, to $19.9 million in the September quarter 2008, while expenditure on existing deposits dropped from $21.5 million for the June quarter to $20.7 million for the September quarter this year.
The Government has enacted its Bringing Forward Discovery program - a $14.4 million four year program - which includes a specific Chinese investment attraction strategy that has already seen four major deals to date and 47 projects submitted by junior and mid-sized explorers.
Dr Julie Hollis, senior geologist and acting director NT Geological Survey, said that because the NT is a small jurisdiction it has the advantage of accessibility as well as the ability to take a hands-on approach.
“This has been highlighted by the recent [ministerial] visit to China and the program developed for Emmerson Resources, Energy Metals, Territory Uranium and TNG.,” Hollis said. This has seen the explorers come away with solid investment leads and many of the companies involved will be visiting Darwin in early 2009.
“The recent trip highlighted the increasing importance of our ‘China’ services to industry and to assist them to raise equity in the current economic climate; it’s a smart approach to encouraging greenfields investment.”
Gavin Wendt believes that Australian companies across the board are progressively looking to Chinese investors to take a stake in their minerals projects.
“Whereas a couple of years ago Australian companies were trying to resist in a lot of instances, what was perceived as the Chinese coming in and exerting undesirable levels of control over our resources industry from a national interest point of view, now those same companies are welcoming China with open arms as they are investors that are still prepared to spend with cash up their sleeves,” he said.

Flow-through Shares Scheme
One way of addressing the lack of investment into greenfields exploration, according to some within industry, is through the introduction of a flow-through shares (FTS) scheme.
The Australasian Institute of Mining and Metallurgy (AusIMM) has said it believes the current Federal Government will recognise the importance of ensuring that junior explorers get a “fair go”.
Monika Sarder, AusIMM senior policy and research coordinator said the single most important thing the Rudd Government can do to support greenfields exploration in Australia is to implement a FTS scheme.
“Increasing exploration will in turn increase rates of discovery, ensuring that Australia continues to benefit from consumption in growing economies such as China and India over the longer-term,” she said.
“The irony in the current tax system is that whilst the drafters recognise the common good aspect of exploration and made exploration expenses tax deductible – those companies wearing the greatest amount of risk, that is juniors, are not able to access this deduction as they generally have no taxable income.
“I would say there is no better time to address this odd quirk in the Income Tax Assessment Act.”
To that end, the minister for resources and energy, Martin Ferguson has recently invited a joint industry submission that outlines a proposal to introduce FTS with the aim of addressing, “the structural impediments and distortions facing junior exploration companies in raising capital for new and increased levels of exploration investment.”
The submission states that an FTS “comparable to that operating in Canada would enable the transfer of deductions of individual exploration companies to individual investors.”