SLN METALS 2016.pdf

8/19/2019 SLN METALS 2016.pdf

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WORLD

EXPLORATIONTRENDS

A Special Report from SNL Metals & Mining

for the PDAC International Convention

2016


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Throughout 2015, deepening concern overthe global economy hammered the resources

sector. January 2016 started just as badly

when more than US$2,300 billion was wiped

off global stocks in the first full week. Despite

a robust jobs report in the U.S., investors

were spooked by China’s slowing economy,

depreciation of the renminbi and the collapsing

oil price, lowering the mining industry’s

aggregate market capitalization to levels notseen since early 2009.

Results from SNL Metals & Mining’s 26th

edition of the Corporate Exploration Strategies

reports clearly show that the global exploration

sector has fared no better, with the mining

industry’s total budget for nonferrous

exploration falling 19% to $9.2 billion in

20151. With depressed metals prices and

weakening Chinese demand, combined withstrong metal production and high levels of

political turmoil, investors are shunning the

mining industry, leaving most explorers with

little option but to further curtail spending.

WORLD

EXPLORATIONTRENDS

1 SNL Metals & Mining obtains the data used in the Corporate Exploration Strategies (CES) studies through the generous cooperation of the surveyed companies. The

individual nonferrous exploration budgets covered by the study include spending for gold, base metals, platinum group metals, diamonds, uranium, silver, rare earths,

potash/phosphate and many other hard-rock metals. They specifically exclude exploration budgets for iron ore, coal, aluminum, oil and gas, and many industrial minerals.

(All figures are reported in U.S. dollars; all historical exploration figures throughout this report represent dollars of the day and have not been adjusted for inflation.)

The PDAC is pleased to partner again

with SNL Metals & Mining in making

this special report on global exploration

and industry trends available to members

and Convention 2016 delegates.

During these challenging times, SNL

Metals & Mining’s services are key to

understanding global exploration trends,which helps us to support our members

through the development of programs,

policy recommendations and advocacy.

Acknowledged as a leader in providing

comprehensive information, expertise

and analysis to the mining industry, SNL

is also the premier source for exploration

statistics worldwide.

Andrew Cheatle

Executive Director

PDAC


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3

World Economy Precarious

Wall Street has an adage: “As goes January, so goes the

year.” Unfortunately, this January was extremely difficult for

global markets generally and for mining specifically. In the

first full week of 2016, the S&P 500 index fell 5%, despite

initially climbing on the announcement of a better-than-

expected extra 292,000 jobs in the U.S. during December.The FTSE All-World Index lost 5.6% — the worst five-day

start to a year since the index was created in 1994, and the

worst week overall since 2011.

Nevertheless, Morgan Stanley signaled a “year of respite,”

saying it expected “only a modest abatement in China-led

commodity demand growth, not the capitulation that year-to-

date price performances imply.” However, Morgan Stanley’s

economists lowered China’s GDP growth outlook to 6.7%

and 6.6% for 2016 and 2017 respectively, with “risks tilted

to the downside.”

Speaking at the World Economic Forum in Davos in January,

Professor Kenneth Rogoff of Harvard University warned

that the world economy is precariously balanced between

continued recovery and a third leg of the global financial

crisis. International Monetary Fund chief economist Maurice

Obstfeld agreed, saying there is a “difficult adjustment

ahead in emerging markets.”

The markets took note and global equity markets were

routed, with the FTSE All-World index falling into “bear

market” territory on January 20 as oil prices slid below

US$27/bbl for the first time since 2003. Investors fled forthe safety of government bonds, and equities in the U.K.,

France and Japan fell to more than 20% below their 2015

high (the common definition of a bear market).

By the end of the Davos meeting Moody’s had formally put

120 energy companies and 55 mining companies “under

review.” It cited lower commodities prices due to China’s

economic slowdown for its decision, which focused on

energy companies following the 75% fall in oil prices since

the peak of US$115/bbl in mid-2014.

International equity prices recovered after the EuropeanCentral Bank signaled a new round of monetary stimulus.

ECB president Mario Draghi confirmed that more quantitative

easing is “on the table.”

Markets rose further at the end of January, helped by firmer

oil prices and the Bank of Japan’s surprise adoption of

negative interest rates. Nevertheless, by February the FTSE

All-World index was down 7% year-to-date.

The late January recovery was welcome after investors’

recent low valuation of the mining industry. Figure 5

on p.10 illustrates the industry’s amalgamated marketcapitalization, which had fallen to US$874 billion by

the end of December (based on almost 2,600 listed

companies). The industry’s value nevertheless still fell

below $800 billion by the end of January. The January

performance is worrying, as the S&P Dow Jones index has

fallen for the rest of the year after a poor January in almost

three-quarters of the years since 1929.

Bear Markets

Société Générale analyst Albert Edwards, a notorious bear,

warned in January of “global deflation and recession.” He

predicts that U.S. stocks could lose almost three-quarters oftheir value as an indirect result of “the failure of the Fed’s

quantitative easing.” He argues that investors will “reap

Five-Year Prices

36,500 3,200

26,000 2,200

! ! ! ! ! !

15,500 1,200

5,000 200

2011 2012 2013 2014 2015

Nickel (US$/t)

Aluminum (US$/t) Zinc (US$/t)Gold (US$/oz)

Left scale:

Right scale:

!! ! ! ! !

2011 2012 2013 2014 2015

Coal* (US$/t)Left scale:

Right scale:

*Thermal; 6,000kcal/kg; 50mm; FOB Richards Bay

Copper (US$/t)

Iron Ore (62% Fe, fines, CFR Tianjin; US$/t)

220

180

140

100

60

20

11,000

9,200

7,400

5,600

3,800

2,000


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the whirlwind” of central bankers’ attempts to support their

economies with looser monetary policy.

Another Société Générale analyst, Robin Bhar, noted in

mid-January that the negative developments in the financial

markets were exacerbated by geopolitical tension. Bhar

expects worries over China and the emerging markets to

place severe pressure on base metals prices in the currentquarter. Further price weakness, he said, should provoke a

stronger supply response, eventually leading to a modest

recovery. Bhar expects prices to recover gradually over

the next two years, based on positive demand trends and

reserves depletion that would eventually return the markets

to deficit.

Given the existing project pipeline, base metals mine

production (with the exception of bauxite) is likely to

peak around 2018. Bhar predicts that “output would

then decline at an accelerating pace, unless higher prices

stimulate investments and incentivize output from higher-

cost projects.”

World Bank View

At the end of January, the World Bank published its latest

Commodity Markets Outlook, in which it predicts a further

10% decline in metals prices this year due to “stubbornly

elevated” metals supplies.

The World Bank’s projections follow an 8% fall in metals

prices in the December quarter, which it blamed largely on

slower growth in China’s economy and an overall increase

in mined material. The Bank’s commodity price index fell21% in 2015, ending the year 55% below the February

2011 high.

The World Bank expects iron ore to suffer the most. Prices

are slated to fall another 25% in 2016, and to sink further

if China’s economy slows more than anticipated and/or

production is higher than expected.

Copper is also expected to fall on projected weaker Chinese

construction and new supply coming online. For copper

prices to improve in 2016, more significant mines may need

to close, the World Bank said.2015 Reviewed

Last year was tough on the seven major mined commodities.

Iron ore and nickel prices were around 40% lower over the

year; zinc, copper and coal fell more than 20%; aluminum

was down over 17% and even gold (traditionally a safe

haven) was down almost 10%, albeit as measured in the

strong U.S. dollar.

The end of the year was positive, however, for most mined

commodities — especially iron ore, which gained almost

11% over the last ten trading days. Iron ore closed the year

at almost US$43.6/t, compared with the December 11

low of US$38.3/t. The exceptions in the last week were

gold, down 0.7% at US$1,060/oz (for a 2015 average of

US$1,161/oz), and aluminum, down 1.8% at US$1,513/t.

The coal miners suffered more than most in 2015; the

Dow Jones Coal Index (of 235 companies) ended the year79% lower than it started, with an aggregate market cap of

US$190.4 billion.

An article by Satyajit Das in the Financial Times argued that

2015’s price declines were exacerbated by the increasing

conversion of commodities into tradeable equivalents. Das

wrote “A Banquet of Consequences” (published in the U.S.

as “The Age of Stagnation”), wherein he notes that cash flow

from future metals sales has been monetized to raise debt

to finance expansion. The need to service this debt has kept

production levels artificially high.

Trade on the London Metal Exchange fell 4.3% in 2015 to

169.6 million lots, equivalent to 3,800 Mt, with a value of

US$11,900 billion. The LME’s owner, Hong Kong Exchanges

and Clearing Ltd., reported that 2015 trade in aluminum

contracts in fell 9.1% to 62.5 million lots, with contracts for

A-grade copper nearly flat year on year at 41.0 million lots.

Trade in tin slumped 30.7%, zinc fell 5.7% and lead slipped

0.9%, compared with 2014. In contrast, nickel trade jumped

6.9% to a record 20.7 million lots.

Mining saw one of its worst years in 2015, but it was a

record year for mergers and acquisitions. Deals for the yearexceeded US$4,600 billion, surpassing the previous M&A

peak of US$4,300 billion in 2007. Analysts explained the

surge as being driven by the hunger for growth, coupled with

cheap funding.

Reviewing 2015 in the Financial Times, Gavyn Davies

commented that although some major trends last year

were obvious in retrospect (weak oil prices, falling euro,

rising dollar, tumbling emerging currencies), many macro

investors failed to navigate the sharp reverses in time.

Davies noted the relative strength of global equities in 2015,

with local currencies returning about 2%. However, with

gains just under zero in U.S. dollar terms, the peaks of May

2015 were not re-attained.

Commodity prices plummeted almost one-third overall,

and eventually took credit markets down with them. The

falling prices also hit emerging markets (with the perplexing

exception of Chinese equities, the best-performing of the

major markets), which generally underperformed developed-

market assets.


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5

Exploration Budgets Fall at Slower Pace

Mining companies responded to these market headwinds

with continued reductions in their exploration activities. The

result was an 19% decline in worldwide nonferrous metals

exploration budgets in 2015, compared with the previous

year. Combined with SNL Metals & Mining’s estimates of

budgets that it could not obtain, the mining industry’s totalbudget for nonferrous metals exploration was US$9.2 billion

in 2015, less than half the record US$21.5 billion budgeted

in 2012.

The steep plunge in exploration budgets over the past few

years reflects increasing investor wariness of the entire

mining sector, which has made it difficult for most junior

companies to raise funds, and for producing companies

to justify intensive capital and exploration spending plans.

Throughout 2015, negative price outlooks further forced

producing companies’ hands, leading many to sell off assets,

shutter operations and focus on companywide cost savings.

SNL’s 2015 global exploration budget calculation was based

on information collected from more than 3,500 mining and

exploration companies worldwide, of which almost 1,800

had exploration budgets reported in the CES study. These

companies (each budgeting at least US$100,000) together

allocated US$8.77 billion for nonferrous exploration, which

SNL estimates covers 95% of worldwide commercially

oriented nonferrous exploration spending.

Although iron ore exploration remains outside the scope of

the CES, and is not included in the analysis throughout theremainder of this report, SNL began coverage of iron ore

explorers in 2011 (surveying companies for their total ferrous

budgets beyond the core CES targets).

Including the allocations by a number of pure iron ore

producers and explorers that were not otherwise part of the

study, SNL compiled a total exploration budget of US$939

million for iron ore in 2015, down from US$1.44 billion

in 2014, US$1.74 billion in 2013 and US$2.89 billion in

2012. Aggregating the iron ore budgets with the budgets for

the other commodities covered by the CES, the total 2015

exploration budget rose to US$9.71 billion, of which almost10% is attributable to iron ore.

World Exploration Trends

SNL’s estimate of annual nonferrous exploration allocations

since the early 1990s, relative to a weighted annual metals

price index, is shown in Figure 1. The graph indicates the

cyclical nature of exploration investment, and the correlation

between metals prices and exploration spending, typically

with a one-year lag.

Through the early 1990s, the aggregate nonferrous

exploration budgets reported by included companies steadily

increased to peak at US$4.67 billion in 1997. As metals

prices slumped in the following years, a combination of

substantial cutbacks and mergers by the majors and a loss

of funding for a great number of juniors caused exploration

budgets to decline for five consecutive years, to a 12-year

low of US$1.77 billion in 2002 — an overall decline of more

than 62%.

The initial increase in worldwide exploration budgets from

2002’s low was due to a combination of higher gold prices

and rising investor interest that revived the junior sector,

increased spending by the majors as they recognized

the dearth of new projects moving up the pipeline and

significantly reduced consolidation at the top of the industry.

The emergence of China’s appetite for resources led to a

multiyear bull run that sent the worldwide exploration budget

total to a new high of US$13.75 billion in 2008 — an

almost eightfold increase from the bottom of the cycle six

years earlier.

The mining industry’s boom years came to an abrupt

halt in September 2008, as the world fell into the worst

economic downturn in decades. The resulting US$5.77billion (42%) drop in exploration spending in 2009 from

2008’s high was the largest year-on-year decline, in both

dollar and percentage terms, since SNL began producing

the CES in 1989.

Most metals prices bottomed in early 2009, and the

industry recovered much more quickly than predicted. The

global economy improved markedly through 2009 and

2010, and with it metals prices, most of which traded well

above their long-term averages through 2011. In response,

Figure 1: Estimated Global Nonferrous Exploration Budgets, 1993-2015


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most companies aggressively increased their exploration

budgets, lifting the industry’s budget total by 44% in 2010

to US$11.51 billion, and by a further 50% in 2011 to

US$17.25 billion.

Marking a transformational year, 2012 began with most

metals prices at or near recent highs, relatively strong

investor interest in the mining sector and signs that theindustry was enjoying a return to the boom times of 2007-

08. Exploration budgets increased 19% in 2012, setting a

new all-time high of US$20.53 billion. Beginning in April of

that year, investors became increasingly wary of the junior

sector, causing many companies to struggle to raise funds

for their ongoing programs and forcing them to cut actual

spending below their budgets for the year.

Throughout 2013 and 2014, markets were even less willing

to support junior companies, and producers pulled back

on capital and exploration spending in order to strengthen

financial margins. As a result, the industry’s total exploration

budget fell to US$14.43 billion in 2013 and to US$10.74

billion in 2014, down almost 48% from the 2012 peak.

Unfortunately, 2015 did not see the start of the meaningful

recovery that many had been hoping for. Despite five

interest-rate cuts since late 2014, and additional measures

designed to stabilize domestic markets or stimulate growth,

China’s economic slowdown has continued, dragging many

resource-based economies down with it. Given the uncertain

demand, virtually all metals prices were in full retreat

throughout 2015, ensuring that the downturn in exploration

continued. In 2015, companies lowered their budgets by

another 18% to US$8.77 billion, marking the first time

aggregate budgets had fallen below US$10 billion since the

2008-09 crash.

Regional Exploration

Exploration allocations for all regions declined in 2015,

with the greatest dollar reductions in Africa and Latin

America. Nevertheless, the latter remained the most popular

exploration destination, attracting 28% of global spending in

2015. Six countries — Chile, Peru, Mexico, Brazil, Colombia

and Argentina — accounted for the lion’s share of theregion’s total.

Gold reclaimed its position as the top Latin American

exploration target, with its share of overall budgets rising to

42% from 41% in 2014. The percentage allocated to base

metals decreased to 40% from 42%.

SNL’s Rest of World regional grouping (Europe and most

of Asia) had the second-largest aggregate budget, led by

allocations for China and Russia, and by two other countries

— Turkey and Kazakhstan — that each attracted more than

US$70 million in exploration budgets in 2015. For the fourth

time in five years, China was in the top position with 32% of

total allocations. Gold replaced base metals as the region’s

top target, led by major allocations for China and Russia.

Africa remained in third place for a third year, attracting 14%

of worldwide budgets; with the largest percentage decrease

(30%) of all regions in 2015, the amount separating it fromthe Rest of World category increased from US$336 million

in 2014 to US$480 million. Major African exploration

destinations included Democratic Republic of Congo (DRC),

South Africa, Burkina Faso, Zambia and Ghana. Allocations

for gold were down 27%, raising the metal’s share of overall

African budgets to 43% from 41%. Budgets for base metals

fell 39%, led by lower allocations for DRC.

Canada remained in fourth place with about 14% of

worldwide allocations. Ontario accounted for one-quarter

of Canadian exploration budgets, followed by Quebec with

17%. Gold exploration was down by just US$87 million,

raising its share of total expenditure to just over 50% from

46%. Planned expenditures for base metals were down

26%, lowering their percentage of overall budgets to 17%

from about 19%.

Australia was in fifth place, where it has been since 2004,

with a 2015 budget of US$1.07 billion and 12% of the

total. Its allocations are down 15% (the third-largest

decrease among the regions) from 2014, shrinking its

distance behind Canada from US$233 million to US$117

million. However, after factoring in iron ore budgets,

Australia continues to be the top destination by country.

Western Australia was again by far the most popular

Australian state for exploration, with 60% of the country’s

total. Gold remained the top exploration target, and with

allocations actually rising by US$400,000, its share of

overall spending was up to 48% from 41% in 2014.

Gold and copper exploration in the U.S. kept the country in

sixth place regionally, ahead of the Pacific Islands. The U.S.

had the smallest percentage decrease (6%) of all regions

in 2015, increasing the gap between it and the Pacific/

Southeast Asia region to US$288 million from US$162million in 2014. Nevada had the largest share (about 42%)

of the country’s 2015 budget total, and three states —

Nevada, Arizona and Alaska — together accounted for 67%.

Gold remained the preferred exploration target; although

allocations dropped just 9%, the metal’s share of overall

U.S. budgets fell slightly to 58% from 60% in 2014. Base

metals allocations actually rose 5% year on year, increasing

their share of the total to 31% from 28%.


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Map 1: Top Destinations for Nonferrous Exploration, 2015

Figure 2: Significant Exploration-Related Financings by Juniors, 2008-15

Note: Exploration-related financings include financings by junior

companies of US$2 million or more, where the company indicated that all

or most of the proceeds were for exploration. Proceeds used primarily for

acquisitions, development or debt servicing/repayment are excluded. The

financing data only covers precious and base/other* metals, which account

for most of the exploration spending covered by the CES report.

Figure 3: Significant Gold and Base/Other Metals Drill Results, 2008-15

Note: SNL Metals & Mining’s Monthly Industry Monitor tracks significant

precious and base/other metals drill results monthly from 2008 onward, as

reported in SNL’s online database. Significant drilling includes initial finds

new zones or satellite deposits, and extensions to existing mineralization

– essentially any drilling that adds to the resource potential of a particular

project or deposit.

*In this report and the Industry Monitor publication, silver and PGM

are included in the Base/Other Metals category to allow a clear

picture of the unique trends in gold exploration.


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Juniors’ Struggle Reflects Market Reality

Rarely immune to the traditional boom-and-bust mining

cycle, junior companies continue to face considerable near-

term uncertainty, with the past decade chronicling the rise

and fall of the sector. A decade ago, junior companies were

well placed to benefit from China’s growing appetite, buoyed

by investors that were keen to capitalize on rising metalsprices. The juniors’ share of the global exploration budget

peaked in 2007 at 55%, before the 2008-09 financial

crisis lowered the group’s share to 40% in 2009. Market

conditions recovered much more quickly than most analysts

anticipated, allowing many juniors to secure strong support

from investors in 2010-11.

By the middle of 2012, however, investment in mining had

become increasingly scarce, forcing many juniors to curtail

programs in the last half of the year. No longer buoyed by a

rising gold price, the juniors’ access to capital continued to

evaporate in 2013, lowering the amount raised by the sector

for exploration to levels not seen for a decade. Despite a

modest increase in the funds raised through the first three

quarters of 2014, a dismal December quarter marked the

beginning of an extended drought in exploration financings

that has continued into 2016.

Efforts to ward off the junior sector’s collapse remain

robust, with various industry organizations pushing hard for

government and investor support. Canada’s PDAC continues

to lobby for a number of fiscal policy tools to help offset

the deficit of infrastructure in the country’s prospective

north, including new tax incentives and the creation of a

Northern Infrastructure Bank. Despite the 2014 adoption

of the Exploration Development Incentive, many Australian

juniors remain vulnerable to the lack of equity market

support, with the Association of Mining and Exploration

Companies advocating for improved State and Federal

initiatives designed to enhance access to exploration

opportunities and funding.

While many junior companies have been able to survive on

minimal funding, an increasing number have moved out of

the sector by leveraging opportunities in existing or emergingnon-mining industries. With any future upward shift in

market sentiment likely to be gradual and uneven, it could

be some time before the juniors derive any practical benefit.

SNL therefore projects a further decline in junior explorers’

aggregate budget total for 2016.

Drilling Steadies

Despite the troubles facing the junior sector, the number of

active projects with drilling activity has remained surprisingly

stable over the past two years, suggesting that some

Figure 4: Initial Resource Values, 2008-15

Note: SNL’s Monthly Industry Monitor has tracked significant precious

and base/other metals initial resources monthly since 2008. The

database includes initial estimates for both new deposits and new zones.

For this graph, and in the Industry Monitor service, silver and PGM

results are included with the base/other metals to allow a clear picture of

the unique trends in gold exploration.

companies are capitalizing on lower drilling costs to continue

small programs at their most promising assets. In addition,

Figure 3 illustrates that the number of reported significant

drill results from this activity has also remained well above

the levels reported in 2008-09, despite a dearth of equity

financing. Regardless of this stability, SNL Metals & Mining

believes the continued lack of funding will translate intolower exploration activity in 2016.

As presented in SNL Metals & Mining’s quarterly State of

the Market report, exploration drilling by primary project

commodity has shifted since 2012, with the annual number

of active copper and gold projects falling by 23% and 31%

respectively in 2015 from 2012 levels — contributing to the

25% fall in the total number of active projects. Bucking the

trend, active drill programs at zinc-lead projects increased by

27%, while the number of nickel projects more than doubled

over the past four years.

Explorers have also shifted their geographic focus in recent

years. Whereas Canada and the United States led the

number of active projects at the peak of the cycle four

years ago, their number of active projects fell by more than

one-third by 2015; Latin America and Africa fared even

worse, with each region having about half the number of

drilled projects in 2015. Conversely, the number of drill

programs at Australian projects jumped by more than half

from 2012 to 2015, despite suggestions that the overall

number of meters drilled fell.


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As documented in CES, exploration budgets have been

shifting away from grassroots work since the 1990s, and

the current downturn has only amplified this trend. With risk

aversion now paramount, companies have been refocusing

their drill activities on existing or new operations to ensure

an adequate level of reserves. The continued decline ininvestor funding for early-stage exploration is impacting the

industry’s medium- and long-term supply pipeline, which

will make it difficult for the sector to respond when demand

begins to rise.

Plunging Initial Resources

With exploration drilling at earlier-stage assets declining,

the disappointing number of initial resource announcements

comes as little surprise. As Figure 4 demonstrates, the

number and value of initial resources peaked in 2008 and

again in 2012; the steep decline after the 2008-09 financial

Map 2: Location of Significant Gold and Base/Other Metals Drill Results, 2015

crisis has been surpassed by the low numbers of new

deposits announced over the past three years.

Persistent uncertainties, financing difficulties and cutbacks

on drill programs targeting new mineralization resulted in

the announcement of only 44 initial resources in 2015,

compared with 50 in 2014 and 168 in 2012. Accordingto SNL’s methodology, the value of 2015’s initial resource

announcements was US$103.2 billion, down 21% from

US$130.6 billion in 2014, which in turn was well short

of the US$366.5 billion valuation achieved in 2012. Map

5 illustrates the in-situ value and global distribution of

the 27 gold and 17 base/other metals initial resource

announcements in 2015, with gold projects in Canada and

a copper project in Russia (Malmyzh) accounting for almost

two-thirds of the total in situ value.


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Significant Project Milestones

SNL also monitors project “milestones.” Positive

developments include the opening of mines, favorable

project decisions and the initiation of feasibility studies.

Negative milestones include stalled feasibility work,

cancelled expansions and mine closures.

There were 54 positive milestones in 2015, compared

with 96 in 2014 and 389 in 2010. Despite fewer project

advancements in 2015, the dollar value of these positive

milestones rose slightly to US$1,334 billion, up from

US$1,245 billion in 2014 but down significantly from

US$8,959 billion in 2010. In 2015, there were a total of

44 negative milestones, valued at US$1,278 billion. This

compares with a total of 27 negative milestones in 2014,

valued at US$752 billion.

As shown in Figure 6, the industrywide pullback

from exploration spending has dramatically slowed or

postponed the positive advancement of many projects.

With the further production cuts expected throughout

2016, and the resulting decreased pressure to replace

reserves, SNL does not foresee much improvement in

project advancement efforts before 2017.

Pipeline Trends

SNL’s Pipeline Activity Index (PAI) is a valuable measure

of exploration and development activity in the international

mining industry. It incorporates data on the number of

projects where significant drill results have been announced,

initial resource statements, exploration financings and

positive project milestones. The PAI slumped in mid-2015 to

reach the year’s low of 41 in April — slightly better than the

all-time low of 40 in April 2014. The index rebounded to 69

in November 2015, but then fell off sharply in December to

end the year at 49 (see Figure 5).

Figure 5 plots the PAI against SNL’s indexed metals price

and the market capitalization of listed companies in theSNL Metals & Mining database. The number of qualified

companies decreased to 2,594 at the end of December, and

the industry’s total market valuation fell in each of the final

three months of 2015.

By the end of 2015, the mining industry had a total market

capitalization of US$874 billion, one-third less than at the

end of 2014 and down 64% from US$2,415 billion in April

2011. Of the latest valuation, 86% was contributed by the

largest 100 companies. As noted earlier, the industry’s

market standing suffered further setbacks in January, falling

below US$800 billion.

Looking Forward

A third consecutive year of industry doldrums has come

to a close, and early indications suggest that 2016 is

unlikely to reveal the light at the end of the tunnel. With

depressed metals prices, production exceeding demand

for most metals, high levels of international political

turmoil and a slowing Chinese economy, investors are

understandably wary of the mining industry, and indeed

of markets in general. As a result, SNL maintains a

moderately negative outlook for investment in exploration,and does not expect exploration budgets to begin

rebounding before 2017.

Over the past three years, companies have significantly

restructured their operations and refined their strategies

to better align with poor economic forecasts and to

reassure their investors. Initially pushed to lower

spending and increase profit margins, many majors have

recently been forced to shrink their operations (including

their exploration departments) to address balance sheet

issues. The inevitable result is a slowdown in organic

Figure 5: Pipeline Activity Index and Industry Market Cap, 2008-15 Figure 6: Project Milestone Announcements, 2008-15


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Map 3: Location of Significant Gold and Base/Other Metals Initial Resources, 2015

growth, leading to greenfields projects being sold or

placed on hold.

The prolonged period of poor financing opportunities forthe majority of junior explorers has forced them to slash

spending, renegotiate agreements or settle for unfavorable

terms, go temporarily dormant or leave the industry

altogether. When market sentiment eventually begins to

improve, the recovery will likely be tentative, offering little

promise of a quick restoration of the juniors’ fortunes.

SNL therefore projects a further decline in junior explorers’

aggregate budget total for 2016.

Although the majors are likely to continue with highly

focused exploration programs on less risky brownfields

targets, SNL believes that some highly leveraged producerswill continue curtailing exploration budgets in 2016,

thereby lowering their category’s aggregate exploration

effort. Given these forecast scenarios and the current

general economic malaise, SNL projects a net decrease of

about 15% in corporate exploration budgets for 2016.


12/12

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RESEARCH& DATA

CONSULTING EVENTS

Documents

SLN METALS 2016.pdf