Exploration Making a Comeback

But Companies Urged to Embrace Digital Age

One of the dominant themes emerging from this year’s PDAC convention is that exploration is making a comeback but requires a different approach in the digital age.

More than 24,000 people from around the world poured into the Metro Toronto Convention Centre – up from 22,000 last year – to visit company booths and hear representatives from finance, consulting and gold mining speak about the importance of greenfield exploration and how to do it better.

“True value is found at the end of a drill bit,” concluded Mark Bristow, CEO of Randgold Resources, at the keynote session on what makes a successful mining company. Bristow attributes Randgold’s success – its share price is one of the few in the gold sector to appreciate over the past decade - to a dedication to exploration and geologists, even during downturns.

The good news is that exploration spending appears to be on the cusp of a turnaround after years of decline in which non-ferrous exploration budgets dropped, according to S&P Global Market Intelligence, from an all-time high of US$20.5 bn in 2012 to US$6.9 bn in 2016. 

“I believe the industry bottomed out in 2016 and is on its way up, and by 2020 exploration spending will have increased by 40%,” said Richard Schodde of Australia’s MinEx Consulting, who has become one of the world’s leading experts on exploration trends.

But if there isn’t a revolution in exploration strategy to accompany the spending, the industry risks continuing on the path of wealth destruction set in the past decade. The average return on a dollar invested in mineral exploration was 47 cents from 2017-2016, according to Schodde.

That’s where technology comes in. There is a massive opportunity to pull exploration into the digital age by using “exponential technology” (such as AI) to generate wealth, said George Salamis, executive chairman of Integra Gold. Mining lags just about every other industry in this respect.

Integra and Goldcorp co-hosted a “Disrupt Mining” event at the convention, a “shark tank” style competition where each of five finalists pitched their innovations to a panel of judges for a $1 mn prize. One of the co-winners was Kore Geosystems, which offers real-time data on drill rigs, allowing geologists to make on-the-spot decisions about whether to continue drilling, or where to target next. Another finalist had developed a machine-learning algorithm to improve mineral exploration targeting.

“Mineral exploration has not had its ‘Uber’ moment yet, but it is coming,” said Salamis. “Oil and gas had this moment in the 1990s with the advent of 3D seismics. That led to a tripling of discovery rates.”

One of the biggest impediments to reaching this goal is the reluctance of companies to share data said Salamis, who launched the crowdsourcing “Gold Rush” challenge to find new targets at the Lamaque gold project in Quebec last year. IBM was a Gold Rush sponsor.

“Cast open your data to the masses, to as wide an audience as possible, not just the geoscience community,” he said. “There are technology giants that are just begging for an entry point into what we do. They will sponsor you.”

Ring of Fire Deadlock Exposes Global Reality for Mine Projects

Strong opinions about the proposed “Ring of Fire” development in the James Bay lowlands of northern Ontario dominated the keynote session at the PDAC conference in Toronto in early March, but there was hardly an audience to hear them.

Although the conference drew more than 25,000 attendees, most of the seats in the giant theatre were empty during the keynote, suggesting investors have tired of hearing about the $60 billion worth of minerals that seem destined to remain in the ground indefinitely, or at least until government, industry and First Nations groups agree on a way to mine them.

The deadlock was perhaps best illustrated by Natural Resources Canada Minister Joe Oliver’s reluctance to actively participate in the “smudge” ceremony at the opening of the conference, a cleansing ritual practised by most First Nations that is meant to sweep away negative energy and emotions. 

Still, the complex issues affecting the Ring of Fire are becoming more relevant to resource developments across Canada and throughout the world. Aboriginal and community groups are more powerful then ever before and mining projects will simply not proceed without their blessing.

“This is a systemic problem which the world is addressing in a variety of ways,” said Bob Rae, former Ontario premier and lead negotiator for the Matawa Tribal Council that represents aboriginals in the Ring of Fire. “The challenge of social responsibility, transparency, accountability and inclusion is not simply an Ontario challenge or a Canadian challenge, it’s a challenge worldwide.”

In Canada, the Supreme Court has determined that there is a duty to consult First Nations about resource projects, but has left it up to governments and First Nations to negotiate what that duty means. This has led to a string of legal battles nationwide, with First Nations groups emerging mostly victorious.

The Ring of Fire is complicated by its location within the province of Ontario, where treaties with First Nations were signed more than a century ago. Provinces that did not have treaties, such as Quebec and British Columbia, are much further ahead in their resource partnerships because they started negotiations with a clean slate, said Rae.

The poverty, health problems and social dysfunction endemic in First Nations communities are added challenges because it’s difficult for leaders to focus on resource negotiations when their communities have no running water, or their youth are committing suicide.

But the image of the disenfranchised aboriginal is no longer relevant, argued Bill Gallagher, who served as a strategist to the Voisey’s Bay Nickel Company when the nickel miner was forging native impact and benefits agreements in Newfoundland & Labrador.  On the contrary, he told the audience that First Nations groups are “riding a winning streak” with a power over resource development that industry underestimates at its peril.

“Whoever aligns with the aboriginals will have the most control in determining development of a project,” Gallagher said. “They have fundamentally reordered the legal underpinnings of the review process for resource projects.”

Junior Sector Quickly Running Out of Cash

Although the PDAC convention drew more than 30,000 registrants from 125 countries to its 81st convention – about the same number as the record set last year – there was speculation that for some juniors, the 2013 gathering may be their last.

According to independent U.S. analyst John Kaiser, roughly 20% of the 527 junior companies registered for the PDAC have less than $200,000 in the bank, enough to maintain an office for a few more months, but not nearly sufficient to finance exploration. He warned that the flight of equity capital has undermined the value of junior projects so severely that the sector is vulnerable to takeovers by cash-rich foreign entities. 

“There’s going to be a massive binging buyout, maybe by the Chinese, of ounces and pounds in the ground,” he said at an international panel luncheon on March 5th where the fate of the junior sector was debated.

Equity investors averse to risk and disappointed by the progress of several gold projects are abandoning the sector, resulting in a 20% drop in the value of the S&P/TSX Venture Composite Index – the bellwether of the junior mining sector – in 2012. Even though commodity prices remain robust, only juniors with the most advanced projects are able to turn to the stock market for cash.

As a result, a 3-year boom in exploration that took spending to record levels of $21.5 billion globally in 2012 is likely to come to a halt this year, according to a special report on exploration trends by the SNL Metal Economics Group, even though the research group expects spending by producers to remain steady.

“Due to the limits imposed by ongoing market volatility, the size and scope of many junior budgets remain dependant on investor interest over the first few months of 2013,” the report concludes. “We forecast that the junior sector as a whole will spend less than in 2012….”

Because gold accounts for more than 50% of global exploration spending, one factor that could revive the junior sector is a rising gold price. Although the price dropped below the US$1600 per oz. level recently as investors became more optimistic about global economic conditions, all three panellists at the international panel luncheon –Kaiser and financiers Eric Sprott and Ned Goodman – expect gold to continue its multi-year ascent in 2013.

Sprott, who oversees about $10 billion in investments as CEO of Sprott Asset Management, estimates that for every 10% move in the price of gold, gold stocks respond with a 20-30% adjustment. That correlation has damaged the sector so far in 2013 as gold has tracked downward, but could just as easily buoy gold stocks if momentum shifts to the positive.

“I’m buying gold stocks everyday,” agrees Goodman, president and CEO of Dundee Corporation.  “Gold is real money, a hedge against the stupidity of the markets.”

Meanwhile, expect much more consolidation in the junior sector as companies pool their cash and assets to survive, and more joint ventures as miners try to “derisk” their projects, said PricewaterhouseCoopers' John Nyholt in a special session on financing in volatile markets.

Miners grapple with uncertainty at PDAC Conference

Where are metal prices heading? What will the development landscape look like in a decade? How will the industry cope with a growing labour shortage? These are just a few of the questions speakers attempted to answer at the PDAC’s keynote session on “dealing with uncertainty.”

The most important driver of the industry is metal prices. When they are robust, as they are today, so is the mining sector. When they drop, exploration is the first to suffer, followed by development projects. If the rout lasts long enough, mines begin to close. But even though metals have come off 11% from their near-term highs in April 2011, Scotiabank’s Patricia Mohr doesn’t see a significant downturn in the foreseeable future.

The reason is the Chinese economy. Although Mohr expects growth rates in China to drop below 9% after averaging 9.6% per annum for the past four years, she is confident that the Chinese will engineer a soft landing.

Mohr is also encouraged by signs of life in the U.S. economy, including car manufacturing as Americans replace their aging vehicles with more fuel-efficient models. “I'm optimistic that we are close to a near-term bottom (in commodity prices),” she told conference delegates.

Although demand for metals should remain strong, it is becoming more challenging for miners to find and develop deposits to supply that demand. It costs twice as much to find an ounce of gold as it did in the 1990s, and an average of 14 years to develop those ounces, according to Michael Chender, founder of Halifax-based Metal Economics Group. Copper miners are even worse off: development costs have more than doubled in the past five years, while the period from discovery to construction can stretch to 20 years.

With costs, permitting times, and taxes and royalties all on the upswing, Chender predicts that the rate of conversion of significant gold deposits (greater than 2 mn ounces) into mines – about 60% historically – will fall by 4% per year. “It’s a gentler slope for copper, but it’s still in the wrong direction, especially in light of the projections for growing demand, ” he says.

The challenge is exacerbated by a growing global shortage of skilled workers, the second biggest risk factor for the mining sector according to accounting firm Ernst & Young. In Canada, one third of the mining work force is eligible to retire by 2016, even as $140 billion in new mining projects are proposed. 

One of the solutions to this human resources challenge is to develop standards and certification for some of the most difficult-to-fill positions, including diamond drillers and underground miners, says Ryan Montpellier, executive director of Canada’s Mining Industry Human Resources Council. 

Another is to change the perception of an industry considered “unskilled and brute force” to one that is highly-skilled (for example, 80% of workers in the mineral exploration sector have some form of post secondary education while 50% have a university degree).

In the end, higher prices won’t mean much if there is a scarcity of both deposits and the workers that can find and develop them.