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Resurgent quarter of explorer spending confirms strong industry sentiment

29 June 2017

Latest research from BDO shows there has been a broad recovery in the resources sector, highlighted by the resurgence in the number of initial public offerings (‘IPOs’) and another expected increase in cash outflows for the June 2017 quarter.

The BDO Explorer Quarterly Cash Update is based on the cash position of Australian-listed explorers based on quarterly Appendix 5B reports lodged with the Australian Stock Exchange (ASX).

Sherif Andrawes, National Leader, Natural Resources at BDO, said “The welcome recovery we saw in the December 2016 quarter has continued. Cash flows increased once again, as did the number of resource company IPOs. We anticipate this revival of increased exploration activity to continue into the next quarter.”

Battery-related commodities led the way on the back of growing demand for electric cars, accounting for 50% of the funds raised by exploration companies via IPOs.

“Of particular significance is the increase in the number of companies lodging Appendix 5Bs for the first time since September 2013.”

“We will wait to see what impact the scrapping of the exploration development incentive (‘EDI’), announced as part of the 2017/18 Federal Budget with a new tax scheme to take its place, will have on junior explorers.”

“We would expect that as the M&A phase continues and with a return of equity to the broader commodity markets, exploration will again be a strategic priority for a number of companies and that the EDI may stimulate this activity earlier in the process.” Mr Andrawes said.

Key findings of the quarterly update reveal:

  • Total exploration expenditure fell from $354 million for the December 2016 quarter to $305 million for the March 2017 quarter. This is despite an increase in the number of companies lodging Appendix 5Bs, with average exploration expenditure falling from $0.51 million to $0.44 million. It is not uncommon for exploration expenditure to decrease from the December to the March quarter, however we note that the decrease from the December 2016 quarter to the March 2017 quarter is much smaller than previous years.
  • Net operating cash outflows fell from $695 million for the December 2016 quarter to $514 million for the March 2017 quarter and there has been a declining trend in the number of companies with cash to support one and two quarters of operating expenditure.
  • The proportion of companies with two quarters or less of cash reserves, based on current operating expenses, decreased from 38% for the December 2016 quarter to 31% for the March 2017 quarter. This is despite a decrease in average cash reserves from $6.20 million as at 31 December 2016 to $5.93 million as at 31 March 2017 quarter.
  • Total administration expenditure decreased in line with exploration expenditure, from $213 million for the December 2016 quarter to $175 million for the March 2017 quarter. Furthermore, average administration expenditure decreased for a sixth consecutive quarter, from $0.40 million for the September 2015 quarter to $0.25 million for the March 2017 quarter as companies sought to restructure and cut costs over the last year in order to conserve cash. With a lower fixed cost base, exploration companies should be well placed to capitalise now that the market seems to have turned. 
  • There has been a broad recovery in the resources sector evidenced by a 13% increase in exploration expenditure from $267 million for the March 2016 quarter to $305 million for the March 2017 quarter.
  • During the quarter, there were 19 companies that reported exploration expenditure in excess of $2.5 million, dominated by gold, oil and gas and potash explorers.
  • Net investing cash flows decreased from a net inflow of $150 million for the December 2016 quarter to a net outflow of $133 million for the March 2017 quarter. We note that the abnormally high figure for the December 2016 quarter was skewed by Gold Road Resources Limited’s sale of 50% of its Gruyere Gold Project for $250 million during December 2016.
  • Net investing cash flows for the same period last year totalled $46 million, indicating improving market sentiment with more companies willing to invest.
  • During the quarter, there were 13 companies that had net investing outflows in excess of $5 million, dominated by oil and gas and lithium explorers. For the December 2016 quarter there were ten companies led by gold and lithium explorers. This reaffirms the increased activity in lithium and the markets shifting preferences away from bulk commodities to battery related and mining technology stocks.
  • For the quarter ended 31 March 201, 698 companies lodged an Appendix 5B, eight more than the December 2016 quarter and 39 less than last year but representing the first quarterly increase since September 2013.