Explorer companies continue to face cash flow challenges

24 March 2015

Phillip Murdoch , Partner, Audit & Assurance |

Australia is rich in natural resources, but it takes exploration activity to discover prime locations for mining and extraction. To gain insight into the operations of ASX listed exploration companies, BDO has been conducting quarterly studies since September 2013 to assess cash reserves, as well as how these companies are responding to requirements for additional cash.

As each quarter passes, a trend has emerged - more and more explorers are facing limited cash resources, and this obstacle is leading many of them to cease or decrease their exploration activities.

Exploration companies are addressing cash flow challenges in a number of ways, however the reduced ability to discover new reserves and resources may ultimately harm Australia's future competitiveness in the sector, as newly established sites today would be expected to come into production as the global market picks up. Because it takes 10-15 years for sites to be fully developed, by not exploring at the current time, as a country, we may miss out on the opportunity to participate in the upturn of the global resources industry when this eventuates.

Increasing struggles for cash 

BDO's research examined the December 2014 Appendix 5B cash information from all of the ASX-listed mining, oil and gas exploration entities. Like the previous six reports, the Q2 Quarterly Explorer Cash Update revealed that an increasing number of companies have stopped exploring, with insufficient cash on hand to continue their operations for an extended period.

In particular, the most recent data showed one in nine entities (11 per cent) did not conduct any exploration activities, which was the same as the previous quarter. However, compared to the December 2013 data this figure increased from 9 per cent of explorers not exploring.

As for cash on hand, fewer companies had enough cash available to cover their net operating expenditures at present levels for one or two quarters, 29 per cent had sufficient cash to fund only one quarter’s net operating expenses and 47 per cent had sufficient cash for two quarters. Since the start of BDO’s analysis, this represented the highest number of entities with insufficient cash to fund operations at current levels for less than half a year. 

What's causing this trend? One of the most significant factors, as highlighted by the report, is falling prices for commodities. This has driven down investor confidence, making it more difficult for companies to raise capital needed to carry out exploration activities. 

Strategic responses and outlook 

Nonetheless, in the December 2014 quarter explorers have continued to demonstrate resilience. Although they've had to decrease their exploration activities, nearly half of those lodging appendix 5B reports (46 per cent) had positive net financing cash flows.

Entities are also taking positive steps to stay afloat. Despite a 17-strong reduction in listed exploration companies between September and December 2014 (from 831 to 814), seven of these organisations transitioned to production or were used as the target of a backdoor listing by non-exploration entities.

These possibilities demonstrate the successful strategies some entities have pursued, but the data still shows a concerning outlook for exploration and the resources sector in Australia