How are explorers dealing with cash flow challenges?

12 December 2014

Phillip Murdoch , Partner, Audit & Assurance |

Australian exploration companies have the advantage of a growing market, but they face significant cash flow shortages. What are they doing to overcome these challenges? 

Worldwide energy and mineral consumption continues to rise, especially as developing countries increasingly engage in industrial activities. Australia has a significant amount of resources that have yet to be discovered and others that remain undeveloped, but the number of exploration wells has declined since 2009, according to a 2014 report from the Australian Petroleum Production & Exploration Association. 

Why? A number of companies aren't conducting exploration activities because they don't have enough money. BDO's June 2014 Explorer Quarterly Cash Update revealed that companies have less cash in June 2014 than during the same period the previous year, with many having only enough funds to maintain operational and administrative activities for one or two quarters. As a result, over 10 per cent of these companies didn't explore in the second quarter of 2014. 

Nonetheless, explorers have employed several strategies to overcome cash challenges. These include: 

  • Tax incentives. Smallexploration companies in particular have turned to research anddevelopment tax incentives to mitigate their financial constraints. Byfinalising their tax returns quickly, they can receive claims to put fundsinto their budget. Currently, the incentive has no cap, but it doesn'tapply to all activities. 
  • Financing activities. During the June quarter, 42 per cent of explorers weresuccessful in fundraising, with some receiving an inflow of over $1million in equity or debt capital. For some, shareholders were willing toadd to their equity or debt funding. Companies that raised over $10million have been able to pursue major ventures overseas. 
  • Backdoor listings. Some explorers were acquired by organisations inindustries such as health care, industrials, IT and materials. Throughbackdoor transactions, exploration companies seeking alternate fundinghave been able to reinvent themselves.

Explorers that were unsuccessful in raising additional funds generally had to put their exploration activities on hold. While this minimises their expenditures in the short term, ultimately it affects their long-term prospects and puts a strain on mining production companies that need new sources to maintain their operations at the necessary levels.