Article:

Will Australia's resources sector be prepared to meet global demand?

25 March 2015

Phillip Murdoch , Partner, Audit & Assurance |

The mining and resources sector has long been a backbone for the Australian economy, but recent years has seen a decline in exploration activity.

BDO's quarterly reports on the cash flow status of exploration companies have consistently shown a decrease in available funding, with the Q2 Quarter Explorer Cash Update revealing only 53 per cent of companies have enough cash to continue operations at current levels for more than two quarters. As a result, many of these companies have ceased or reduced their exploration activities.

What's in store for the sector, and will it miss out on future opportunities if it neglects grass roots exploration?  

Australia's shifting explorer landscape

The decreasing number of exploration companies in Australia is no secret. It's a trend that's garnered media attention over the past few years, with industry experts commenting on the state of affairs and implications of the decline.

"Right now there isn't money," Mark Bennett, chief of Sirius Resources, told The Australian Financial Review in August.

"Everyone has really shut up shop or is teetering on the edge of being insolvent, with a few exceptions here and there, there is just no exploration happening anymore."

BDO's research into the cash reserves of listed exploration companies has highlighted a two-fold reduction in the sector. Not only is one in nine companies putting exploration activities on hold, many are falling off of the ASX.

The Q2 report, which examined data from the December 2014 Appendix 5B reports, revealed that 17 fewer companies filed reports compared to the September 2014 quarter, down a total of about 5 per cent from the previous year. 

Not all of the decrease indicates financial trouble for explorers: two were acquired and five changed their business through backdoor listings. However, the overall trajectory demonstrates that exploration activities are on the decline in Australia, with the struggle to raise capital causing these firms to pursue alternative business strategies. 

The global perspective

As the Q2 report explained, falling commodity prices are at the heart of the difficulty to attract investment and continue exploring. Despite current levels, the prospect for greater demand and higher profitability in the future presents ongoing opportunities for the sector - if it's prepared to seize them. 

In 2013, McKinsey&Company concluded that the ‘supercycle’ of high prices and volatility was ‘alive and well’. Importantly, demand from emerging markets is expected to surge, with advances in technology supporting greater productivity and efficiency in producing products. The challenge, the firm predicted, would be in generating sufficient supply to meet those needs. 

Therefore, the market may yet prove lucrative for the resources sector. However, because it takes years for a new site to develop into a fully operational production facility, a drastic reduction in exploration activity could limit the country's ability to capitalise on improving conditions.  

Preparing for the future

Recognising these concerns, the government and other leaders have encouraged firms to continue exploration efforts.

The Exploration Development Incentive (EDI), which attempts to boost exploring through tax credits, is one measure officials have taken to support the industry. This measure recently passed the House of Representatives, with the Association of Mining and Exploration Companies encouraging the Senate to follow suit. 

"The EDI will encourage much needed investment in greenfields exploration which is at historic lows," said Simon Bennison, CEO of AMEC, on 26 February.

"Greenfields exploration is essential to make new discoveries that will become the mines of tomorrow and generate Government revenue streams." 

Although BDO has noted some of the limitations of the plan, it is one step toward creating greater exploration activity.

As McKinsey&Company pointed out, the global economy is still improving after the financial crisis struck in 2008. As it gathers steam, greater conditions for the resources market may develop.

Will Australia be prepared to take advantage of these developments when they come, or will today's exploration struggles get in the way of future competitiveness?