June quarter shows growth in financing inflows and exploration expenditure, with strong results for gold

15 October 2019

Latest research from advisory firm BDO shows the cash position of ASX-listed explorers for the June 2019 quarter provides positive news with an increase in financing inflows and exploration expenditure.

The June quarter saw financing inflows increase by 32% to $1.2 billion, the highest level since the June quarter of 2018. On top of this, exploration spend increased by 20% to $435 million; up $363 million from the previous quarter.

Sherif Andrawes, BDO’s Global Head of Natural Resources, said this was good news for the sector with total exploration spend exceeding the two year average ($411 million) and financing inflows reverting towards the two year average ($1.37 billion) after declining to $908 million in the March 2019 quarter.

“This increase can partly be attributed to the higher prices we’re seeing for commodities like iron ore and gold, as well as monetary easing by central banks, which typically increases liquidity and has a positive impact on capital markets,” Sherif said.

“Since the start of 2019 we have seen an upwards turn in the Australian resources sector and this has given some of our explorers greater confidence to raise capital and continue to invest more in the ground,” he said.

The total number of explorers raising more than $1 million increased from 103 in the March quarter to 133 in the June quarter. Sherif commented that this reflects an increase in confidence by financiers, as well as solid valuation levels in which exploration companies are willing to go to market.

During the quarter, 28 companies raised in excess of $10 million. Of these 28 companies, there were seven gold companies, five oil and gas companies, and three lithium companies. In total, the 28 companies that raised in excess of $10 million accounted for $765.7 million (64%) of the $1.2 billion total of financing inflows. Of the $765.7 million raised by these 28 companies, gold accounted for 34.1% of the total financing inflows, followed by oil & gas with 20.2%.

The June quarter was particularly strong for gold, with a price increase of 9% driven by a combination of rising share market volatility, geopolitical tensions and falling interest rates. The high price and falling Australian dollar also contributed to strong share prices and profits for many Australian gold producers and encouraged corporate activity within the sector. 

Gold explorers accounted for 34.1% of the total capital raised by exploration companies for the June quarter, with one of the highlights being the $105.63 million capital raising by West African Resources Limited (West African) to progress the development of the Sanbrado Gold Project in Burkina Faso. Another highlight was the IPO of gold explorer Mont Royal Resources Limited (Mont Royal Resources) on 7 May. As at the last trading day of the June quarter 2019 (Friday 28 June), the company was trading 35% above the 20 cent issue price.

“The uncertainty the market is feeling from events like the US and China trade dispute, Brexit and the instability in Hong Kong has driven the gold price higher which has provided greater opportunities for Australia’s gold producers.” said Sherif.

Sherif said it is a big concern that most smaller explorers are finding the market to be very tough.

“The latest BDO research confirms the continuation of a two-speed market, where explorers like Gold Road Resources, which had favourable commodities and projects nearing production, are finding it easier to raise capital. Our smaller explorers are continuing to struggle to raise capital through the share market, which is partly being overcome by some explorers seeking funding from larger mining companies in exchange for farm-in agreements,” he said.

The struggle for smaller explorers is further evidenced by the number of explorers lodging Appendix 5Bs falling to 666 in June from 680 in March, which is the lowest number since BDO commenced its quarterly analysis in 2015.

“We’re expecting to see a solid pipeline of M&A and capital raising activity within the exploration and mid-tier producer sector during the second half of 2019. Unfortunately, life does not look like it’s going get any easier for smaller explorers in the short term,” Sherif said.

Read the full Explorers Quarterly Cash Update 

Explorers Quarterly Cash Update