Worldwide Mineral Exploration: Preparing for the next boom
Executive
Summary & Table of Contents
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This report examines the worldwide mineral exploration sector with detailed chapters on the structure of the industry, how prospects are evaluated and financed and the opportunities and risks associated with the search for minerals, as well as recent and future trends.
Chapter 1 provides an overview of the nature and structure of the business. Mineral exploration is a high risk, high reward business characterized by boom and bust cycles. On average, only about one in 100,000 grassroots prospects becomes a mine. Most companies never find an orebody, but a few are extraordinarily successful. Economic discoveries tend to occur during boom phases when metal prices and exploration spending are relatively high.
Chapter 2 deals with recent trends. The dominant trend for the industry over the past decade has been globalization. Whereas exploration was once concentrated in Australia, Canada, South Africa and the U.S. (the 'big four'), changes to mining codes around the world have broadened the playing field considerably.
The risks and uncertainties of mineral exploration are examined in Chapter 3. These are increasing as mining companies go global. On top of traditional market and technical risks, the industry is now faced with a myriad of political risks ranging from vague mining codes to expropriation. To improve the odds of success, companies have developed a number of risk mitigation strategies.
Chapter 4 provides a guide to some of the methods used to evaluate property potential. The Bre-X Minerals scandal in 1997 highlighted the importance of property valuation as a means of directing investment decisions. Valuation methods change as exploration progresses. In the early stages, property valuation is highly subjective. Later, valuation becomes more rigorous and objective.
Financing options are explored in Chapter 5. The last boom (1993-1997) was characterized by unprecedented access to equity markets for exploration financing. In 1996 alone, mining companies listed in Canada, the main source of equity capital, raised an estimated US$6.2 billion for mining projects, perhaps a third of which was directed toward exploration.
In less receptive equity markets, junior mining companies rely on senior partners and, to a lesser extent, royalty companies, to provide exploration financing. Senior partner financing can take the form of an option agreement, joint venture, or strategic alliance, while royalty financing is tied to revenues and profits from mining.
Chapter 6 describes business opportunities in the industry. Revised mining codes in many developing nations have facilitated exploration. New processing techniques have broadened the definition of "ore" and made formerly marginal deposits attractive. The decline in metal prices have made bargains out of quality mining companies, and their properties. There are also opportunities for companies that supply and service the exploration industry. Financial services are required for the wave of mergers and acquisitions that is sweeping the sector. Geological expertise and technological innovation are responding to the repercussions of the Bre-X scandal, the mountains of data being generated by modern exploration programs, and rising competition.
The industry is witnessing a protracted bust phase. Without an elephantine discovery by a junior company or a major increase in the price of gold, exploration spending could decline further. Many juniors will fail, some companies will retreat from foreign soil, and the discovery rate will decrease.
During this phase, the Canadian regulatory system will be revised to provide investors with the tools they need to recognize fraud and misrepresentation of exploration results. The changes will likely add to the costs of exploration, but in the long-term, will give investors the confidence they need to return to the market in time for the next boom.
Over the long-term, the outlook for mineral exploration is brighter. Prices for most metals should increase incrementally with the increase in global population and the rise of the middle class in many developing nations, providing an incentive for exploration. The trend toward globalization will continue as the industry continues to push into new frontiers, including China and perhaps the ocean floor.
Long-term trends will also be affected by the evolution of a two-tier system in the mining sector. On the top tier will be a handful of international mining giants that dominate the development and production scene. On the bottom tier will be a much larger number of junior companies that focus purely on exploration, feeding the giants reserves and advanced exploration properties as needed.
CHAPTER 1: INTRODUCTION TO MINERAL EXPLORATION
Introduction
Boom and bust
Global distribution of spending
Key players
The exploration sequence
Exploration techniques
Cost
Ore deposit types
Summary
CHAPTER 2: RECENT TRENDS
Introduction
Globalisation
Mining Law Reform
Mineral prices
Access to Capital
Mergers & Acquisitions
Privitisations
Technological innovation
Junior Discoveries
The Bre-X scandal
Summary
CHAPTER 3: RISK & UNCERTAINTY
Introduction
Market risk
Technical risk
Political risk
Other Risks
Summary
CHAPTER 4: PROJECT VALUATION
Introduction
Early Stage Valuation
Later Stage Valuation (Due Diligence)
Summary
CHAPTER 5: EXPLORATION FINANCING
Introduction
Equity Financing
Senior partner financing
Option agreement
Farm-in agreement
Strategic alliance
Royalty financing
Summary
CHAPTER 6: OPPORTUNITIES
Where to look
A niche for juniors
Opportunities for investors
Opportunities for service companies & suppliers
Summary
CHAPTER 7: FUTURE TRENDS
Introduction
Short-term trends
Long-term trends
Summary
APPENDIX 1: LIST OF KEY
CONTACTS
GLOSSARY
BIBLIOGRAPHY
LIST OF TABLES
Table 1.1: Major international
ore deposits
Table 2.1: Major mergers & acquisitions, 1996-97
Table 3.1: Risk Mitigation
Table 4.1: Drilling density for selected deposits
Table 5.1: Minimum listing requirements for juniors: TSE, VSE, NASDAQ, ASX
Table 5.2: Equity finance vehicles: advantages and disadvantages
Table 5.3: A typical option agreement
Table 5.4: Financing options: advantages and disadvantages
Table 6.1: Canadian gold exploration property transactions, 1996-98
Table 7.1: Senior exploration budgets, 1996-98
LIST OF FIGURES
Figure 1.1: The Exploration
Clock
Figure 1.2 Exploration expenditures in Canada/metals price index 1969-97
Figure 1.3: Worldwide exploration spending by location (1997)
Figure 1.4: The exploration sequence
Figure 1.5: The cost of exploration
Figure 2.1: Winners & losers in the global exploration battle
Figure 2.2: Copper prices, 1997
Figure 2.3: Nickel prices, 1997
Figure 2.4: Zinc prices, 1997
Figure 2.5: Gold prices, 1997
Figure 2.6 Silver prices, 1997
Figure 3.1: Corruption Perception Index
Figure 4.1: Minimum acceptable gold exploration target conditions: remoteness
variants
Figure 4.2: Minimum acceptable gold exploration target conditions: price variants
Figure 5.1: Sources of equity financing for mining companies in 1996