Big cut in mining firms' budgets to spark metal price boom

Firms to continue slashing exploration spending despite China's huge demand for resources

PUBLISHED : Saturday, 18 January, 2014, 1:29am
UPDATED : Saturday, 18 January, 2014, 5:25am

Mining companies are extending massive cuts in exploration budgets for a second year, setting up the next price boom as China continues its relentless pursuit of metals and energy.

Exploration spending plunged 30 per cent or US$10 billion last year, squeezing budgets to search for minerals and sustain supplies, according to MinEx Consulting, whose clients include top miner BHP Billiton. Payments might drop a further 10 per cent this year for geologists, drilling exploratory holes and analysing mineral specks to unearth the next copper, iron ore or gold El Dorado, MinEx said.

Investors in mining companies and metals may welcome the cuts because they will help propel a rebound in prices. Platinum, aluminium, silver, nickel, zinc, lead and uranium are forecast to rise by 2017, according to analyst estimates.

Rio Tinto on Thursday said it more than halved exploration and evaluation spending to US$948 million last year from US$1.97 billion in 2012.

OZ Minerals, an Australian copper producer, this week cut its exploration budget for this year by 62 per cent.

BHP, the world's third-biggest producer of nickel, iron ore and copper, almost halved its exploration spending in the past financial year from a peak of US$2.45 billion in 2012.

The austerity has been triggered after a decade-long mining boom peaked in 2012. That forced producers including BHP, Rio Tinto and Glencore Xstrata to slash spending and sell assets to bolster earnings as more than US$60 billion of write-downs mounted.

BHP chairman Jac Nasser said China, despite its slowing economy, would remain the major driver of world economic growth. It could increase demand for some commodities as much as a 75 per cent over the next 15 years, he told shareholders at a meeting in November last year.

Richard Schodde, the managing director of MinEx, said miners were struggling to find enough deposits to replenish what they had mined. "Enthusiasm or financial capability to fund exploration is fairly limited," he said.

Macquarie said slower growth rates in mine output increasingly were being priced into metals. The market's focus might shift towards potential deficits of supply in the next two years, its analysts said in a report last week.

Markus Bachmann, the chief executive of Craton Capital, said: "The irony is that the biggest investment cycle in history hasn't produced enough capacity."

Aluminium is forecast to rise 22 per cent to US$2,204 a tonne in 2017 from the first quarter of this year, according to estimates. Uranium is seen 69 per cent higher at US$66.03 a pound.

The drop in exploration now might create supply shortages because it could take between 10 and 12 years to develop a mine from when a deposit was discovered, Schodde said.

Companies were pressured to retrench as metals prices tumbled about 12 per cent from last year's high in February.