Most of the discoveries of the last 20 years have been stock market-funded. But is the model sustainable, and is there a better way?
Exploration is essential to the mining industry – if you don’t find, you can’t mine. Aside from the necessity for exploration, discoveries of mineral deposits can also generate immense wealth, so there is ample incentive to explore.
Even so, exploration is costly and risky, which makes funding for exploration a specialist endeavour. It makes sense that the mining industry itself would ultimately fund this activity – the sector requires replacement of mined Reserves and is best placed to understand the risks involved.
But the proportion of exploration discoveries funded by the industry has dropped substantially in the last two decades, with the mantle taken up by stock market-funded junior exploration companies. Is this the way of the future? Surely depending on the stock market to fund discovery of future supply is not in the industry’s best interest.
A short history of how discoveries have been made
The nature of exploration has changed over time, commensurate with evolving structure of the mining industry (see Figure 1).
Before (roughly) the 1930s, prospectors were by far the most significant finders of ores, and discoveries were made from basic observation. If a deposit was large and mass exploitation was possible, this might have manifest as numerous independent small claim operators prior to consolidation under a single company (or a few). Many of the world’s now largest mining companies were nucleated around ownership of large orebodies.
By the 1950s, big mining companies had become explorers in their own right. Size enabled the concentration of better assets in larger companies, and a necessary renaissance for exploration practice led to better and more science being used. This might seem entirely logical today, but was a substantial competitive advantage to those who were early adopters at the time.
During the 1980s, junior companies sponsored by investors via the stock market began increasing their proportional contribution to discoveries of new mineral deposits.
Since circa 2000, the proportional contribution of discoveries made by major miners has fallen, with the share made by juniors expanding commensurately. Over roughly the same period of time, a major consolidation has resulted in fewer, but larger, mid-tier and major miners, and there has also been a massive expansion in the population of listed junior exploration companies – which has more than doubled.
Factors of exploration success
Exploration is an iterative process, which in recent decades is rarely instantaneously successful and seems a far cry from prospecting finds made during the early phases of the modern mining industry. Once upon a time, diligence and keen observation might have yielded a company-making discovery from surface-based observations. The modern individual explorer has a multitude of techniques available, and while many are not new, computing power has improved their precision and provides the ability to overlay different and large datasets to look deeper than ever for clues of hidden ore. More and more often a discovery relies on diligent application of nearly all the tools available.
Eventual success requires two crucial inputs over a sustained period:
- patient funding that can endure faint encouragement and understands unambiguous success may not be immediate
- the ability to gather and interpret data in a way that
is both scientific and creative.
The role of personalities and relationships to both these inputs is often overlooked but cannot be downplayed. Funding an exploration effort relies on the budget gatekeeper believing the case to explore, which must be well-argued by the explorer. This works best if the two get along and trust each other. Data alone is of little use without the accumulated learnings of years of interpreting, testing, and re-interpreting. This intellectual property can’t be owned – it is possessed by the explorers themselves.
Changing of the guard?
One effect of mining company consolidation, especially that which took place between the 1990s and 2012, was centralisation of services. Teams were combined and duplicates removed – there was a loss of people who were specialist explorers and subsequent corporate loss of that intellectual property. The increase in scale of companies also increased thresholds of interest. The potential size of a discovery that would interest BHP today is no doubt larger than it would have been in the 1980s.
Major and mid-tier miners used to account for the largest share of discoveries made and were serious contributors to exploration – both through expenditure and as curators of the science. The mantle of dominant discoverers has been ceded to an enlarged army of junior companies. The critical implication of this shift is a wholesale change in how exploration is funded. This used to be strongly led by the industry – ie cash flows generated by miners were partially re-invested in exploration budgets. But junior companies have no revenues, so rely on the stock market to provide the money. Herein lies the problem – exploration, a critical function, funded by the stock market which lacks patience and possesses an apparent unwillingness to fund anything less than an unambiguous success.
As unsophisticated as the market can be toward concepts like exploration, it tends to be efficient at tallying supply and demand. For the junior sector to remain as the stock market-funded exploration workhorse of the industry, the incentive to investors needs to be clear – required stimulus might include commodity price increases or large miners buying their junior peers.
But perhaps the stock market has realised it is not cut out to fund exploration to the extent it has done up to now. After all, that same money could be spent making a quick buck on any manner of company peddling medicinal marijuana or a disruptive app! Consider for a moment encapsulating a focused exploration effort in a sole-purpose company – the materialisation of immense value if a discovery occurs provides the greatest possible investor leverage, so it is possible to see how the concept began to appeal to the market. It’s hard not to be drawn to such an entrepreneurial ambition, especially if the executives doing the hard (and clever) work drew their reward in the same way as investors.
Along the way however, wages in juniors had to rise – ostensibly to ensure that the very best people could be secured, especially against the backdrop of severe wage inflation in the industry throughout the last boom. As much as the stock market can rally to an idea where value can materialise rapidly, it also has a keen sense of obtaining ‘bang for buck’. Hefty wage bills and other expensive corporate arrangements in a small company rapidly diminish the probability of successes when it erodes firepower from the exploring budget. Could administrative excesses and inefficiencies bring the ‘age of juniors as explorers’ to an end?
Major miners lost a lot of ground in the most recent mining bust (circa 2011-2015), having shed a lot of their exploration knowledge and ground to rein in costs. It is time-consuming to rebuild the capabilities to explore, but the majors are exploring again, and they appear to be making discoveries.
There have been two notable recent examples
- in late 2018, BHP reported a deep but impressively mineralised copper find in the Gawler Craton of SA (BHP, 2018)
- in early 2019, Rio Tinto revealed a potentially extensive copper discovery in the Paterson province of northern WA (Rio Tinto, 2019).
As well as reinvigorating their own direct exploration efforts, large miners have also been investing in junior explorers, both directly and via joint ventures. This paints a picture of a potential future trend – explorers backed (or partly backed) by established larger miners. The advantage of this model is an easier exit from projects that don’t meet the major’s size or quality threshold. It also sidesteps needing to build (or rebuild) a large and clever exploration team, and enables more instantaneous cost cutting in future. Looking forward, merger and acquisition activity could play a significant part in transmitting projects from their finders to the ultimate long-term owners.
The requirement to explore is not in question – the ability for the stock market to continue to provide funding for discoveries is the key issue here. It’s quite probable that a return to the exploration/discovery dominance of major miners would be a fairly long-term undertaking. However, when considering the often short-term gains mentality of the stock market,
funding of discoveries via junior explorers is unlikely to be sustainable.
BHP, 2018. BHP copper exploration program update, announcement to ASX on 27 November.
Rio Tinto, 2019. Rio Tinto Exploration Update – copper-gold mineralisation discovered in the Paterson Province in the far east Pilbara region of Western Australia, announcement to ASX on