Rising costs somewhat dampen the enthusiasm that surrounds a significant increase in exploration expenditure by listed juniors in the June 2005 quarter.
On the surface, the increased exploration expenditure by stock exchange-listed Australian junior mining and exploration companies looks good.
But squirreled away inside the June 2005 quarter figures are the effects of rising exploration and production costs, including those associated with attracting skilled labour and the ultimate costs of investment disincentives stemming from unattractive regulatory and policy frameworks.
So, increased expenditure may not translate into more holes in the ground; it just costs more to do the same.
A lot of this exploration money has also been spent on overseas projects.
Even if these negatives were not the case, current investment levels in Western Australia are still about $80 million short of those in the June 1997 quarter.
And all this with no apparent end in sight to Australia’s resources boom.
At a recent Ernst & Young economic presentation and panel discussion in Perth, managing director of nickel producer LionOre Australia, Mark Ashley, lamented the chronic shortage of skilled labour and cited unskilled labour costs in the WA mining sector of $150 an hour.
“The margins we are seeing are plus 20 per cent and that’s too high, so in many cases we either do it ourselves or send work offshore,” Mr Ashley said.
It’s even worse in the oil patch, not included in this survey. At the same gathering, the managing director of Perth-based oil producer Tap Oil, Paul Underwood, said the cost of hiring a semi-submersible drilling rig had risen from about $A93,000 a day to $A226,000 in two years.
The oil sector is also facing the fallout from the possible loss of up to 20 rigs to Hurricane Katrina in the US in an already tight market, and the upward effects that will have on insurance costs around the world.
Another sticking point is the cost of power; about A8.5c per kilowatt hour in Australia compared with two cents per KwH in Africa.
“This is a huge cost impediment,” Mr Ashley said.
But the resources boom continues unabated, with predictions that Western Australia’s gross state production growth will grow 7 per cent between 2004-05 and 2006-07, way ahead of Queensland’s 4.8 per cent, Victoria’s 3.5 per cent and NSW’s 3.1 per cent.
These growth figures moved distinguished economist and Melbourne Business School executive director Ian Harper to tell his mostly resources-based Ernst & Young audience: “These are possibly the best economic conditions in living memory. If you guys can’t make money under these conditions, then someone ought to take you outside and horse whip you.”
Way out on its own at the top of the heap of junior explorers by expenditure is Pilbara iron ore project developer Fortescue Metals Group, which outlaid $16.9 million for the quarter. At the end of the period it still had $81.2 million in the bank.
Construction of the company’s $2 billion-plus project is expected to begin in December this year, with first production slated for January-February 2008.
The project has inferred and indicated resources of 1.5 billion tonnes at 58 per cent iron, but has run into problems over the Chinese commitment to project financing.
After eastern staters Ballarat Goldfields, which spent $6.65 million on exploration while reopening its Ballarat East underground gold mine in Victoria, and Queensland-based gold producer Pan Australia Resources, which is getting its $20 million Phu Bia gold mine in Laos up to full production, local Western Areas comes next in the WA pack.
The nickel developer spent $3.52 million exploring its Forrestania tenements, 450 kilometres east of Perth, which contains 115,000 tonnes of nickel worth about $A2.3 billion, including 15,000t at the Flying Fox mine’s T1 underground deposit, from where first production is scheduling by the middle of next year.
First-stage production from Flying Fox is expected to yield 6,000tpa nickel for a pre tax $A50 million over two years from the start of production. The company finished the quarter with $3 million in the bank.
Gallery Gold spent $3.37 million on its southern African gold properties for the period, lifting total resources at its Buckreef Project in Tanzania 36 per cent to 1.91 million ounces.
It has also recently brought its Mupana gold mine in Botswana back on line and remains on target to produce 100,000 ounces in its first year. It finished the quarter with $10.51 million in the bank.
Moto Gold Mines spent $3.29 million on exploration, mostly on upgrading existing resources at its Moto gold project in the Congo. Current resources include an indicated 700,000 ounces and an inferred 7.33 million ounces, with the pre-feasibility study expected late next year.
Pakistan gold/copper explorer and takeover target Tethyan Copper Co is concentrating on its Tanjeel project at Reko Diq, where latest drilling has come up with indicated and inferred resources containing 7.07mt of copper and 10.9 million ounces of gold.
The company spent $3.27 million on exploration in the June quarter aimed at lifting the total resource base to more than one billion tonnes ahead of scoping studies on a potential world class mining project by early next year. It also had good cash reserves of $11.32 million at June quarter’s end.
WA gold and silver miner Legend Mining has extensive silver holdings around Karratha and the old Gidgee gold mine south west of Wiluna, which was shut down in March this year.
Extensive exploration since then has yielded a resource of 320,000 ounces, while cash reserves stood at $1.87 million at the end of the period.
This top end of WA junior explorers is rounded out by Wedgetail Exploration (which spent $2.38 million), De Grey Mining ($2.22 million), Universal Resources ($2.07 million) and CopperCo ($2.01 million).
Those at the bottom of the list include some well-known names from the past that are now obviously watching their cash reserves.
They include: Lach Drummond Resources (with exploration expenditure of $3,000 and $992,000 cash); Golden Deeps ($5,000 and $1.6 million); rebuilding Burdekin Pacific ($11,000 and $471,000); Bannerman Resources ($19,000 and $2.13 million); and Rand Mining ($19,000 and $3.34 million).
• The writer holds shares in Western Areas.
