Special Report - Costs cut into exploration

Booming commodity prices mean annual minerals exploration spending in Australia is expected to exceed $1 billion this year for the first time since 1997.

But while this is generally seen as a positive for the industry, rising costs suggest the value of exploration achieved with those funds is diminishing. Meanwhile, the perennial debate over a lack of green fields exploration is continuing.

In the March quarter, the amount spent by Australian-listed mining and exploration companies was $131 million, down 11 per cent on the previous quarter, according to figures compiled by local resource information group Intierra for the WA Business News exploration survey.

Another measure of exploration activity – numbers of drilling enquiries – has been steady in WA during the March quarter, according to Mineral Drilling Association president and Ausdrill Northwest general manager Peter Wright.

“From the drilling industry’s perspective, there certainly has been no decline in the number of enquiries in both the base metals sector and gold,” he said.

“While it may be true to say base metal enquiries were up significantly in the first quarter, it would be fair to say gold enquiries, while slow at the beginning, are also on the rise and would be perceived to be up in the second quarter.”

But the perceived expenditure may just reflect the justified increase in rates over recent times, said Mr Wright. He said drilling costs during the 1997 peak in spending paled in comparison to those currently being experienced.

“Ten years ago, while it may be true that exploration activities did increase, we certainly did not see any increase in rates. If anything the rates went down just to keep the rigs working, which was ultimately the catalyst behind many contractors going into administration,” Mr Wright said.

“This was an unfortunate outcome because the fallout of this has been that confidence in the industry was lost and as a result we lost a lot of experience.”

And the attitudes of contractors appear to have shifted since then, according to Mr Wright.

“I guess the positive on this is that those contractors who have survived the difficult times have learnt a lot from their ordeal and will not bend over for anybody,” he said.

“Gone are the days where drilling contractors will go out and do it for nothing just to keep the machine working.”

A report by Geoscience Australia to the Federal Government’s Minerals Exploration Action Agenda shows that national exploration expenditure deflated by the consumer price index is rising to levels within 25 per cent of the 1996-97 peak expected for this financial year. But the CPI may not be an accurate proxy for drilling rates, which have increased about 20 to 25 per cent in the past two years.

The MDAA president said drilling contractors’ costs had increased significantly during recent times, forcing them to increase their rates.

A major component of these costs – wages (representing around 40 per cent of total drilling costs, according to Mr Wright) – are currently being affected by the requirement to fulfil a “two weeks on, one week off” roster, exacerbating the skills shortage.

“Typically, these days, the mineral exploration drilling sector works three weeks on and one week off. There is a growing demand by many of our contractor member clients to go over to a two and one roster because of fatigue issues,” Mr Wright said.

However, the industry representative is yet to be convinced.

“The fallout of this for the industry is that for every two rigs a contractor owns, they need an additional driller. Within the MDAA contractor members alone, there are in excess of 200 drill rigs, so that means we need to employ another 100 or so drillers,” Mr Wright said.

“The clients need to understand that, while there was a skills shortage before, there will certainly be more than just that issue going forward.”

Ian Burston, executive chairman of Aztec Resources, which ranked second in the survey, spending $3.9 million, said Aztec had negotiated rates with its contractor about 15 months ago, helping it to avoid “extravagant” costs.

But he said the market for geologists was very thin.

“We recently hired another geologist, but when we advertised we got a pretty limited minute response,” Mr Burston said.

“When you receive three applications, I think it indicates what’s happening … two or three years ago we would have received about 15 or 20.”

But other than costs, a lack of green fields exploration is still a concern for the industry.

The Association of Mineral and Exploration Companies chief executive Justin Walawski said the State Government should bear the majority of responsibility in relation to a backlog of exploration applications, together with the issue of land access, which was also a source of disquiet.

“We currently have a policy position in WA that is not yet conducive to good land access,” Mr Walawski said.

Julian Hanna, chief executive of Western Areas, which ranked third in the survey, spending $3.2 million, said his company had spent most of its budget on firming up reserves at its Forrestania nickel deposit.

In terms of green fields exploration, Mr Hanna said there were some positive intersections in the March quarter at Koolyanobbing, which Western Areas has a 70 per cent stake in.