By Tess Ingram
Australia’s mineral exploration companies are revelling in the best conditions they have experienced in a decade, with investors stumping up billions of dollars for the next generation of discoveries.
More than $2.3 billion flowed into the 658 companies exploring for minerals on the Australian Securities Exchange in the March quarter, bringing cashflows for the past 12 months to just shy of $8 billion, according to accounting firm BDO.
“All our drill rigs are busy… there is no spare capacity as we sit here today,” says DDh1 chief executive Sy Van Dyk.Credit: DDH1
That cash bounty compares to the $4.99 billion raised by the sector a year earlier, weighed down by COVID-19, and sees investment levels creep close to the highs of the last mining ‘boom’, which peaked in 2011.
The cash is providing the companies with healthy bank balances to spend searching for mineral riches, with exploration expenditure for the March quarter at $549 million, 18 per cent higher than BDO’s two-year average quarterly spend of $464 million.
The findings echoed recent data from the Australian Bureau of Statistics which put the metres drilled by mineral explorers just shy of the fresh nine-year high recorded in the December quarter.
There is so much activity on the ground that drilling companies are busier than they have been in years, labour is hard to come by, and the geologists hoping to strike gold or other metals are waiting months for results from testing laboratories as ore samples flood in.
Sy Van Dyk is chief executive of DDH1 and said the drilling company, which has about 100 rigs across the country, had never been busier.
“All our drill rigs are busy … there is no spare capacity today,” he said.
The Perth-based company has been forced to turn away potential work away, or schedule it months in advance, due to high demand.
“Over the last year, our forward order book or what we call our rig schedule, which is an indication of where these rigs are going to work, is the longest dated it has been in this company’s history,” Mr Van Dyk said.
“We now have a fair understanding of where we are going to drill in the next 12 months, whereas we used to have a clear idea for six months.
“Rates are definitely on the increase due to the supply demand tightening and utilisation is on the increase across the industry. And what is great about the current demand signal is that it is multi-commodity, unlike most of the previous booming times which have been driven by a single commodity.”
As well as high prices for commodities such as iron ore, copper and gold fuelling the boom, mining-focused fund manager Hedley Widdup said investors’ appetite to support the work of explorers had also been sparked by a run of significant discoveries in 2019 and 2020.
“The message used to be that exploration was a risky enterprise that didn’t reward you,” Mr Widdup said.
“But after those discoveries the message became that exploration is a risky enterprise but you can find things and you can build massive value through doing that. We have seen that shift in attitude flow through to the spend in the ground but also to the equity prices of smaller companies in Australia.”
Drill rigs are turning as investors back the exploration sector.Credit: DDH1
The beneficiaries have been companies like De Grey Mining and Chalice Mining, which have seen their market capitalisations rise after firming up major new projects in WA, from about $50 million to over $2 billion and $3 billion respectively.
Chalice appears poised to make history as the first explorer to join Australia’s primary stock market index, the ASX200, when it is rebalanced this month.
Chalice Mining managing director Alex Dorsch said he believed his company’s market momentum was due to the location and scale of the discovery at its nickel, copper and palladium Julimar project about 70 kilometres north-east of Perth, and the attractiveness of those metals for new energy technologies.
“It is very hard to look at an exploration project and put a value on it because it is not as simple as analysing a company that is generating cashflow,” Mr Dorsch said.
“I think the market is valuing us where they are because they understand the strategic significance of what we have found, and the scale of it.”
The challenge for Dorsch and his team will be maximising value from the project, whether that is through bringing it into production themselves or striking a deal with a larger company keen to take it over.
Dorsch says it is clear “the discoveries of today are the potential acquisitions of the bigger players tomorrow” but Chalice would not consider any approaches before having a clear understanding of what it is sitting on. And to do that, it will keep drilling.
While service and equipment providers are revelling in the surge in exploration, it is creating painful shortages for some companies.
BDO’s global head of natural resources Sherif Andrawes said there were challenges with rig availability, backlogs in laboratories and “a sector-wide shortage of skilled labour”.
“Although we expect that exploration activity will continue to grow in light of strong cash balances and the higher number of listed exploration companies, the extent of exploration spending growth will be limited by the availability of resources, particularly in relation to drilling services and assay testing,” he said.
Chalice’s Mr Dorsch said the company had noticed some of the constraints first hand.
“When we made our discovery in March 2020 you could get assays under two weeks from the labs because they were pretty quiet and there were drill rigs everywhere around WA and people were staring down the barrel of being laid off,” he said.
“By about July we saw a pretty noticeable uptick in the general market sentiment and an early pinch on the labour market.”
Mr Widdup said he expected current levels of activity in exploration to continue for at least 12 months, but did not believe a skills shortage would be what ultimately halted momentum.
“Every mining cycle comes to an end,” Mr Widdup said.
“It’s hard to predict when that will be but ultimately there is a catalyst that takes place and you have a reversal when people stop spending.
“The mining cycle works on liquidity, which is just the amount of money that investors are prepared to throw into the sector. That moves up and down and right now, we are getting indications that we are in the really heady parts of liquidity which only ever occur within two or three years from the top of the cycle.
“What we have our eyes open for is the top of the equity market, when this momentum starts to correct and slow down.”