Drilling for energy transition metals holds up better against spurned gold

Facing a lull in investor appetite for gold, cash-needy mineral explorers are pinning their hopes on hunger for critical minerals such as lithium and copper to help boost exploration amid an overall drop in drilling activity in recent quarters, according to industry experts.

Financing markets for gold exploration have been particularly tough over the past 12 months despite a historically high price for the precious metal, which is largely hoarded as a safe-haven asset during times of financial uncertainty. Gold exploration drilling, after a bumper 2021, fell through 2022 and into 2023, while exploration for base metals and specialty metals was relatively strong, according to S&P Global Market Intelligence data. Drilling is the main tool explorers use to find and flesh out significant discoveries.

"This is definitely a sign that the junior sector, which is highly focused on gold exploration, is having a harder time finding funding for their gold projects," Kevin Murphy, a mining analyst with S&P Global Commodity Insights, said in an email. "Much as we anticipated earlier in the year, funding for battery or critical minerals has been insulated somewhat from this, though not entirely."

Drilling down

One of the more obvious signs of trouble for gold explorers is a recent drop in drilling activity.

Drilling activity, comprising the total number of unique drillholes punched into the ground at exploration projects, has dropped for three consecutive quarters since the third quarter of 2022 on a year-over-year basis. Drilling activity decreased 8.6% year over year to 16,662 drillholes in the first quarter of 2023. Drilling recently peaked in the fourth quarter of 2021 at 18,758 drillholes, according to Market Intelligence data.

The relative disinterest in gold is obvious at the project level. The number of distinct gold projects drilled by mineral explorers fell year over year in every quarter of 2022. In the first quarter of 2023, the number of drilled gold projects dropped 35.4% year over year to 541 sites, after peaking in the first quarter of 2021 at 858 projects.

Against this backdrop, explorers have flexed stronger muscles when it comes to base metals and specialty metals. The number of projects drilled for both commodity groups has grown quarterly, year over year, since the second quarter of 2021. Where gold activity fell in the first quarter of 2023, projects drilled for base and specialty metals grew, albeit at a slower pace than in previous quarters. Drilling for base metals climbed 11.2% year over year to 328 projects, and activity at specialty metals projects, which includes lithium, jumped 92.9% to 135 sites.

The relative strength in metals such as copper and lithium as compared to gold comes on the back of shifting investor interest in a market that is prone to wild swings in financing flows, share prices and risk-taking moods, industry veterans said.

"Markets are driven by narratives. The gold narrative is old. The new narratives for battery metals and copper are more exciting," David Harquail, chair of Franco-Nevada Corp., a gold streaming and royalty company, told Commodity Insights. "That's all it takes."

Cold on gold

Gold explorers have reined in exploration plans in recent quarters and, in some cases, shifted focus to energy transition metals to keep the lights on and the drills turning, according to industry analysts and players.

"Companies, especially earlier-stage explorers, had to tighten their purse strings and step on the proverbial brakes," Kai Hoffmann, CEO of Oreninc, which tracks mining sector financings, told Commodity Insights. "Drill programs have been drastically scaled back, as funding has been lacking — despite a high gold price."

Gold prices have ranged near historic highs since 2020, breaking over $2,000 per ounce for the first time that year and doing so again in 2022 and 2023. The gold price was $1,959.40/oz on June 6, according to Market Intelligence data.

Explorers are increasingly snubbing gold projects in favor of metals like lithium, which is an important ingredient in batteries that are crucial to the energy transition.

"Gold, in my opinion, is seeing competition from the critical elements funding," said John-Mark Staude, president and CEO of Riverside Resources Inc., a junior explorer. The company recently started to focus more heavily on exploration for rare earth elements amid favorable government policies and funding for critical minerals, Staude said.

Financings for junior and intermediate companies in the exploration and mining sectors surged in 2021, building on increases in previous years, according to Market Intelligence data. Financings for base metals and specialty metals spiked in 2021, far outstripping gold financings.

Financing activity pulled back in 2022 across all metals, though combined financings for base and specialty metals remained stronger than for gold. The trend continued in the first quarter of 2023. Junior and intermediate financings totaled $1.79 billion for base, specialty and other metals in the first four months of 2023, while gold financings drew $1.37 billion, according to Market Intelligence data.

Experts see gold exploration remaining muted through the year unless the price of gold, already at historic highs, climbs higher and rekindles love for the safe-haven asset. And despite some weakness in prices for base metals and specialty metals in 2023 — copper traded for $8,334 per metric ton on June 6, down from a 2023 peak of $9,330.77/t on Jan. 23 — some analysts see investor interest in energy transition metals holding up relatively well.

"We are hopeful that the critical mineral story will continue to keep drilling activity declines more modest than [in] precious metals," Commodity Insights' Murphy said.

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