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Pandemic Expected To Push Exploration Budgets 29% Lower In 2020

Highlights

Copper to be hit hardest, but gold will not be spared

Australia, Canada to be most impacted

As the coronavirus crisis continues to weigh on markets and propels many countries into full or partial lockdowns, planned exploration spending for 2020 will likely be pushed downwards. With junior explorers unlikely to see much support over the next several months, this sector will be the hardest hit, with allocations forecast to decrease 42%. Producers will not be spared, as they face lower metals prices and country-wide closures in areas in which they operate, sending their budgets an estimated 23% lower. As a result, we now expect global exploration budgets to fall 29% in 2020 to a total of US$6.9 billion.

We arrived at this projection by taking the results of our 2019 survey and applying trends documented in previous market downturns, while adjusting for country-specific shutdowns. This methodology resulted in a smaller aggregate 2020 budget total of $6.6 billion; adding our estimate for budgets of companies spending less than $100,000, and budgets by private companies for which we did not obtain data in 2019, resulted in an estimated total of $6.9 billion, or $2.9 billion less than in 2019.

Difficult market conditions for explorers will be exacerbated by continued merger and acquisition activity, such as Endeavour Mining Corp.'s acquisition of Semafo Inc.. Our research has shown that company-level M&A activity generally results in lower budgets from the combined entity as exploration priorities are reassessed.

We currently see more downside potential for exploration budgets than upside. The continuing pandemic and the uncertainty around the timing at which it will begin to subside or come under control via a vaccine are both contributing to downside risk. The longer the virus keeps markets in turmoil and makes mobilization of exploration personnel difficult or impossible, the more likely it is that budgets will sink further. There is also considerable uncertainty around how economies will react to stimulus packages being enacted by various countries. If markets respond quickly, it will reduce the severity of the decline. We currently expect exploration budgets to recover in 2021, but this will depend on the same factors stated above.

Copper to be hit hardest, but gold will not be spared

We expect copper to be the hardest hit commodity this year with allocations decreasing around 40%, more than erasing the gains the metal made in 2019. Copper budgets will be hit from multiple angles. The current price level of US$4,800/t will act as a disincentive for juniors who brave the markets for funding. At these prices, majors will also enter cash-flow-preservation mode, which normally results in lower exploration spending. Companies of all types will face difficulties getting into the field as a result of regional lockdowns.

Gold will also feel the strain, despite its price bouncing around the US$1,600/oz level. Again, juniors will be less active due to market conditions, although majors should be able to maintain their exploration programs. The largest impact will be reductions due to lockdowns or companies exercising caution with their personnel. We expect gold budgets to decline about 20% in 2020.

Australia, Canada to be most impacted

The stock exchanges of Australia and Canada host the vast majority of the world's junior exploration companies, with many of these firms focused on their home countries. As a result, both Australia and Canada have disproportionately more juniors exploring for metals than the rest of the world. During market downturns, when juniors are less able to raise funds, these countries will feel a greater impact. This will be exacerbated by restrictions on fly-in, fly-out operations that are seen as a risk to indigenous communities and which may not be possible if personnel cross provincial or state lines. As a result of these factors, the combined budgets of Australia and Canada are forecast to decrease a total of US$1.0 billion in 2020.

Given that we anticipate copper budgets to decline most in percentage terms, countries with a focus on copper exploration will also see significant decreases, including the U.S., Democratic Republic of Congo and most of Latin America. Peru in particular, with its focus on both gold and copper projects, has announced some of the most restrictive policies to combat the COVID-19 pandemic.

Companies to focus more on minesite work

Since our Corporate Exploration Strategies studies began in the 1990s, there has been a notable shift away from earlier stages of exploration toward minesite work. While there is some variability from year to year, global allocations directed to near-mine exploration have increased from less than 20% in the late 1990s to over 30% since 2014. With the additional uncertainty in 2020, we expect explorers to cut earlier stages of exploration more than activity at and around their mine sites. As a result, minesite exploration is forecast to hit a new high of 41% of global allocations, while the percentage devoted to grassroots and late-stage work will decrease.

Majors to continue driving exploration

While we expect companies of all types to reduce activity in 2020, the difficult financing conditions will greatly impede the junior sector's ability to fund exploration, while the larger companies will be more able to maintain programs at and around their producing mines. The majors' share of global allocations will likely increase to 58% while the juniors' share will decrease to 24%, as exploration funding becomes even more dependent on mining revenues than on equity market support.

Challenging 2020 gives way to improved 2021

As 2020 shapes up to be a very difficult year for the mining industry, the forecast decline in exploration activity is expected to contribute to further weakening of an industry pipeline of assets that has thinned since 2012. Assuming that the impacts of COVID-19 begin subsiding before midyear, improving global economic conditions in the second half of 2020 should feed through to higher metals prices for many industrial commodities. We therefore expect exploration budgets to rebound modestly in 2021 as junior companies are once again able to tap equity markets and producers relaunch paused exploration programs.

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