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APRIL 2006 • No 65 SEG NEWSLETTER 9... from 1The Mineral Exploration Business: Innovation Required (Continued)Battle Mountain, Cyprus, Homestake,Lac, Magma, MIM, Noranda, Normandy,North, Rio Algom, Santa Fe,and, most recently, Placer Dome. Thenumber of new names is far fewer,Xstrata being the only significant one.This consolidation began with thefall in exploration expenditures fornonferrous minerals exploration from1997 to 2002, and somewhat surprisingly,has continued as explorationbudgets have climbed back to their1997 levels (Fig. 1; Metals EconomicsGroup, 2005a, b). The so-called juniorsector, an important generator anddiscoverer of new projects, sufferedseverely after the Bre-X scandal in1997, the subsequent diversion ofinvestment into the technology boom,and the profound depression of metalsprices. The loss of exploration budgetsas a result of mergers has beenoffset by a strong revival since 2003 inthe junior sector.Although the substantial six-yeardecline in exploration spending doesnot appear to have had much effect onexisting production, the decline in newdiscoveries moving up the pipeline willprobably significantly reduce new minedevelopment in the near future. Theconsensus of senior executives at theReuters Mining Summit was that thereis serious lack of good new projects ofthe kind that last for decades and makea company’s fortune. Donald Lindsay,Chief Executive of Teck Cominco,expects “the scarcity of good explorationprojects to become a serious issuein three to five years from now”(Industry Outlook, InternationalMining, September 2005, p. 29–30). Ithas been pointed out that there arelarge, unexploited gold resources available,if the gold price is right (Burton,2003). However, the quality of thesedeposits in terms of grade, metallurgy,infrastructure, and legal-fiscal regimesis often suspect. Indeed, Barrick’s golddiscovery at Alto Chicama in Peru illustrateshow a near-surface oxide golddeposit in a favorable mining country ispreferable to lesser quality orebodieselsewhere despite their availability. Interms of copper exploration, the availableresources around brown-field sitesin the advent of better prices is vast,and thus the exploration for new copperdeposits must take this into account:the question is, are there quality targetsto compete? Zinc is very much in a$6,000$5,000$4,000$3,000$2,000$1,000$01996 1997 1998 1999 2000 2001 2002 2003 2004 2005FIGURE 1. Global exploration budgets for nonferrous metals, estimated totals in US$ million(Metals Economics Group 2005a, b).similar position, although the view isthat zinc oxide deposits (technologydriven) are the way forward.Clearly, there is always going to be ademand for new, quality projects,because the major mining houses muststrike a balance between growth strategiesof exploration versus acquisition—the product they deal in is finite andhas to be replaced. This bodes well forcompanies involved in E&D, especiallyfor successful ones capable of providingreturns for investors on a par with, oreven better than, the high-technologyand dot.com sectors. Interestingly,despite phenomenal returns forinvestors in these sectors, the inabilityto be profitable drove them into a spectaculardecline.THE BUSINESS OFEXPLORATION:MEASURING SUCCESSIn order to determine whether or notexploration is profitable, exploration asa cost item must be compared with thereturn generated as a result of thisexpenditure (Doggett, 2000). This comparisonis complicated by the long-termnature of exploration. In even the mostfavorable geological environments, itwill take, on average, several years todiscover and delineate an economicmineral deposit—the basis for calculatingreturns from exploration. In thisrespect, there is clearly a need toshorten the time frame of exploration toallow the returns to be seen by the relevantcompany and the investor.The most direct evidence that explorationis profitable in the long term isprovided by the survival and growth ofindividual companies (Doggett, 2000).From the perspective of the explorationindustry, the market should provide anindication of actual and expected profitsthrough valuation of explorationcompanies and availability and cost offunds required for exploration. Theaverage cost of exploration should notexceed the average return from exploration.From a corporate perspective,this is the bottom line for survival. If theprofits from the development and productionof economic deposits do notoutweigh the costs of finding (or acquiring)them, then economic ruin will bethe long-term outcome.Yet E&D companies that do notdevelop and produce cannot use revenueas a measure of success. Survivalis about securing funding and beatingthe probability of failure—in otherwords, continual discovery.Given the importance of R&D inother business sectorsand its high cost, manyto pagecompanies struggle to 10 ...