Overview of Trends in Canadian Mineral Exploration 2009
Printable version - PDF (127 kb)
Louis Arseneau and Ginette Bouchard
Louis Arseneau is the Chief, Exploration, and Ginette Bouchard is a senior mineral resource development analyst with the Minerals and Metals Sector, Natural Resources Canada.
Telephone: Louis Arseneau at 613-995-0959 or Ginette Bouchard at 613-992-4665
E-mail: louis.arseneau@nrcan-rncan.gc.ca or ginette.bouchard@nrcan-rncan.gc.ca
INTRODUCTION
This chapter contains data and analyses that are based on pre-1997 survey definitions when only field and overhead costs were considered. While more restricted by this measure of exploration and deposit appraisal activity, the data are available over a much longer time period. The resulting time series provides useful statistics for studying historical trends in Canadian mineral exploration spending. Dollar amounts quoted in this chapter have been adjusted for inflation (constant 2008 dollars) unless otherwise specified.
HISTORICAL SUMMARY
Figure 6.1 depicts Canadian exploration and deposit appraisal expenditures (field and overhead costs only) in constant 2008 dollars over the period 1978-2008. Above-normal expenditures in the 1980-82 period resulted from high prices for gold, silver, and copper over much of that period. Spending declined somewhat in 1983, but generally rose from 1984 to 1988 as a result of the introduction by the federal government, in 1983, of the Mining Exploration Depletion Allowance (MEDA). MEDA was replaced in 1989 and 1990 by the Canadian Exploration Incentive Program (CEIP). By 1987 and 1988, expenditures had reached unprecedented high levels because of MEDA and the high gold prices that had prevailed until the end of 1987. However, spending fell dramatically after 1988 and decreased until 1992 when it reached its lowest inflation-adjusted level since 1966.
Activity picked up gradually in the 1993-96 period. Expenditures increased by 118% from 1992 to 1996, and the 1996 level of $1183 million was the highest since 1989. Although exploration and deposit appraisal spending declined to $1070 million in 1997, it still remained relatively strong by historical standards. However, spending dropped significantly in 1998 to $756 million, a 29% decline from 1997. After another 25% decline, the 1999 total of $565 million represented the second-lowest total in almost 40 years. The recovery began almost imperceptibly in 2000 when field and overhead spending increased by $2 million, and gathered a little momentum in 2001 when spending reached $576 million. Data on field and overhead spending for the period 2002-07 show an acceleration of the upward trend as field and overhead spending, buoyed by strong metal prices and a number of government-provided incentives like the federal 15% Mineral Exploration Tax Credit (METC), eventually reached successive record levels of $1791 million in 2006 and $2621 million in 2007. Another record high ($2887 million) was reported in 2008, but there was a definite deceleration of the upward trend as this represented only a 10% increase over 2007, compared to the 46% rise that had been recorded from 2006 to 2007. A rough estimate puts 2009 spending at $1625 million and confirms that a major correction in spending took place during that year. This strong decline in activity shows a strong correlation with the collapse in NRCan’s Monthly Metals Price Index1 that was recorded between April and December of 2008 (Figure 6.2).
The above-mentioned fluctuations in spending can be explained by a relatively small number of factors and events. The relatively higher expenditure levels that were recorded from 1993 to 1997 resulted, to a large extent, from important discoveries of diamonds in Canada’s North and nickel-copper-cobalt in Labrador. A combination of factors took over after 1997 to bring Canadian mineral exploration and deposit appraisal activity to dangerously low levels where both the resilience of the Canadian junior mining sector and the ore reserve sustainability of a number of mineral producers were tested. Metal prices constituted the primary factor behind this slide as generally low demand for metals was exacerbated by worldwide economic events (i.e., the Asian financial crisis and the September 2001 terrorist attacks in the United States) and by corporate scandals (e.g., the Bre-X affair).
In this generally negative context, the introduction of exploration tax credits and other measures by the federal government and some provincial/territorial governments was welcome news. Along with a rapidly improving metals price outlook across a broad range of commodities, these measures contributed to the recovery and ensuing effervescence that characterized the Canadian mineral exploration sector during the latter years of the record-breaking trend that ended with the collapse of metal markets in the second half of 2008. A rapid deterioration of the situation resulted in a number of mine closures, suspensions, project deferrals, and a general slowdown in exploration and deposit appraisal activity. While the market outlook improved noticeably in 2009, the investment climate for mineral exploration remained dependent on a fragile world economy in which governments were still applying massive fiscal and monetary stimulus.
EXPLORATION AND DEPOSIT APPRAISAL LEVELS
Metal Prices
Under normal circumstances, metal prices are the most important factor influencing the level of exploration and deposit appraisal activity. In early 1995, metal prices embarked on a generally downward trend, as reflected by NRCan’s Monthly Metals Price Index (based on the prices of copper, nickel, lead, zinc, silver, and gold), that lasted until mid-1999 (Figure 6.2). The index then recovered for about a year before heading downward again and bottoming out in October 2001 following the September 2001 terrorist attacks in the United States and amid generally low metal prices. The recovery that began afterwards picked up considerable steam in the second half of 2003 and continued towards new heights in 2004 and 2005. In 2006, the Monthly Metals Price Index really took off, reaching an historical high in December. Successive new highs were established in the first four months of 2007 and, in May 2007, NRCan’s Monthly Metals Price Index was six times as high as it was in October 2001.
As outlined in previous editions of this report, there is a relationship between the level of spending in a particular year and metal prices in earlier years. For example, when comparing expenditures for precious metals and base metals with the NRCan Monthly Metals Price Index, it can be seen that the decreasing trend in metal prices that began in 1995 was not reflected in spending levels before 1997, partly because of that relationship and also because of the slow decline recorded throughout 1995 and 1996. Expenditures peaked in 1996, started declining in 1997, fell even more in 1998 and 1999, were mostly stable but low in the 2000-2002 period, and began to recover in 2003. They exploded in 2004 after the price outlook really showed signs of improving in the second half of 2003, and continued to improve greatly as prices continued to head higher and higher, pulling exploration spending towards the records already discussed.
As mentioned above, metal market conditions deteriorated greatly as a result of the economic crisis in the second half of 2008. However, this decline was not apparent in the 2008 exploration and deposit appraisal spending totals as budgets were already secured at the time that the situation began to unfold. Instead, the impact of weaker prices in 2008 was reflected in the 2009 survey results. Companies regularly display an ability to respond to significant fluctuations in metal prices and adjust the scope of their projects in a very short timeframe not only in downturns, but also as conditions improve. Since metal prices recovered in the last seven months of 2009, the year 2010 should unveil a better outlook in terms of exploration and deposit appraisal activity in Canada.
Commodities
Figure 6.3 shows historical exploration and deposit appraisal spending by commodity group. Base-metal expenditures were at a record high in 2008 when they reached $743 million, a dramatic improvement over the trough of $136 million recorded in 2002 (the lowest amount since at least 1975). Expenditures for precious metals, usually the most sought after commodity group, peaked at $1061 million in 2008, marking the seventh year of increase after the trough of $197 million recorded in 2001. A record high precious-metal spending level was recorded in the 1987-88 period when more than $1.7 billion was recorded in each of these two years.
In terms of share of total spending, it is interesting to note that precious metals only accounted for 7% of the total in 1975 while base metals accounted for 63%. This changed drastically in 1987-88 when the precious metals’ share climbed to 83% and the base metals’ share dropped to 11% in 1987 and 13% in 1988. The proportion of total spending accounted for by precious metals declined progressively to 51% in 1991 and averaged 40% afterward. Similarly, base metals averaged around 30%. These lower percentages coincided with the beginning of more significant diamond and uranium exploration. In 1993, for example, 18% of total spending was dedicated to the search for diamonds and 7% for uranium. In 2001, diamonds reached a peak with 28% of the total while uranium reached its peak in 2007 with 16% of the total expenditures for that year. Diamonds played a particularly important role in keeping the Canadian mineral exploration sector active during the difficult years of 1999-2002 when precious metals and base metals failed to attract much interest.
Companies
As shown in Figure 6.1, junior companies have traditionally played an important role in Canadian mineral exploration and deposit appraisal activity. However, their contribution really expanded in 1984, a year after the introduction of MEDA, when their spending accounted for almost 24% of total exploration and deposit appraisal expenditures (field work and overhead). That proportion had more than doubled by 1987 when junior companies accounted for $1107 million, or 51% of the total of over $2.0 billion spent during that year. Junior spending was also very important in 1988 with almost 50% ($1059 million) of total expenditures. The junior companies’ proportion of total spending then started to gradually decrease until it reached 21% in 1992.
The spending levels recorded by junior companies in the 1986-88 period are even more impressive when taking into account the fact that, during that period, considerable contributions were made by junior companies to joint-venture projects operated by senior companies. In the Survey, these contributions were counted as part of senior companies’ spending, thus overstating senior expenditures and understating junior expenditures.
On a yearly basis, junior spending accounted for approximately 30% of total expenditures (field work and overhead only) over the period 1993-2000 (Table 6.1). The discovery of diamonds in Canada’s North and nickel-copper-cobalt at Voisey’s Bay were the two most important positive factors affecting junior spending during those years. Low metal prices, a slowing world economy, and difficulties in raising financing explain the more difficult years. The introduction of the federal Investment Tax Credit for Exploration (ITCE)2 in October 2000 and related provincial tax credits helped junior mining companies, and their expenditures started to recover faster than those of the senior companies. This recovery in junior spending was strong enough to increase their share of total spending (field and overhead costs) to almost 44% in 2003. The momentum continued to build in 2004 as junior mining companies accounted for 53% of all spending, the first time since 1987 (and only the second time in the history of Canadian mineral exploration statistics) that junior spending exceeded that of senior companies. Buoyed by strong metal prices and the eagerness of financial markets to fund mineral exploration activity, junior companies’ spending continued to surge at a much faster pace than the expenditures of senior companies in 2005 and 2006. As a result, junior company field and overhead spending represented 60% of total spending in 2005 and 64% in 2006. The proportion of junior company spending continued to increase in 2007, accounting for 68% of total field and overhead expenditures. In 2008, junior expenditures increased by only 11% (compared to a 60% increase in the previous year). In dollar terms, this increase in junior spending was similar to the increase recorded by senior companies. Consequently, junior companies saw their share of total spending decline slightly in 2008 (to 65%). While the 2009 totals for field and overhead expenditures are not yet available, the impact of the economic crisis on the capacity of junior companies to finance their projects is expected to be reflected in these companies’ share of total spending, which should fall to around the 55% mark.
Regions
Tables 6.2 and 6.3 show exploration and deposit appraisal expenditures (field and overhead costs only) by province and territory in terms of current dollars and 2008 constant dollars starting in 2003. Furthermore, the major 1997 survey reform has introduced two other layers of statistical data: first, other costs such as engineering, economic and pre- or production feasibility studies, environment, and land access; and second, the associated capital, and repair and maintenance costs, all collected by property or mine. National totals in each complementary series are presented in these tables. The overhead costs category adds an average of 10% in expenditures to the original field work total, “other costs” add a further 12%, and capital and repair costs add another 10%.
The time series covers two exciting periods in the history of mineral exploration in Canada: the beginning of the diamond rush after the 1992 discovery of the first diamond mine in Canada (Ekati, in the Northwest Territories) followed by the subsequent Snap Lake (Northwest Territories) and Victor (Ontario) diamond mine discoveries in 1996 and 1997, respectively, and the Voisey’s Bay nickel-copper-cobalt discovery of 1994 (Newfoundland and Labrador), which also contributed to a base-metal staking and exploration rush in the surrounding and similar geological domains. These discoveries had an impact not only in terms of total exploration and deposit appraisal expenditures, but also in terms of total investment (as described in Chapter 2) for these jurisdictions.
ENDNOTES
1 The NRCan Monthly Metals Price Index is a Fisher Ideal Index that is based on the prices of six metals: gold, silver, copper, zinc, lead, and nickel.
2 At the time of its introduction in October 2000, the tax credit was called the Investment Tax Credit for Exploration (ITCE). After expiring at the end of 2005, the program was reinstated in the May 2006 Federal Budget as the Mineral Exploration Tax Credit (METC).
Note: Information in this chapter was current as of December 2009.
Note to Readers
The intent of this document is to provide general information and to elicit discussion. It is not intended as a reference, guide or suggestion to be used in trading, investment, or other commercial activities. The author and Natural Resources Canada make no warranty of any kind with respect to the content and accept no liability, either incidental, consequential, financial or otherwise, arising from the use of this document.
Sources: Natural Resources Canada and Statistics Canada, based on the Survey of Mineral Exploration, Deposit Appraisal and Mine Complex Development Expenditures.
(1) Includes on-mine-site and off-mine-site activities. (2) Includes mineral leases, claims, property taxes, and project-related head office expenditures.
Notes: Total expenditures for 1975-81 are overstated by about 17% relative to earlier years because of changes to the methodology used by Statisitcs Canada. For 1987 and 1988, overhead costs were estimated based on previous years' ratio of total costs/field costs. Data for 1997-2008 include both exploration and deposit appraisal expenditures as defined in the 1997 survey reform. Previous to this period, most of the expenditures now reported under the deposit appraisal work phase were mostly reported under exploration (broadly speaking).
Source: Natural Resources Canada, based on the Survey of Mineral Exploration, Deposit Appraisal and Mine Complex Development Expenditures.
. . Not available; n.a. Not applicable.
(1) Includes on-mine-site and off-mine-site activities. (2) Total in bold represents the sum of the provincial/territorial breakdown listed above. (3) Includes mineral leases, claims, property taxes, and project-related head office expenditures. (4) Other related expenditures were collected as of 1997 and include engineering, economic and pre- or production feasibility studies, environment, and land access costs.
Note: Numbers may not add to totals due to rounding.
Source: Natural Resources Canada, based on the Survey of Mineral Exploration, Deposit Appraisal and Mine Complex Development Expenditures.
. . Not available; n.a. Not applicable.
(1) Includes on-mine-site and off-mine-site activities. (2) Total in bold represents the sum of the provincial/territorial breakdown listed above. (3) Includes mineral leases, claims, property taxes, and project-related head office expenditures. (4) Other related expenditures were collected as of 1997 and include engineering, economic and pre- or production feasibility studies, environment, and land access costs.
Note: Numbers may not add to totals due to rounding.