The strategic benefits to Governments in supporting exploration

Transcription

1 The strategic benefits to Governments in supporting exploration Richard Schodde Managing Director, Adjunct Professor, Centre for Exploration Targeting, UWA 2018 NSW Minerals Council Exploration Forum 7 th May 2018 Sydney

2 Overview 1. Costs & benefits of supporting the mining industry - Resource Curse issue 2. Australia s experience of riding the boom - Increase in mine production 3. Economic impact on Australia of the recent boom 4. The need to find new deposits 5. The value-proposition for supporting exploration - Case studies from Western Australia, South Australia and Canada 6. Cross-Check of results 7. Summary / Conclusions 2

3 1. COSTS & BENEFITS OF SUPPORTING MINING 3

4 Costs & benefits of Governments supporting mining Increased mining directly creates revenues, wealth and employment However there is the risk of resource-curse where other sectors of the economy are adversely affected Question of the long-term sustainability of the industry Mining can diversify the country s economy Opportunity for downstream processing and service industries Government requirements (Indonesia) for downstream processing can be value-destroying Financial Services and Mining Equipment Technology & Services (METS) sectors can be big Exploration (and its success) is an essential first step in developing a mining industry Challenge is the inherent uncertainty of discovery. And the long lead times for development Financial support for mining and exploration can be expensive Need to invest in infrastructure and pre-competitive data Co-Funded drilling programs and (in the case of Canada) tax breaks such as Flow Through Funding Cost of the various exploration support programs in Australia is ~A$60-80m pa Net cost of FTF to the Canadian Government is ~C$ m pa 4

5 Resource Curse - Definition The resource curse is a paradoxical situation in which countries with an abundance of non-renewable natural resources experience stagnant economic growth or even economic contraction. The resource curse occurs as a country begins to focus all of its production means on a single industry, such as mining, and neglects investment in other major sectors. Source: Question : Is it real?

6 Empirical evidence of the Resource Curse is not strong MGI economic performance scorecard 1 Index Australia On average Resource-driven countries tend to have poorer economic performance Average economic performance score by income bracket 2005 US$ per Capita Per Capita Income (2005 US$) Resourcedriven Not resourcedriven [A] [B] [A] / [B] $0-1, % $1,000-3, % $3,000-5, % $5,000-10, % $10,000-20, % $20,000-40, % $40, % Per Capita GDP (2005 US$) But this issue can be overcome through better governance and fiscal responsibility. Australia does a good job. Resource curse is actually not an issue for rich countries 1) The MGI economic performance scorecard is the sum of 22 different social and economic metrics across 5 broad themes - institutions & governance, infrastructure, fiscal policy & competitiveness, local content, spending the windfall and economic development 2) Resource-driven countries defined as those where resource accounts for >20% of exports or 10% of economic output Source: Reverse the curse: Maximising the potential of resource-driven countries Report by the McKinsey Global Institute Dec

7 The recent boom in commodity prices resulted in a doubling in mine production for Australia 2. RIDING THE BOOM 7

8 Impact of commodity prices on mine production Australia: January 1980 April 2018 Commodity Prices (Constant 2016 A$ and Year 2000 = 100) Mining Boom Mining Boom Gold Bulk Minerals Base Metals Australian Mine Production (Year 2000 = 100) Sources: RBA, ABS, LME and 66 The 1980s and 2000 s booms each led to a doubling in mine output Several years lag between higher prices and increased production 8

9 Employment growth is strongest in the investment/construction phase Stock market is strongest in the first phase 3 Phases to the Mining Boom Australia: If commodity prices stay up, the sustained rise in Production should result in a large lift in Taxes & Royalties Exploration expenditures tend to follow the movement in Prices The take-home message is that the boom is not really over its just moved onto the next phase Source: Office of the Chief Economist, Dept of Industry Canberra, March

10 The recent boom in commodity prices has been of net benefit to Australia s economy and household wealth 3. ECONOMIC IMPACT OF THE RECENT MINING BOOM ON AUSTRALIA S ECONOMY 10

11 Estimated change relative to what would have happened if there hadn t been a boom in commodity prices Estimated impact of the Mining Boom on Australia s economy Change in Industry Output (Percent) 50 Forecast >> The net effect of the Mining Boom has been very positive for Australia Construction Mining Electricity, Gas & Water Overall GDP Finance Distribution Services 0 Consumer Services Agriculture Manufacturing Source: Reserve Bank of Australia Oct 2014 Research Discussion Paper

12 Change (Percent) 20 Estimated impact of the Mining Boom on Household Income in Australia Household Wealth Forecast >> The Mining Boom has clearly has been of significant positive benefit to Australian families Real Household Disposable Income Real After-Tax Labour Income The challenge is that their memories may be short-lived and their attitudes may be driven by the recent decline in wealth from the peak 5 Employment Real Consumer Wage Population Source: Reserve Bank of Australia Oct 2014 Research Discussion Paper

13 Australia is not alone in seeing a decline in manufacturing Manufacturing Value-Add and Exports: Australia versus OECD % of GDP Australia has never been a strong exporter of manufactured goods. Decline in manufacturing driven mainly by opening up of Free-Trade and Globalisation Source: Grattan Institute report on The Mining Boom : Impact and Prospects July

14 The recent boom led to several new mines opening in Australia. However new discoveries need to be made now to replace these mines in the future 4. THE NEED TO FIND NEW DEPOSITS 14

15 40 30 Number Number of mines opened and closed Australia: Forecast >> New Mines Mine Reopenings Potential New Mines Mine Closures Care & Maintenance The Bow Wave of new mines in the last decade will inevitably lead to a flood of mine closures in the next decade We need to find new deposits to replace them Note: Includes Bulk and Non-Bulk deposits The forecast number of potential new mines for assumes that 75% of the 136 active projects currently at the Feasibility Stage are developed Source: Nov

16 The challenge is that not only has the rate of discovery has slowed down, but also getting more difficult (and taking longer) to convert a discovery into a mine 16

17 Cumulative Number of Discoveries that become mines All Discoveries in Australia : Moderate + Major + Giant deposits Cumulative % 100% 1 The overall conversion rate for most metals is getting lower and slower 87% 88% 80% % 60% Discovery Period % 40% 40% % 46% 50% 20% 0% 9% GOLD Years from Discovery % BASE METALS (Cu, Ni, Pb, Zn) Note: Excludes nickel laterites Years from Discovery Cumulative % refers to those deposits that (eventually) turn into mines. Caution: Even if the deposit does get mined, not all of the contained metal will be extracted /covered. Source: May

18 Cumulative Number of Discoveries that become mines All Discoveries in Australia : Moderate + Major + Giant deposits Cumulative % % 14% 42% 29% 56% Years from Discovery Discovery Period BULK MINERALS 29% (Bauxite, Coal, Iron Ore, Phosphate and Potash) % 17% 57% 20% 42% OTHER MINERALS & METALS Years from Discovery Cumulative % refers to those deposits that (eventually) turn into mines. Caution: Even if the deposit does get mined, not all of the contained metal will be extracted /covered. Source: May

19 Recent reviews of Government Programs in Western and South Australia show that supporting exploration does create significant value for the State. Qualitative studies in Canada show strong industry support for R&D in Geoscience 5. THE VALUE PROPOSITION FOR GOVERNMENTS SUPPORTING EXPLORATION 19

20 Value proposition for Governments supporting exploration CASE STUDY 1: 2014 Review of South Australia s PACE Programs Economic Benefits of the A$56m spent on PACE between The Review assessed the benefits of the PACE Program which was introduced in Total spend (to June 2014) was A$56m. PACE is focused on getting the right mix of prospectivity, programs, promotion and people. Key themes are: 1) Balancing resource development with conservation 2) Drilling partnerships 3) R&D on exploring under cover 4) 3D geological models 5) Working relations with Indigenous Communities 6) Baseline geochem survey 7) Better data delivery 8) Stronger promotion through having expert resource ambassadors Extra A$700m invested in private mineral exploration (20:1 leverage) Extra A$2400m in State Mining Revenues (a factor of 44x) The collaborative drilling program led to 2 major copper discoveries and 14 other significant deposits Establishment of 2 leading research centres in SA Deep Exploration Technologies CRC and SA Centre of Geothermal Energy Research Other benefits to South Australia Internationally recognised as having best practice policies & regulations such as One stop shop and improved land access decision making SA now recognised as a leader in developing exploration technologies Higher PPI & MPI ratings in the Fraser Institute surveys 20

21 Value proposition for Governments supporting exploration CASE STUDY 2: 2015 Review of West Australia s Exploration Incentive Scheme Every $1m spent on the EIS for greenfield exploration will (in the long run) generate $23.7m in benefit to the State Study was based on empirical modelling of the WA s EIS scheme, which was introduced in Total spend (to June 2017) is A$130m. EIS funding is focused on providing new pre-competitive geoscience data. 1) Geophysics & geochem surveys 2) Innovative drilling 3) 3D-geological mapping 4) Strategic R&D with Industry 5) Working relations with Indigenous Communities Assumes normal commodity prices. A low / high price scenario generates $0m / $38.3m benefit Present Value calculated using a 12% discount rate. Source: Report on the Exploration Incentive Scheme for the WA Dept of Mines and Petroleum by ACIL Allen Consulting Jan

22 Canadian Studies Since 2008 The Canadian Government has funded over C$100m over research to improve Canada s exploration performance Program is called the Targeted Geoscience Initiative (TGI) - and is now in its 4 th iteration Over the years, several reviews have been carried out to assess its effectiveness These have mainly focused on measuring outputs (such as the number of PhD students trained, number of research papers published, number of reports downloaded. It also included qualitative assessments of the individual R&D projects based on in-depth interviews with stakeholders General conclusions were that the programs were well-managed and expenditures were of value to industry. However it was too early to measure increased number of discoveries

23 Canada: 2012 GEM Review Evaluation of Geo-Mapping for Energy and Minerals (GEM)Program Source: Review included a literature review, assessed a wide range of output metrics, plus 5 case studies and interviews with 60+ stakeholders. All of the respondents said that the GEM project was needed, 80%strongly agreed that GEM was contributing to the understanding of the geology of Northern Canada. All respondents indicated that GEM was achieving its intended objectives, although it was too early to assess the final results of the work given the short four-year window to date. The respondents also noted that GEM projects led to more educated decisionmaking, more interest, and use of the information generated by the Program

24 Canada: 2014 Review Evaluation Report: Targeted Geoscience Initiative 4 (TGI-4) Source: Carried out a literature review (200 documents), measured outputs (in terms of publications and conference presentations), plus carried out two case studies and interviews with 36 stakeholders. 90% of respondents strongly felt that TGI-4 was addressing their organization's needs. However it was too early too measure the full results

25 Various studies by confirms the importance of supporting Australia s exploration sector 6. CROSS CHECK ON THE RESULTS 25

26 Cross-Check The general results of the SA and WA Case are confirmed by a recent study by which assesses the 40 year production outlook for the Australian gold industry MinEx s Study uses a Monte-Carlo approach to model the effect of uncertainty of the likelihood of existing mines, new projects and exploration success A copy of this report can be downloaded from my website 26

27 Primary Objectives of the Report The 12 sponsors can be broken down into three groups State & Federal Geological Surveys (WA, SA, NSW, NT and GA) + Dept of Industry, Innovation & Science Industry R&D Groups (CSIRO, CET and DET CRC) Industry Lobby Groups (AMEC, AIG and CME WA) Each group has its own interests & priorities The Surveys need hard data to build the business case on why Government should support the mining & exploration industry principally the revenues and employment that flow from it The R&D Groups need hard data to assess the economic and social payoff from being smarter at exploration The Lobby Groups want to raise public awareness on the critical issue that exploration and mine development are both slow-burn stories. By the time you realise that production is falling, it may be too late to fix it 27

28 Forecast gold price and exploration expenditures - Australia : AUD$/oz $2,500 $2,000 $1,500 $1,000 $500 GOLD Price (in Australian Dollars) $1471 $1524/oz 5-95% Confidence Interval Forecast ->> $ AUD$ Million $1,400 $1,200 $1,000 $800 $600 $400 Actual Predicted GOLD EXPLORATION EXPENDITURES (in Australian Dollars) $677m $200 Forecast ->> $ Source: October

29 Long term outlook for the Australian gold industry : Number mines in 2017 A: NUMBER OF MINES Mines Moz pa Historical Forecast 9.70 Moz in 2017 B: PRODUCTION % & 90% Confidence Intervals 4.69 Moz No of Workers 40,000 30,000 27,980 in 2017 C: EMPLOYMENT 2017 A$ Billion $25 $20 $16.6b in 2017 D: REVENUE 20,000 $15 $10 10, ,300 Workers $5 $ $7.3b Source: October

30 Moz pa Forecast sources of Gold Production 9.7 Moz in 2017 Australia: Forecast ->> In 15 years time, half of gold production will deposits yet to be discovered Exploration Success New Projects Existing Mines Historical Of concern is that the average delay between discovery and development is 13 years 4.7 Moz in 2057 In 40 years time, 80% of gold production will come from new discoveries Moz Moz 0.4 Moz Note: Mean/Average forecast only. Due to uncertainty in commodity prices and exploration success the likely forecast figure (at a 90% Confidence Interval) will vary by +/-40%. Source: October

31 Impact of a step increase in exploration spend Incremental change in revenues from spending and extra A$1 billion on gold exploration in Australia: A$ Million $800 $600 $400 $613 m in 2031 Spending (say) an additional $100 M pa on exploration over a decade (i.e. $1 Billion in total) will generate an extra $11.4 Billion in revenues in subsequent years Incremental revenues generated from additional gold deposits found and developed $200 Spend an extra $100m per annum for 10 years (from ) $ Source: October

32 Moz pa Effect of improving exploration performance on gold production in Australia: Moz in 2017 Forecast > Moz in 2021 To maintain long term production at 2017 levels, industry needs to improve its current discovery performance by more than 2x Moz 3.0x Improvement Moz 2.0x Improvement Moz 1.5x Improvement Moz BASE CASE Note: Analysis assumes that exploration performance (discovery cost per ounce) is progressively improved over 10 years from Base Case assumes a discovery cost of A$70/oz, rising by $1/oz pa Source: October

33 10 Impact of 2x improvement in exploration performance Incremental change over the Base Case Discoveries & Production (Moz pa) Revenues (2017 A$m) and No of Workers (#) Additional Ounces Found [<- LH Scale] Additional Employment [RH Scale ->] 7160 workers 6.24 Moz Additional Revenue [RH Scale ->] $6232m Moz Additional Gold Produced [<- LH Scale] Note: Analysis assumes that exploration performance (discovery cost per ounce) is progressively improved over 10 years from Base Case assumes a discovery cost of A$70/oz, rising by $1/oz pa Source: October

34 Key take-aways from the Australian Gold study Even under a wide range of possible scenarios, it is clear that the long term sustainability of the industry critically depends on sustained exploration success Due to the long lead times between discovery and development Government & Industry need to support exploration now to offset the real risk of a supply disruption in the medium term 34

35 7. SUMMARY / CONCLUSIONS 35

36 Summary / Conclusions [1/3] 1. Costs and Benefits of supporting the mining industry - Growing the mining sector can create wealth and employment - Governments can avoid the resource curse by having good governance and being fiscally responsible 2. Riding the boom - The recent boom in commodity prices resulted in a doubling in mine production for Australia 3. Economic Impact of the recent mining boom - (in the case of Australia) mining s contribution to GDP grew by 40%. While the manufacturing and agricultural sectors were adversely affected, total GDP grew by over 6% and employment by 3%. Household wealth grew by over 15%. 36

37 4. The need to find new deposits Summary / Conclusions [2/3] - All mines have a finite life. Over the next decade an increasing number of mines will close down (and be replaced). The challenge is is that it can take years to convert a discovery into a mine and the speed and level of conversion is slowing down over time to sustain the industry we have to start exploring now!! 5. The value proposition for governments supporting exploration - A review of South Australia s exploration (PACE) program found that every dollar spent subsequently led to $20 of spending by industry on exploration and $44 worth of extra mining revenues. - A review of Western Australia s exploration incentive scheme found that every dollar spent created ~$24 of net benefit to the State 37

38 Summary / Conclusions [3/3] 6. The long term prosperity of Australia s mining sector critically depends on a maintaining a pipeline of new discoveries & new projects - Sensitivity studies indicate that each additional dollar spent on exploration generates an extra $11.40 in revenue - For the gold industry to maintain production at current levels in the longer term, it will either need to double the amount spent on exploration or double its discovery performance - The long term pay-off will be an extra 4.1 Moz pa of gold production, generating extra $6.3 billion in sales revenues and 7200 extra jobs In summary a well-constructed program to support exploration can create significant value to the State and be of net benefit to the overall economy 38

39 Contact details Richard Schodde Managing Director Melbourne, Australia Website: MinExConsulting.com Copies of this and other similar presentations can be downloaded from my website 39