Gold exploration spending is down in Australian, up in Africa...
IS THE BOOM in exploration and capital spending on Aussie resources a sign of another top in the commodity cycle – or a sign of higher commodity prices to come? asks Dan Denning in Melbourne for the Australian Daily Reckoning.
Yesterday, the Australian Bureau of Agricultural and Resource Economics (ABARE) said there are now 74 resource projects at an advanced stage, with some $112 billion sunk between them. That's a 67% increase from this time last year. Is that cost-price inflation?
These projects were already in the pipeline before the commodity price correction of 2008. The Gorgon gas project off the Northwest Shelf alone is a $43 billion project (nearly 40% of the total). Energy projects make up 38 of the 74 projects and 72% of total capital spending – which is why in both Australian Small Cap Investigator and Diggers and Drillers, my colleagues Kris and Alex are recommending both conventional and unconventional energy shares.
But usually the companies doling out billions in new capital expenditure are larger companies with deeper pockets. That doesn't mean they aren't shares you want to own, or that their share prices aren't correlated with rising commodity prices. But we reckon you're going to find bigger capex-related gains from those companies getting the contracts related to projects like Gorgon – the "pick and shovel" companies of the commodities sector's capex spending boom.
Look at the other end of Resource City too, and you'll find the explorers and developers. ABARE reports that last year set another record in resource exploration spending in Australia. Some of it was brownfield exploration (old sites or mines being redeveloped) and some was greenfield (brand new sites or mines). All up, there was $6 billion in exploration spending in Australia last year.
More than half of that was a frenzy of small companies drilling for new oil. Some $3.8 billion was spent on petroleum exploration. That tells you what the industry thinks about oil prices: they are going higher. Coal exploration spending was up 27%, with iron ore exploration up 30%.
The big shocker, however, was that uranium exploration and Gold Mining exploration spending were both down by double digits in the last year. The uranium exploration spend was down 20% and gold down 26%. Yet the price forecasts for both commodities look, at least according to Alex's research, pretty damn bullish.
So why aren't the explorers out kicking rocks and taking names?
It turns out they are, just not in Australia. The ABARE numbers measure exploration spending within Australia. But many Australian-listed firms are looking for gold and uranium in other places, especially in Africa. They're doing so because production costs are lower there, even if political risk is higher (although in some places, it's more than acceptable for the projects on offer).
They're also working outside Australia because, if you find a country with an acceptable level of political risk, you can also find greenfields mines to develop and build. Granted, that takes a lot of capital. But some of the developers never plan on running the mine anyway. What they're looking for is an economic deposit (high ore grades that can be produced easily) leveraged to higher commodity prices. Then they can sell off the site to a producer without ever turning a shovel.
Just this morning, Aussie-listed Impact Resources said it believes it's found a large new uranium province Botswana. In a possible case of "nearology", Impact said the new province has similar characteristics to A-Cap Resources 98 million pound inferred resource in the same neighborhood.
We have no idea what the facts are for either company. What we do know is that Alex told us two things (in his November letter) that you should look for with Aussie uranium companies: they need to have a resource big enough to produce a given amount of uranium each year and they need to be in production by 2012-2013. Impact's resource, according to Alex's research, was not big enough to qualify on the first measure.
As to the second measure, that's when Alex believes a shortage could hit the uranium market, thanks to interrupted mine supply at BHP's Olympic Dam and Cigar Lake in Canada. That, plus the removal of Russian-supplied recycled nuclear warheads. And that's just on the supply side. On the demand side, well...you've probably heard that story, so we won't go into it.
Of course, all this fuss about oil, gas, and uranium presumes there will be a functioning world economy needing and/or wanting these things next year. It also presumes that, whatever else gold says about the broader outlook, digging it out of the ground will continue to be tough, driving new development in far-off places where surging costs have yet to hit so hard.