Exploration suffers as copper miners axe costs, cut debt

SANTIAGO, April 10 Thu Apr 10, 2014 1:57pm EDT

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SANTIAGO, April 10 (Reuters) - A weak copper price and tighter financing are forcing mining companies to cut or stall spending on exploring to their lowest levels in four years as they focus instead on axing costs and reducing debt.

Executives who gathered in the Chilean city of Santiago this week acknowledged tougher environmental standards, labor strikes, community resistance and resource nationalism were also making exploration more challenging.

Over the last year to 18 months mining companies have been buckling to shareholder pressure and cost cutting, Vanessa Davidson, consultancy CRU's copper group manager told the CESCO/CRU copper conference in Santiago.

She said this has included head count reductions and cutting or stalling exploration spending; a trend that is likely to continue.

"We are just seriously focusing on using capital effectively, so exploration would come under the spotlight as well," Anglo American copper business Chief Executive Officer Hennie Faul told Reuters on the sidelines of the annual CESCO/CRU copper conference in Santiago.

"We believe in the fundamentals of copper, but we don't foresee ourselves expanding our exploration for now."

Capital constraints may force the global miner to exit its Michiquillay copper project in Peru, Faul said in an earlier interview, as he warned that copper prices will remain weak in the short-term on uncertain Chinese growth. China accounts for more than 40 percent of global consumption.

From a 2002 low of just $2 billion dollars, global exploration spending for nonferrous metals boomed to an all-time high of $21.5 billion in 2012, according to consultants SNL Metals & Mining.

But as the market weakened through the latter half of 2012 and through 2013, just about all mining companies cut exploration budgets resulting in a overall fall of 30 percent to about $15 billion last year, its lowest since 2010, SNL Director Jason Goulden said on the sidelines of the conference.

That will slide by another $2 billion this year.

Junior miners have led the decline as they cut spending in order to conserve cash and stay afloat, and the main producers also trimmed exploration to cut overall costs in a new capital sensitive environment, Goulden said.

"Like the rest of the industry we had to restore our balance sheet, we had to reduce our capex," Rio Tinto copper CEO Jean Sebastien Jacques told Reuters. "It's important to focus resources on the most attractive targets and that is what we have done."

Rio's copper strategy is focused on its interest in four producing mines - Kennecott Utah Copper, Oyu Tolgoi, along with stakes in Escondida and Grasberg - and two development projects, La Granja in Peru and Resolution in Arizona.

CREDIT SQUEEZE

In the meantime, credit conditions have become a lot tighter in the years following the 2008 financial crisis, and it's now much harder to raise financing from third-party sources, which has been exacerbated by low copper prices.

The metal is the worst performer on the London Metal Exchange this year, down 10 percent, and prices are expected to continue to fall as supply from current projects increase. Prices are down a third from the February 2011 record above $10,000.

"The challenge for some of these miners is they probably weren't budgeting for copper prices being as low as they are now," Macquarie analyst Colin Hamilton said.

"Their ability to pay back what they promised shareholders becomes harder, and therefore they delay spending even further down the line."

Antofagasta CEO Diego Hernandez said his company was maintaining, but not expanding, current levels of spending on exploration, adding: "Ideally we should try to invest in the countercycle, but it is difficult because when prices are low we have less cash."

Prospects don't look good for the copper price with the market expected to be in a 352,000-tonne surplus this year, metals consultancy Thomson Reuters GFMS said this week. That compares with a market surplus last year of around 49,000 tonnes.

GFMS forecast an average three-month copper price of $6,790 a tonne this year, nearly 8 percent lower than the average in 2013 and the third consecutive year of decline.

Those falling prices mean mining margins will remain under pressure.

Long-term copper prices need to reach $7,940 to incentivise enough production to meet demand through 2020, according to investment banker, Morgan Stanley.

Permitting of greenfields projects is increasingly hard and expensive too, so delays are almost inevitable. Communities in South America and other mineral-rich locations are better organized than they were in the past, and therefore balancing those forces will take longer and become increasingly difficult.

"We do think there will be a period of pain for the industry," CRU's Davidson said. "But we are certainly not forecasting a huge glut of oversupply that is going to take a lot of years to draw down."

CRU estimates that global refined copper demand growth slowed to 2.8 percent year on year in the first quarter of this year, but green shoots are emerging and the consultancy expects a rebound in annual consumption growth to around 3.8 percent.

Davidson expects a supply gap to open up by 2020 as demand increases further, absorbing the surplus metal.

"The difficulty is we are not seeing investment forthcoming," she said. "And given the length of time it takes to develop those new mines we think there could be a situation where we see quite an aggressive increase in prices toward the end of the current decade." (Additional reporting by Felipe Iturietta in Santiago, and Melanie Burton in Sydney; Editing by Sofina Mirza-Reid and Chris Reese)

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