| SANTIAGO, April 10
SANTIAGO, April 10 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
"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.
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
"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
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
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