One in five Australian listed mining, oil and gas explorers have virtually ceased exploration while more than 40% have enough cash reserves to last them for one or two quarters, according to a new report.
Accounting and advisory firm BDO conducts a quarterly review of Australian ASX-listed explorers each quarter, and its most recent report for the March 2015 quarter is quite shocking.
As BDO reports (PDF), just 4 juniors have proceeded to production while another 16 managed to successfully raise capital during the quarter. That's out of 793 companies lodging quarterly reports for March, the lowest level in two years, as you can see from the chart below. 15 companies were delisted, suspended or didn't provide a response for not lodging a quarterly report.
Source: BDO
12% of all explorers did not conduct any exploration activity at all, the highest level since BDO started analysing quarterly reports. Another 20% either spent nothing or less than $10,000 on exploration expenditure.
38% of explorers had positive financing cash flows according to BDO – another record low since the accounting firm began analysis.
The problem for the explorers is the fall in commodity prices across the board. Iron ore, coal, gold, nickel and copper, not to mention oil have all swan dived in recent years. As a result, companies are being forced to take desperate measures. Go into hibernation and ride out the low commodity prices for the next few years, cut back exploration to the bare minimum, divest some of their non-core projects and focus on their best asset, or take the risky approach, continue exploration and hope they can raise capital before they go bust.
Among the companies that managed to raise more than $10 million were Nido Petroleum Limited (ASX: NDO), Orocobre Limited (ASX: ORE), CuDeco Limited (ASX: CDU), Wolf Minerals Limited (ASX: WLF), Doray Minerals Limited (ASX: DRM), Sundance Energy Australia Ltd (ASX: SEA) and Empire Oil & Gas NL (ASX: EGO). Reflecting the huge fall in oil prices, just 3 of the 16 companies that raised more than $10 million were oil and gas explorers (Nido, Sundance and Empire).
Foolish takeaway
The biggest problem this issue creates is that a lack of exploration now means fewer projects will reach the production stage in future, meaning at some stage supply of certain commodities will be unable to match demand, forcing prices high, until more supply comes online, which will see prices fall again and the cycle begins all over. Such is the risk of investing in resources and energy companies, whether they are at the production stage or not.
