AUSTRALIAN-LISTED junior explorers are searching in far-flung, risky places around the globe in the hope of discovering a “company-changing” find. But Australian shareholders aren’t yet convinced it is a wise move.
In the past month, a list of juniors have announced deals, joint ventures and new acquisitions in remote areas, including Greenland and Eritrea. And mining giant Rio Tinto signed an investment agreement for its long-awaited massive copper-gold project in Mongolia.
But while the explorers are treading into unknown territory, it is European and Canadian investors that are mostly funding the move, with the Australian market still unconvinced on backing projects in “risky” places.
Michael Humphreys, managing director Australia Pacific of specialist risk consultancy firm Control Risks, says there is an increasing move by Australian explorers towards Africa.
“Five years ago there were 10 juniors exploring in Africa, that is now at around 150. Africa is the new destination,” he says, adding Central Asia is also becoming more attractive.
Humphreys says most of the good sites in Australia are already pegged and the economics of labour is also a driving force behind junior and mid-caps looking abroad. “It can cost you $100,000 for a truck driver in an open cut mine in Western Australia. You can train a guy in Africa and pay him much less,” he says.
The attractiveness of heading overseas is clouded by the many risks companies have to overcome to succeed, which include political, reputational, security and operational risks.
Humphreys says the issues around political risk include governments’ ability to deal with mining issues, as most don’t have legislative cover for mining.
“There is no legal framework, so you are quite often operating in a grey area,” he says.
The rate of success is still difficult to determine, with the previous failures of 30 years ago known. But the recent interest will take years to determine if it was the right move.
“The jury is still out on making that judgment on Africa. It is unclear how many will get through the exploration phase to operation. It could be as little as one in 10,” Humphreys says.
One company that has had success is Zambia-focused Equinox Minerals, but chief executive Craig Williams says starting a project in a developing country was challenging, with attracting investor funds one of the more difficult issues.
“We managed to get financing, but not without difficulty. Even when we had the numbers (for its Lumwana operation) in front of us and put it to the market, our market cap in Australia was less than $20 million and we had to raise around half a billion.”
Williams says the company had to tap European banks for debt and then had to list in Canada to raise equity, as the Canadian market was more receptive to African risk.
“In the last two years, Australia has finally recognised that the right parts of Africa are a valid investment and the last raising we did of over $100m was shared evenly between Australia and North America,” he says.
Williams says Australia has a very mature exploration environment, the obvious deposits had been found and it was becoming more difficult and expensive to discover new projects.
“We decided to go offshore because by going to areas that had not had such intensive activity there was potentially opportunities there that were sitting at surface ready to be discovered,” he says.
“It is a balancing of the risk-reward equation. We recognised we were going into a more difficult environment, but that the potential rewards were in several orders of magnitude better than Australia.”
Equinox may fall into the success category, but there is a long list of juniors that will be waiting a long time to discover if their risky move pays off.
Greenland Minerals and Energy believes it is sitting on one of the world’s biggest rare earths deposit, but its efforts may not prove fruitful if the government stands by its no-uranium mining policy.
Greenland’s newly elected socialist government continues to ban mining at the deposit because it will need to produce uranium as a by-product.
Another interesting overseas player is Range Resources, which has a strong appetite for risk, with interests in Puntland, a breakaway part of Somalia, and in Georgia.
Rob Murdoch, who previously ran Union Resources — which has an interest in Iran — and is now attempting to float a company in Albania, argues that when entering far-flung places, a company replaces exploration risk with political risk.
“If you explore in Australia, you have a high exploration risk because the country is so mature for exploration, so you take the risk one way or another,” he says.
“You need to develop skills that manage political risk and most political risk relates to someone trying to get rich quick at a higher level.
“I’ve always focused on doing very professional work and do what you say you are going to do. Then you get the professionals in the country onside.
“As you get a good reputation in a country it becomes harder for the political guys that want to play games to play the games. But that takes a few years. It is not something you can achieve overnight.”
Murdoch says it is still difficult to sell some of the more remote countries to Western investors.
“While you might be taking on political risk instead of exploration risk, it is still a hard road to sell that to where you get upside in your exploration stock,” he says.
“The shareholders know it is a bigger risk, but they have a much bigger chance of getting a mine off the ground.
“I’m positive that in another 10 to 20 years we will see a lot more projects coming from the developing countries.”
Australian mining company Gippsland, which is focused on an area in Africa — the Nubian-Arabian shield — announced last week its subsidiary, Nubian Resources, had been granted three new prospecting licences in
Eritrea.
Gippsland chief executive Jack Telford says he has recognised for some time that exploration in Australia is fairly high risk, because of costs and legislative constraints.
“There is a lot of competition in Australia and the chances of a junior making a major discovery is fairly remote. But with our overseas knowledge we have one world-scale project on the books and it is quite possible we will develop more as time goes on,” he says.
Telford says there is always a degree of risk with exploration in any country, but added it was difficult to get Australian investors to back interests in developing countries.
“We look at investors in two areas. There are the Australian investors who do prefer something closer to home. But we have a large proportion of our shareholding in Europe and England, where we believe the investors have a broader understanding of the world and international opportunities,” he says.
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