Mineral exploration and project financing were recurring topics at this year’s Prospectors and Developers Association of Canada (PDAC) convention, which took place in Toronto from June 13 to 15.

Experts noted that 2021 saw mineral exploration budgets grow to US$11.2 billion, reminiscent of the last commodity super cycle when discovery spending rose to US$20.5 billion in 2012.

As Mark Ferguson, research director and the head of mining studies at S&P Global Market Intelligence, explained during his macro-overview of mining exploration financing, even with 2020’s COVID-19 related disruptions, budgets only contracted 11 percent year over year.

“By the end of March (2020), we saw that metals prices were starting to rebound, particularly gold,” Ferguson told attendees of his presentation. “And with that we saw an uptick in equity market support for many companies, as well as activity on the ground as that money started to translate.”

That exuberance carried over into 2021, which registered a 35 percent year-over-year uptick in spending. There were also an additional 200 exploration companies that planned to commence exploration, a “healthy sign that a lot of participants were reactivating programs,” Ferguson said.

Gold-focused exploration saw the largest amount of capital allocation representing 55 percent of global spending.

“That was precipitated by the higher gold price that allowed a lot of gold juniors and majors to really reactivate and increase their spending,” he said.

While growth on the gold side comes as little surprise, the research director and head of mining expects to see growth in battery metals capital allocations this year.

“There’s been a lot of interest in battery metals in recent years stemming from the energy transition and the rollout of electric vehicle plans,” Ferguson said. “Exploration budgets for lithium certainly gained traction in 2016 and 2019 before lithium prices fell, and as a result budgets also came down.”

Although spending was reduced in 2019, budgets remained elevated above 2015 levels. The rising value of lithium over the last 12 months will also be supportive of more discovery.

“We anticipate strong growth from lithium launches this year,” he said.

For 2022, budgets have largely been reigned in this year, as contracting markets and bullish commodity prices have made investors more risk averse.

“As we move into 2022, there’s been a lot more market volatility and a little bit less support,” he said. “March wasn’t too, too bad. And even the data in May was weaker than any month we saw in 2021, adding a little bit of downside risk to sustaining current exploration.”

Despite 2022’s decline in exploration expenditure, Ferguson pointed out that May of this year saw the most drill activity across the sector in a decade and was preceded by the mining industry market capitalization reaching an all-time high of US$2.5 billion in March.

“We’re anticipating budgets to rise to 5 percent to 15 percent (this year),” he said. “I’d say energy minerals uranium, lithium, cobalt and nickel should see more benefit just because their prices are low. But gold and copper will still be at the forefront.”

Global volatility catalyst for physical demand

Offering a macro-overview of the precious metals space during her presentation, Nick Shiels, head of metals strategy at MKS PAMP, told conference goers 2022 will be punctuated with a struggle between reflation and stagflation.

With US inflation ballooning to 8.6 percent during the month of May, Shiels explained that the US Federal Reserve’s interest rate hikes won’t be enough to control the growing cost of commodities and consumer goods.

“We think inflation will be sticky for a range of reasons, but one is supply driven,” she said. “The Fed hiking is not going to stop a war in Russia or China’s zero COVID policy. There’s persistent labor shortages … it’s chaotic.”

Although energy commodities have been out far ahead of the other minerals and metals, Shiels anticipates growth in the precious segment.

“We’re in a commodity bull market led by energy, (and) commodities are outperforming their past trends,” she said. “But if you look at precious metals, precious is only up 5 percent since COVID and theoretically it should be around 30 percent.”

The head of metals strategy believes there will be some rotation out of the “utility commodities” such as base metals and energy as higher inflation forecasts and growth downgrades begin to materialize later this year.

Despite the price constraint gold has experienced in the last year, its value as an asset class remains strong, especially in a higher interest rate environment.

“When we started having a higher interest rate regime, commodities outperform,” she added. “And gold right now is still outperforming tech and crypto by 20 to 30 percent. So yes, it is somewhat rate sensitive, but there are more sensitive asset classes out there.”

Constrained gold and silver prices have helped facilitate massive growth in demand for physical gold and silver, a trend Shiels expects to continue.

“There really is this growing ‘bunker mentality’ in the states that we will obviously see ramp up into US midterms as they’re accumulating physical gold.”

Regardless, the mounting uncertainty is expected to be supportive of precious metals pricing this year, as Shiels forecasts an average gold price of US$2,000 an ounce and an average silver price of US$25.

Don’t forget to follow us@INN_Resource for real-time updates!

Securities Disclosure: I, Georgia Williams, hold no direct investment interest in any company mentioned in this article.

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