The following is an extract from a biannual report titled Resources and Energy Major Projects April 2015, prepared by the Department of Industry and Science.
Exploration is an important precursor to the development of projects in the mining investment pipeline. It is an investment in knowledge about the location of deposits and the quantity of resources available to potentially support future development. Thus, exploration activity is a useful indicator of possible future mining activity. Before making the decision to undertake exploration activities, resources and energy companies consider a number of factors to ensure the benefits of exploration activities exceed the costs. These include prevailing and expected commodity prices; regulatory environments; geological prospects and fiscal arrangements.
Commodity market and general economic conditions have not supported exploration activity as they did during the height of the mining boom. Lower commodity prices have pushed many established companies to curtail exploration activities to save costs while the quarterly activity reports of aspiring producers indicate they are having more difficulty arranging finance for exploration programs.
EXPLORATION EXPENDITURE
In 2014 Australia’s total exploration expenditure, including both minerals and petroleum exploration, decreased 6.7 per cent, compared to 2013, to $6.6 billion. Market conditions such as lower commodity prices and an oversupply of material in most markets reduced the incentive to undertake exploration activities. Minerals exploration expenditure totalled $1.8 billion, down 27 per cent; however, petroleum exploration expenditure increased 4.6 per cent to $4.7 billion.
In Western Australia total exploration expenditure decreased 15 per cent ($689 million), to $3.8 billion in 2014. Expenditure in Queensland was down 7.9 per cent to $1.1 billion and the combined expenditure of New South Wales, Victoria and Tasmania decreased 30 per cent to $187 million. However, exploration expenditure in South Australia and the Northern Territory increased 20 per cent and 67 per cent, respectively.
Minerals exploration activity, as measured by the number of metres drilled, fell in line with the drop in expenditure. In 2014 the total metres drilled decreased 14 per cent, year-on-year, and totalled 6125 thousand metres. Metres drilled at new deposits and existing deposits decreased 29 per cent and 8.2 per cent, respectively. As a result of this drop in activity, exploration expenditure on new deposits decreased 37 per cent to $545 million and expenditure on existing deposits decreased 22 per cent to $1.3 billion.
Exploration expenditure decreased across all types of mineral commodities in 2014. Expenditure on base metals decreased 27 per cent, compared to 2013, to $607 million. After peaking in 2011, base metals exploration expenditure has now declined 59 per cent. Although iron ore and coal export volumes increased over 2014, exploration expenditure for both commodities decreased by 31 per cent and 23 per cent, respectively, in 2014. Gold exploration expenditure decreased 32 per cent with other minerals expenditure decreasing 8 per cent.
Both onshore and offshore petroleum exploration increased in 2014 compared to 2013. Onshore exploration increased 7 per cent to $1.4 billion and offshore exploration increased 3.7 per cent to $3.3 billion. Offshore exploration accounted for nearly half of Australia’s total exploration expenditure in 2014. However, the recent downturn in petroleum prices is likely to result in lower exploration in the short term.
SUMMARY OF PROJECTS AT THE PUBLICLY ANNOUNCED STAGE
Slowing demand growth in key markets and increasing supply of most commodities led to lower commodity prices through the second half of 2014 and into 2015. This trend has in turn impacted the development of resource and energy projects in Australia. At the end of April 2015, DIS has identified 55 projects at the Publicly Announced Stage with a collective value of between $62 billion and over $81 billion. This is four less than reported in October 2014. Seven projects were removed from the major projects list after extended periods of inactivity or announcements that they are on hold, four projects were added to the list, four advanced up the investment pipeline and three were moved back from the Feasibility Stage to reflect delays in their progress.
At the end of April there were eight iron ore projects worth over $11 billion at the Publicly Announced Stage. The decline in iron ore prices through 2014 and into 2015 appears to have stalled the development of several iron ore projects. Three iron ore projects have been removed from the major projects list since October 2014 (worth a total of around $10 billion) and none were added to the list or progressed to the Feasibility Stage.
There are nine coal projects at the Publicly Announced Stage with a combined value of more than $10.7 billion. While the number of coal projects at the Publicly Announced Stage has remained the same since October 2014 the overall value of those projects has fallen by around $1 billion.
Following the fall in the price of oil and gas there has been a general slowdown in project investment in these commodities. However, in terms of total value, LNG, oil and gas projects account for the largest share of projects at the Publicly Announced Stage. There are seven LNG, gas and oil projects at the Publicly Announced Stage with a combined value of over $67 billion. This high value is underpinned by offshore gas projects including Browse floating LNG, Crux LNG and Cash Maple Development projects, each estimated at over $5 billion.
At the end of April 2015 there were six gold projects with a combined value of between $730 million and $1.5 billion in the Publicly Announced Stage. There have been no changes to the number and value of gold projects at the Publicly Announced Stage since October 2014. Given the ongoing fall in the price of gold recorded over the past 24 months the number and value of gold projects at the Publicly Announced Stage is a positive result.
At the end of April 2015 there were seven metals projects, including copper, nickel, zinc, lead and aluminium at the Publicly Announced Stage. The number of projects has increased by one since October 2014, the net effect of removing one project from the major projects list, three moving back to the Publicly Announced Stage and one project advancing up the development pipeline. The project removed from the list fell below the $50 million threshold following a re-appraisal of the development. The metals projects have a combined value of over $5.8 billion, mainly due to BHP Billiton’s Olympic Dam expansion.
The fall in most metal prices through 2014 and into 2015 has slowed the development of many projects in the early stages of planning. Many major producers have indicated through their quarterly reports that they are cutting, or intend to cut, capital expenditure (particularly exploration and project development) in an attempt to reduce costs.
SUMMARY OF PROJECTS AT THE FEASIBILITY STAGE
The progress of projects at the Feasibility Stage has been affected by the downturn in commodity prices. Since the generally acknowledged peak in commodity prices in 2011, the number of uncommitted projects (comprising those at both the Feasibility and Publicly Announced stages) has declined from a peak of 305 in April 2011 to 180 in April 2015.
At the end of April 2015 there were 125 projects at the Feasibility Stage with a combined value of $143 billion. The number of projects has decreased by 13 since October 2014 and the total value is down 2 per cent. Three projects progressed to the Committed Stage, three projects were added to the Feasibility Stage, three projects progressed from the Publicly Announced Stage, three projects were moved back to the Publicly Announced Stage and 13 were removed from the major projects list. These projects were removed after announcements they were no longer being developed or following 12 months or more of inactivity.
If market conditions remain subdued through 2015 several more projects may be removed from the list. However, a number of projects have secured Government (both state and federal) approval since the October report, indicating that if conditions improve several projects will be in a position to make a final investment decision.
Projects to develop or expand coal mines continue to account for the highest number and value of projects at the Feasibility Stage. There are 37 coal projects worth a combined $54 billion. This is down two projects from October 2014 which is the net effect of one project progressing to the Committed Stage (and completed during the period) and the removal of one project from the major projects list.
There are 13 iron ore projects at the Feasibility Stage with a combined value of $21 billion. This is five projects less than reported in October 2014 and the result of five projects being removed from the list. There are several high value, greenfield magnetite development projects that remain at the Feasibility Stage from October 2014 with a combined value of over $12 billion.
There are seven LNG, gas and oil projects at the Feasibility Stage worth $30 billion. While the number of projects has remained the same since October 2014 the value has increased by around $700 million, following the re-evaluation of the Narrabri coal seam gas project. The largest of these projects is the proposed Scarborough floating-LNG platform with an indicative cost estimate of $14 billion.
There are 10 gold projects at the Feasibility Stage with a combined value of $2.2 billion. Following the retreat in the price of gold producers have moved focus from expansions and new projects to cutting costs and improving efficiency. The Mt Todd mine expansion in the Northern Territory remains the highest value gold project at the Feasibility Stage, it is worth an estimated $1 billion.
Over the past six months the number of metals projects, including aluminium, copper, lead, zinc, silver and nickel projects, at the Feasibility Stage decreased by three to 19. This is the net effect of one project being removed from the list of major projects, three projects moving back to the Publicly Announced Stage, the addition of one project to the list, one project progressing to the Feasibility Stage and one project progressing to the Committed Stage. The value of metals projects at the Feasibility Stage decreased by 12 per cent to $12.5 billion from October 2014. Over the past six months an abundance of most metals combined with a slowdown in demand growth led to a broad increase in stock levels and a fall in prices. This trend has in turn reduced the incentive for investment in metals projects. Oz Minerals’ Carrapateena copper mine remains the largest metals project at the Feasibility Stage worth around $3.0 billion.
PROJECTS PROGRESSING TO THE COMMITTED STAGE
In the six months from November 2014 to April 2015, seven projects worth $2.2 billion were identified as receiving a positive final investment decision and progressed to the Committed Stage. While this is a moderate rebound both in the number and value of projects since October 2014, investment in resources and energy has been on a downward trend since October 2012.
ANALYSIS OF COMMITTED INVESTMENT
The number of projects at the Committed Stage decreased by five, relative to October 2014, to 39. These 39 projects have a combined value of around $225.8 billion which is $1.9 billion less than in October 2014. Over the last six months 13 projects were completed and seven progressed from the Feasibility Stage. The peak of the investment boom has now well and truly passed however opportunities for further investment, particularly in infrastructure, still remain. Business conditions, cost competitiveness in Australia and the price cycle, will drive implementation of these opportunities. The ‘mega projects’ valued at more than $5 billion represent the highest proportion of projects at the Committed Stage. At the end of April 2015 there were eight mega projects at the Committed Stage, which represent 90 per cent of the value of all committed projects. Most of the mega-projects are LNG related, with Hancock Prospecting’s Roy Hill the only non-LNG mega-project.
SUMMARY OF PROJECTS AT THE COMMITTED STAGE
LNG, gas and oil projects continue to drive resources and energy investment in Australia, accounting for 88 per cent of committed investment. There are 13 LNG, gas and oil projects at the Committed Stage with a combined value of $200 billion. Over the past six months two projects moved into the Committed Stage (worth $1.9 billion) and two projects (worth $600 million) moved on to the Completed Stage. The Queensland Curtis LNG and Gladstone LNG projects, worth $20.4 billion and $18.5 billion respectively, remain on the committed list. Although these projects have commenced production they are yet to deliver their full scope though this is expected before the end of 2015.
There are three iron ore projects worth $11 billion at the Committed Stage. Roy Hill is the largest iron ore project at the Committed Stage (accounting for approximately 90 per cent of the total value of iron ore projects at the Committed Stage) and the last non-energy mega project on the DIS production pipeline. Roy Hill is scheduled for completion in late 2015.
There are seven coal projects worth a combined value of $5.5 billion at the Committed Stage. This is two projects less than in October 2014 as two projects moved to the Completed Stage. Four of the committed projects are in New South Wales and three are in Queensland, however the four projects located in New South Wales are expansions which are smaller in scale than the greenfield development projects located in Queensland. The Grosvenor underground mine in Queensland is the highest value project worth approximately $2 billion and is scheduled for completion in 2016.
There are two gold projects worth $300 million in the Committed Stage, which is one more than in October 2014. No major gold projects were completed in the last six months. However, several gold mines that did not meet the threshold for a major project (and are therefore not on the DIS major projects list) have moved to the Committed Stage. The recent rise in the Australian dollar gold price has supported the development of low cost gold projects, which typically have a shorter life span.
Since October 2014 the number of metals projects, including aluminium, copper, lead, zinc, silver and nickel, at the Committed Stage increased by one to total four. These four projects have a combined value of $2.5 billion. Notably, the Nova-Bollinger nickel project moved to the Committed Stage and is the first metals project to do so in over 12 months. No metals projects reached completion. There are still no projects at the Committed Stage for aluminium, bauxite, alumina or copper that are valued at over $50 million.
Since October 2014 the number of infrastructure projects at the Committed Stage has decreased by three to total seven. This is the result of four projects moving to the Completed Stage and one project moving to the Committed Stage. As a result, the value of infrastructure at the Committed Stage has decreased by 44 per cent since October 2014 to $5.5 billion. The fall in value was primarily due to the completion of the Wiggins Island Coal Terminal (worth $2.6 billion). There is now only one high value infrastructure project at the Committed Stage, the Hay Point Coal Terminal (worth $3.5 billion), and it is scheduled for completion in the next 12 months.
SUMMARY OF PROJECTS AT THE COMPLETED STAGE
In the six months to April 2015, 13 resource and energy projects with a combined value of $7.8 billion progressed to the Completed Stage, this is eight projects and $6.6 billion more than recorded in October 2014.
Three iron ore related projects, with a combined value of $600 million, were completed in the six months to April 2015. The three projects consist of two new mines, Iron Bridge and Iron Valley and one expansion, Mt Webber stage 2. Once fully operational these projects will increase Australia’s annual iron ore production capacity by approximately 11 million tonnes or 1 per cent of annual production.
Three coal related projects worth $1.3 billion progressed to the Completed Stage in the period. Two of the projects, Drake Coal and Middlemount (stage 2) are located in Queensland while the Boggabri open cut project is located in New South Wales. All were expansion projects.
Two oil and gas projects worth $600 million were completed in the past six months. The Coniston Oil Field Project in Western Australia was the largest of these projects and was worth $500 million. There are several large LNG projects scheduled for completion in 2015 including Queensland Curtis LNG and Gladstone LNG. These two projects alone have a combined value of approximately $40 billion.
Over the past six months five infrastructure projects worth $5.2 billion were completed. The largest of the completed projects was Wiggins Island Coal Terminal (stage 1) worth approximately $2.6 billion. Once fully operational the coal terminal will add around 27 million tonnes to Australia’s annual coal transport capacity. BHP Billiton’s Western Australian Iron Ore optimisation project, worth $2 billion, was also completed during the period.
No gold or metals projects, including aluminium, bauxite, alumina, copper and nickel projects reached completion in the past six months. However, several gold and nickel projects are due for completion in the next 12 months.
OUTLOOK FOR RESOURCES AND ENERGY INVESTMENT
World demand for raw materials and energy remains strong and for most commodities is still growing. Nevertheless, expenditure on exploration and investment in developing new projects has slowed markedly around the world due to lower commodity prices. The quarterly activities reports of many project developers operating in Australia are reflecting this trend and while there was a modest uptick in the number of new project commitments in the past six months, the focus of resources companies is clearly to improve the commercial viability of their existing facilities rather than develop new ones. For emerging junior companies targeting the development of their first asset, the operating environment is proving particularly challenging. In an environment of tighter finance availability, companies that have completed feasibility studies are re-evaluating their plans to identify cost savings in a bid to improve the economics of their projects. For many project developers this process has not delivered the desired results and subsequently the number of uncommitted projects in Australia has been declining over the past three years.
The outlook for resources investment in Australia remains broadly unchanged. The value of committed projects is about to start declining, substantially, and this will not be offset by new investments coming through the pipeline which are being increasingly delayed due to adverse market conditions. Two of the large LNG projects in Queensland have already started initial production but remain on the major projects list as the project is yet to be fully completed. This is providing some support to the value of projects that are underway but it is likely that by the end of 2015 they will be moved to the completed stage in the major projects list. The total value of committed projects peaked in 2012 at around $268 billion, has now declined to $226 billion and is likely to fall below $200 billion by the end of 2015 as a result of the LNG projects being moved to the Completed Stage. Almost all projects currently under construction are scheduled to be completed before 2018 and new project final investment decisions will be required to drive capital expenditure in the resources industry after this time.
Decisions to proceed to construction are becoming increasingly difficult due to market conditions, high project costs and in some cases legal proceedings to delay or prevent projects occurring. Both the likely and possible scenarios contained in this outlook reflect the announced schedules of projects under development which are now starting to reflect these schedule risks. As such, a number of projects in both the likely and possible scenarios have been adjusted to have later dates for final investment decisions. However, it is still likely that further delays will occur and that will push the resources investment profile further back.
The resources investment boom has been driven by high value projects that aimed to mainly increase production of bulk commodities and LNG. Although such projects are now winding down, Australia still has many high quality deposits of other commodities that can be developed in the future to meet growing world consumption. Continued advances in technology and demand growth in highly populated emerging economies will continue to support higher consumption of commodities such as base metals, rare earth elements, gold, silver and uranium. The development of such mines in Australia is far from guaranteed, but the cyclical downturn in the broader industry and draw dawn in investment in high value projects makes it the opportune time to bring a greater focus on developing them.
For the full report visit http://www.industry.gov.au/Office-of-the-Chief-Economist/Publications/Documents/remp/REMP-April-2015.pdf
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