Friday, 3 March 2023

With declining resources and reserves Australia’s biggest driller says explorers need to keep splashing the cash

by Berkeley Lovelace

  • Australia’s biggest driller says the long-term outlook for exploration remains bullish with gold and battery metals to shine
  • BDO data shows investors continue to back explorers, as $3.02 billion of funds flowed into the coffers of ASX exploration stocks in the December quarter
  • Rare earths stocks raise almost as much as gold companies as energy transition metals capture investors’ eyes

Australia’s biggest drilling stock DDH1 Drilling’s (ASX:DDH) headline results were impressive, its merger with underground experts Swick last year propelling the company to a record profit and an interim dividend of 3.3c which outstripped any full year payout from the company since its 2021 ASX listing.

But a major fall in its share price came on news from the company that January and February had been weaker than expected, with revenues poised to fall when its March quarter results are released in April.

Talking to analysts and media after the release of its results on Tuesday, the Fremantle-based contractor blamed wet weather, especially in Queensland, approval delays and program deferrals for its tough start to 2023.

But the long term outlook remains a bullish one, with DDH1 managing director Sy Van Dyk suggesting a recent boom in exploration activity powered by gold miners and a surge in spending on copper and battery metals key to the energy transition has further room to run.

“We’re still very optimistic about the medium to long term drilling demand and requirements. We believe the fundamentals are there,” he told Stockhead in response to questions on its conference call.

“All of that decarbonisation, electrification, reserve depletion, that people have to replace, all of that comes into play.

“And if you look at the data sets, then you have to conclude that there will be a lot of drilling going forward.

“So we are definitely upbeat, we’re not pessimistic, we’re not changing. We think there is a lot more drilling to take place.”


DDH1 Drilling (ASX:DDH) share price today:


Exploration, fund raising still strong: BDO

Statistics from the Australian Bureau of Statistics and professional services firm BDO back up Van Dyk’s perspective, suggesting drilling remains near record levels across ASX-listed explorers despite headwinds in the global economy.

And new data from the three months to December 31 suggest commodities key to decarbonisation like rare earths, base metals and lithium are joining gold in the engine room of Australia’s world-leading mining and drilling sectors.

Australian companies spent $1.04 billion on mineral exploration in the December quarter, just $56m less than the record $1.099b spent in the three months to September 30.

With three billion dollar-plus quarters in a row, a record $4.0549b was spent in 2022, eclipsing even the iron ore boom a decade earlier.

Spending on gold, iron ore and copper drilling came off slightly but battery metals were strong, with drilling for nickel and cobalt ($88m) reaching its highest quarterly level since September 2008 and drilling for “other”, a class including lithium, rare earths and graphite, hit $145m, just $3.5m of September’s all time high.

Year on year drilling for those commodities lifted 65% from $291.2m to $482.6m across 2022, making up over 10% of the total spend.

ASX listed explorers, including those operating outside Australia, saw total exploration spending fall 8% to $993 million in the December quarter after hitting a nine year record of $1.07b in September, according to the BDO Explorer Quarterly Cash Update out this morning.

But BDO’s figures show investor support for miners remains bullish despite geopolitical and macroeconomic uncertainty, with $3.02 billion in fund raisings for companies who file Appendix 5B reports.

51 companies were able to raise over $10m in a single hit, with the total figure up 66% on the $1.82m raised in the September term.

But the headline number was the $369.76m raised by rare earths explorers, led by near term developers Hastings Technology Metals (ASX:HAS) and Arafura Rare Earths (ASX:ARU).

That was only just shy of the $379.68m raised by gold miners, the mainstays of the Australian exploration market, and eclipsed the $343.51m raised for lithium and $282.9m raised by coal miners.


Short term headwinds no match for roaring long term tailwinds

BDO Global Head of Natural Resources Sherif Andrawes told Stockhead the outlook for metals in the energy transition would eclipse short term economic concerns for investors in exploration companies.

He says traditional issues like interest rates have been “transcended” by the longer term trend of decarbonisation.

“I think the short term demand uncertainty, inflation, interest rates are kind of transcended by the longer term trend of energy transition,” he said.

“If you look at the net zero commitments of companies around the world, the amount of energy transition related metals that are required to meet that just probably doesn’t exist at the moment.

“And so the demand for offtake for all these commodities is huge and demand longer term, not just the next two or three years, but longer term transcends that.

“If you’re looking at explorers here, it takes an average eight to 10 years, even 12 years to build a mine from start to production. You’ve got to put the money in now into exploration to build that mine to be producing in that sort of timeframe.

“And I think this is the money that the market’s realising the opportunities and the demand is so large and supply is not there, you have to start going through the greenfields exploration now.”

In 2021 it was lithium and gold miners challenging for supremacy and attention from investors. They were still the top fundraisers in that order in 2022, albeit well down on the $2.016b and $1.942b raised a year earlier at $1.2 and $1.15b respectively.

They were supported by increased funding for other commodities like rare earths ($350.45m to $698.7m), graphite ($367.37m to $574.34m), uranium ($474.91m to $502.94m), nickel ($290.42m to $317.87m) and cobalt ($343.6m to $528.67m).

Ironically investment was also much higher for oil and gas and coal companies ($611.88m and $519.77m) after massive price runs on the back of energy shortages exacerbated by the war in Ukraine.

READ: RIU Explorers Conference: Rare earths are all the rage, but not everyone can be a winner


IPOs expected to rise

Andrawes says there are likely to be more IPOs this year, though the net increase of companies lodging 5Bs of 47 last year was down on the very high 84 seen a year earlier.

Expect battery metals to be the focus, though regulators (and investors) will be taking a finer comb to look at just how green these firms really are.

“There’s going to be a focus on the statements those companies that are in the battery metal space (make), that they are green companies and they’re environmentally friendly and net zero,” he said.

“All those sorts of statements are really being looked at and we’ve seen ASIC taking some action against some of those companies (on) greenwashing.

“So I think that’s something that will be a big focus this year for ASIC and the companies to actually be able to justify some of the statements they’re making, to say they’re involved in the energy transition industry, but they’re also green themselves if that makes sense.”

But DDH’s results show clients in bread and butter commodities like gold, copper and iron ore continue to make up the lion’s share of its revenue.

“We are definitely seeing more activity levels in all battery minerals, from the lithiums, rare earths in there as well and then nickel,” Van Dyk said, noting demand for gold drilling remained strong.

“But it’s the nature of the orebodies that people need to understand. Narrow vein orebodies attract a lot more drilling, therefore, gold, copper and nickel will always be a mainstay of any drilling organisation.

“These commodities aren’t going to go away. If you look at even gold, gold prices are reasonably strong and gold reserves across the world are diminishing, but demand for gold hasn’t.

“So I don’t think that is going to change at all.”


Other drilling stocks on the ASX

DDH1’s takeover of Swick last year whittled down the number of drilling stocks listed on the ASX, a move that came off the back of a heightened period of consolidation in the industry.

DDH1 had previously consumed private groups Ranger and Strike, while Perth’s McKay Drilling was sold to Canada’s Major Drilling in 2021.

But there remain a handful of other drilling stocks on the ASX to play the continued strength on the exploration sector.

Queensland-based Mitchell Services (ASX:MSV) in its first half results last month revealed a 17% increase in revenue to a record $120.2m and reduced its gross debt by 13% to $37.2m after a major capital investment program that saw the driller boost its operating rig count 13% to 81.

Mitchell delivered a net profit after tax of $186,000, down from $1.091m a year earlier, but returned $1.5m to shareholders via a buyback and expects to see a “material increase” in both revenue and earnings in the second half after recording EBITDA of $16.6m in the six months to December 31.

American-based Boart Longyear (ASX:BLY) also reported net profit after tax of $12 million in 2022, its first profit in a decade.

The company said copper budgets rose 21% last year to a nine year high, with S&P data showing global non-ferrous budgets rose 35% to US$13 billion in 2022.

“S&P recently reported that drilling metrics started 2023 strongly, with the total number of distinct holes drilled in January 2023 reaching the highest level since the firm began tracking the metric in 2014,” Boart said in its full year results on February 24.

“Over the long term, gold has accounted for approximately 40-50% of global exploration activities with copper making up approximately 20-30% of the remaining base metal commodities.

“Historically, both copper and gold prices have held a strong correlation to exploration spend levels, and both commodities have seen a run up in price. For example, gold miners have seen a reduction in average mine life from highs of 20 years in 2011 to approximately 10 years in many reports, indicating a serious reserve crisis is in front of the sector.

“The base metals sector, in which copper is a dominant indicator, has analysts predicting insufficient supply over the next five years, even when factoring in the current project pipelines. Electrification and green technologies will increasingly consume more copper, thereby contributing to supply shortages.”

Other mining services stocks with drilling or drill and blast businesses include Dynamic Drill and Blast (ASX:DDB), Perenti (ASX:PRN) and SRG Global (ASX:SRG).


Mitchell Services (ASX:MSV) and Boart Longyear (ASX:BLY) share prices today:


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