Can the pull of the energy transition save explorers from a capital crisis?

Financing inflows for Aussie explorers fell 55% to $1.35 billion against a tough economic backdrop last quarter
BDO’s Sherif Andrawes does not think an iron ore downturn like crash is coming
He says demand for critical ‘energy transition’ metals means investment should flow for ASX-listed explorers

A mining expert says demand for energy transition metals like lithium, copper, graphite and nickel should see funds continue to flow for Aussie explorers despite reporting the largest drop in fundraising for the sector since the pandemic.

Mining’s hot run has stalled, with new figures from accounting firm BDO showing financing inflows for companies lodging Appendix 5B reports cratered 55% to $1.35 billion in the March quarter this year.

It comes amid suggestions the mining industry may have tipped over the peak of the cycle, with Lion Selection Group’s (ASX:LSX) Hedley Widdup revealing last month that 87% of mining and metals companies with a sub-$200m market cap saw their share price fall since April 19 last year amid a so-called ‘liquidity crunch’.

Exploration and investment spending fell 17% and 51% respectively in the three months to March 30 as explorers stashed their cash for a rainy day, BDO says in its latest Quarterly Explorers Cash Update, with financing inflows of $1.71m per company 53% lower than the two-year average of $3.61m going back to March 2021.

IPOs have also dried up with just seven lodging their first Appendix 5B (quarterly cashflow report) in the quarter.

The number of companies reporting those have plateaued for the first time since hitting a trough of 642 in September 2020, stalling at 787.

However, BDO’s global head of natural resources Sherif Andrawes says despite the bearish mood in capital markets, the outlook for explorers in battery metals remains strong.

“I think we’re going into more difficult period, whether it’s the top or whether it’s just a plateau for a while,” he told Stockhead.

“The overall need (for metals), particularly in the energy transition, is still high.

“In previous cycles it has been the cycle of saying there are ups and downs. But here you’ve got a general cycling where we might be peaking in terms of buying but we also desperately need for the commodities and minerals for the energy transition.

“So I suspect there’s going to be two competing forces there.”

IPO pipeline dripping

Back in the supercharged days of 2021, before the Russian invasion of Ukraine, Covid Zero in China, inflation crisis and hiking cycle blew a global bull market to smithereens, we saw 180 IPOs hit the bourse in Australia. Over 100 of them were in resources alone.

READ: IPO Watch: ASX IPOs in 2021 were up 14 per cent on average; here are the best performers

Andrawes said demand for lithium has made that space a saving grace for the IPO market, but risk capital is undeniably lighter than it was a couple of quarters ago.

“Currently, our office has probably not got many on the go. We’ve only get a handful. The ones we are seeing here are in the energy transition metals space,” he said.

“For example, we’re doing work on Lithium One, which is the spin out of Kali from Kalamazoo and Karora, putting their lithium projects together to do an IPO on that.

“That’s one that has been announced, there are couple of that haven’t been (announced) in the lithium space.”

On a longer term horizon, however, Andrawes says the Australian exploration space remains in a stronger position than it was after the iron ore bust from 2013-2015.

“If you compare us to any time from 2014 to 2020, we’re stronger than any of those positions by quite a margin, by every measure, just not as strong as you’ve been in the last three years,” he said.

“So I think the question really is whether it’s gonna go back down to those levels of 2013 to 2019.

“I don’t think it will for the reasons I was talking about in terms of the need for these commodities.

“Whether it just kind of plateaus out. Those last two years of 2021-22 were halcyon years, and we could have a plateau at the sort of mid-level.”

Support for explorers

Investment in critical minerals overseas has surged on the back of demand from OEMs for EV materials and the arms race between the US and Europe to fund mining and procure metals like lithium, cobalt, graphite, copper and nickel.

Notable is the Inflation Reduction Act (IRA) in the United States, which will provide around US$369b of subsidies and incentives to stimulate domestic production of low emissions metals for EVs, defence and renewables.

Andrawes says something similar could stimulate investment in exploration in Australia, against a risk that tight capital markets could spur higher prices down the line by stunting investment in the drilling needed to identify new sources of supply today.

“There’s no doubt there’s impact from the Inflation Reduction Act and the similar one in Europe, their Green Minerals Act,” he said.

“Those two attract lots of money to those regions, and ASX-listed companies don’t necessarily benefit from that unless their projects give offtake or processing in those regions.

“I think it would be useful for these ASX-listed companies if the Australian Government did similar.

“We’ve announced $52m or $58m — I can’t remember the exact number — in the last budget for critical minerals, but if they were to have a look at what was done in other countries, that would be helpful certainly for the companies in this report.”

Which explorers are finding the funds?

So the general trend in March was, as might be expected, down, with the average cash balance of explorers down from $13.2m at June 30 to $10.2m at March 31 and the number of companies with over $1m in the kitty down from 87% to 81% over the same period.

Total admin expenditure fell 10% to $314m, but remained 11% higher than the two-year average, while exploration expenditure fell 17% to $827m and exploration spend per company fell to $1.05m, the lowest since the $980,000 spent in June 2021.

But a number of companies still found funds easy to come by, with 34 companies raising $10m or more, down from 51 a quarter earlier.

Gold was the top performing commodity where this was concerned, with prices rising through the quarter before hitting an Aussie dollar record in excess of $3000/oz early in April.

Those companies pulled in a combined $274.12m, with lithium stocks among the top 34 drawing $165.17m from investors and financiers.

Graphite ($96.7m), silver ($95.51m) and rare earths ($76.64m) rounded out the top five, through the latter two can largely count their raising power to large inflows for one or two companies, Syrah (ASX:SYR) and Talga (ASX:TLG) in the case of graphite and Adriatic Metals (ASX:ADT) in the case of silver.

“When there’s times of economic uncertainty gold, it’s a cliche this, but it’s obviously safe harbour,” Andrawes said.

“So it doesn’t surprise me that in our Fund Finders list gold is number one with lithium, graphite and the like just falling behind. That story is consistent with expectations.”