An increased exploration effort is needed to stop the resources industry shrinking massively in coming decades, reports Barry FitzGerald in his Garimpeiro column.

The gold industry is pretty pleased with itself after its successful campaign against the West Australian Labor government’s proposed royalty increase.

The tax increase from 2.5 per cent to 3.75 per cent on gold prices of more than $1200 an ounce was slated to raise $392 million over four years. But it was shot down last week in the Upper House by the Liberal Party, the Nationals and the cross-benchers.

But the industry is best advised not to rest on its laurels.

The amount “saved’’ by the victory (currently $20 per oz) is small beer compared with the increased exploration effort required to stop the industry shrinking massively in coming decades.

Manning barricades to stop governments tinkering with royalties is one thing.

Diverting more of the bumper free cash flows being generated at the current spot price of $1650 an oz to a substantially increased exploration effort over the long term is another.

A deep dive into the industry’s long-term future by veteran mineral economist Richard Schodde from MinEx Consulting, commissioned by a collection government bodies and industry groups, neatly sums up the nub of the problem.

“It goes without saying that every mine has a finite life (and will eventually close down); it also equally true that all mines were once a gleam in the eye of a geologist (ie it took someone to find them),’’ Schodde said in the report, released today.

A Kalgoorlie without the Super Pit churning out masses of gold is a real possibility inside of 10 years. The same goes for the big Telfer mine in WA.

But where are their replacements?

Schodde’s report – it is being repeated across other commodities critical to the Australian economy – found that over the longer term (40 years) about $677 million annually will be spent on gold exploration in Australia (slightly up on current levels), resulting in 266 new gold deposits being found.

Half of the discoveries will be developed and will contribute 4.06 million oz to annual production come 2057.

But because existing and nearer term mines will have been largely depleted by then, national output will come in at 4.69 million oz – half of the current rate of 9.7 million oz.

Industry revenues plunge by half to $7.3 billion as well (on gold price assumptions by the Federal government’s chief commodity price forecaster used in the report).

Under that scenario, the number of operating mines falls by a third (from 71 to 47), and total employment dives by 70 per cent (from 27,900 to 8300 workers), with about half of the jobs losses a result of productivity gains associated with automation.

But the tide can be held back.

MinEx estimates that gold production levels 40 years out could be maintained at current levels if the industry doubles spending on making new discoveries, or get a lot better at finding new gold deposits by reducing current discovery costs from the current $70 per oz to $35 per oz.

“The incremental benefits of reaching this target will be an extra 4.05 million oz annual production, an extra $6.23 billion in revenues and additional 7160 jobs,’’ Schodde said.

“The opportunity exists for industry and government to take the initiative to invent its own future.’’

“In addition to developing policies that encourage and stimulate exploration, the opportunity also exists to be more efficient and effective at making discoveries.’’

“The challenge is that many of these initiatives require effort (and money) and will take several years to bear fruit,’’ Schodde said.

And given Schodde’s modelling predicts that in 15 years half of Australia’s gold production will come from mines that are yet to be discovered, and that it generally takes 13 years for a discovery to become a mine, the industry had better get cracking.

“Government and industry need to support exploration today. We only have the next couple of years to properly identify and address ways to improve our exploration performance — otherwise Australia runs the real risk of a significant supply disruption in the medium-term,’’ Schodde warned.

Tinkering with gold royalties obviously doesn’t help. But the reality is that with the gold price in Aussie dollars moving in a $180 an oz range in the last 12 months, the $20 an oz increase from the thwarted royalty increase was a small victory.

A bigger battle remains.