XPLORATION expenditure continues to grow with an increase of 13% for the December 2016 quarter, BDO research has revealed. It was the third consecutive quarter of growth while average estimated cash outflows for the March quarter were almost 40% higher than estimates for the same period of 2016, which BDO says provides a clear indication that industry sentiment is improving.

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The BDO Explorer Quarterly Cash Update reveals that more mining companies are spending more funds seeking new mineral deposits.

BDO’s Natural Resources national leader Sherif Andrawes said, “Median expenditure has increased 23%, indicating there has been a widespread increase, rather than just at the larger end of the market. The increase in funds committed to exploration and estimated future expenditure illustrates the positive market sentiment for junior explorers, which was first identified in the June 2016 quarter.”

The BDO Explorer Quarterly Cash Update is based on the cash position of Australian-listed explorers based on quarterly Appendix 5B reports lodged with the Australian Stock Exchange.

“Gold, oil and gas stocks continued to receive significant financing cash flows, with four gold and three oil & gas companies raising in excess of $10 million during the December 2016 quarter,” Sherif Andrawes said.

Six exploration companies conducted IPOs during the December 2016 quarter, 100% more than the three in the September 2016 quarter and 300% more than the two new listings in the June 2016 quarter.

“We are aware of a strong pipeline of IPOs and expect to see an increase in the level of M&A activity over the coming months,” he said. “Another feature we are likely to see more of in 2017, will be spin offs of non-core assets by way of IPO.

“It’s even possible that we may see a reversing of the trend of exploration shells being used as vehicles for reverse takeovers by technology companies. Don’t be surprised if in 2017 we start to see exploration projects being reversed into technology shells,” he concluded.

The update revealed that the average exploration expenditure increased for the third successive quarter, from $450,000 in the September 2016 quarter to $510,000 in the December 2016 quarter. This indicates that the previous trend of declining exploration expenditure and cash preservation is well and truly reversing.

BDO found that in the December 2016 quarter, 690 companies lodged Appendix 5B reports, a decline from the 698 companies that lodged reports in the September 2016 quarter. It said reasons for the reduction included 11 companies being the subject of backdoor listings, seven of which were technology related companies, and five companies being delisted, suspended or entering administration. These were partially offset by the addition of six exploration companies that conducted an IPO during the quarter.

The number of companies that raised in excess of $10 million in Q4 2016 was 18, down six from the 24 in Q3 2016. Of the $903 million in financing cash inflows for Q4, these 18 companies accounted for $402 million, or approximately 45%.

The update found that the proportion of companies with two or more years of cash reserves, based on current operating expenses, increased from 25% for Q3 2016 to 46% for Q4. This increase is largely the result of an increase in cash reserves over the analysis period.

Additionally, with the declining number of exploration companies reporting, BDO has observed that the companies exiting the industry typically have less than one year of cash reserves, based on current operating expenses. Consequently, the remaining companies with more than one year of cash reserves account for a larger proportion of the total exploration companies.

Net investing cash flows transitioned from a net outflow of $102 million for Q3 2016 to a net inflow of $150 million for the December 2016 quarter. The difference was primarily attributable to Gold Road Resources’ sale of the Gruyere project for $250 million.

BDO said that despite the change in net investing cash flows from a net outflow to a net inflow, the proportion of explorers with a net investment in capital expenditure increased from 37.5% for the September 2016 quarter to 40.0% for the December 2016 quarter.

It also said that investor appetite for gold stocks reduced over the quarter as a strong performing US economy alleviated uncertainty stemming from the US Presidential Election and its impact on the global economy.

BDO offers a wide range of business and corporate advisory services to large corporate organisations, government and public sector entities, private businesses, entrepreneurs and individual clients across a wide range of industry sectors. In Australia, BDO offers the expertise of 155 partners, supported by 1247 staff.

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