By Rhiannon Hoyle and Francesca Freeman
SYDNEY-As the global mining slowdown intensifies, resources
companies are unlocking vast land banks built up during the heady
years of high commodity prices and outsourcing exploration to
smaller rivals.
For years, major miners like Fortescue Metals Group Ltd.
(FMG.AU) and Anglo American PLC (AAL.LN) chose to go it alone when
hunting for new mineral deposits, bolstered by record profits built
on Asia's booming demand for resources. Now, a subdued outlook for
commodity prices is forcing them to take change tack and seek out
junior partners that can help shoulder exploration costs.
"You need to be opportunistic," said Stewart Bailey, a senior
vice president at South Africa's AngloGold Ashanti Ltd. (ANG.JO),
which will cut its exploration budget to as little as US$150
million next year, from US$461 million last year. "In the current
gold market, there's less exploration money to go round in general,
so people will be looking for smarter ways to do things."
Tie-ups with smaller companies may ease concerns that the world
is heading toward a future supply shortage of metals like copper
and iron ore as major resources companies slow investment in new
projects and focus instead on boosting shareholder returns. BHP
Billiton Ltd. (BHP), the world's largest mining company by market
value, cut exploration spending by 46% to US$1.3 billion in the
year through June.
Some companies see an opportunity to cut costs and free up staff
to focus on existing projects, while others are attracted by
alliances with explorers that target commodities outside their
realm of expertise. More large miners are also seeking stakes in
prospective projects held by junior explorers, in exchange for
funding and know-how.
Already, Fortescue has struck a deal with Northern Star
Resources Ltd. (NST.AU), a small Australian gold company, to allow
it to hunt for precious metals on a parcel of land controlled by
the world's fourth-biggest iron-ore miner in Western Australia's
Pilbara region.
The dusty Pilbara plains in the country's northwest are a key
supplier of iron ore to the world, accounting for two of every five
tons shipped by sea. But there's been little focus on finding other
commodities like copper and gold till now.
Northern Star Managing Director Bill Beament said the deal
opened up "an extensive land holding in one of Australia's most
prospective yet barely explored gold regions." Fortescue has
exploration licenses in the Pilbara covering some 85,000 square
kilometers of land-double the size of Switzerland.
Fortescue, which is working to pay down around US$10 billion in
debts accumulated through the expansion of its iron-ore business in
the Pilbara, will continue to look for similar deals with niche
explorers, said Chief Executive Nev Power. "We are very specialized
in iron ore in the Pilbara, whereas this allows us to bring people
in who have very high levels of expertise elsewhere, and thus
increases the likelihood of discoveries," Mr. Power said.
Other companies like Panoramic Resources Ltd. (PAN.AU), a nickel
miner with precious and base metals deposits in Australia and
Canada, have also brought in smaller companies to aid exploration
efforts.
Such deals aren't new practice, but they faded in popularity
when commodity prices ran hot. Companies with active mines were
able to fund exploration efforts entirely from their own cash
reserves and didn't see a need to share risks with a partner.
However, prices of copper--used in power lines to household
boilers--are down 10% since the start of the year. Gold and nickel
prices each fallen 18% over the same period.
Igor Bogdanich, a partner at law firm Allens, said he expects to
see more deals now that major miners are facing increased scrutiny
from investors. He described them as a "graceful exit" for sites
that aren't a top priority, while allowing major miners to keep a
stake in case of a big discovery.
Resources companies have vowed to rein in expenditure amid an
economic slowdown in China, a top buyer of many commodities. Amid
the austerity, major miners are refocusing spending on mines
already in production rather than on exploration efforts, which
they can cut without any immediate effect on revenue.
Similar partnerships are on the radar for companies like
ArcelorMittal (MT, MT.AE), which is the world's biggest steelmaker
and also operates more than 30 mines and exploration projects
around the world.
Larger, more specialized explorers also want a piece of the
action.
Iluka Resources Ltd. (ILU.AU) Managing Director David Robb said
his company-one of the world's biggest producers of mineral sands
used to make paints and ceramics-has already signed some small
deals with peers for the right to explore their land.
"There have certainly been examples where we have been able to
cut deals for access that were much harder to do a while ago," Mr.
Robb said in an interview.
Froydis Cameron, spokesperson for exploration at Anglo
American-which reduced its spending on exploration and
pre-development work by 24% in the three months through June-said
the London-listed miner was open to other miners exploring on its
land. Still, much of its focus right now is on talks with smaller
companies to access their sites.
"The market is different now, and what we're looking to do in
exploration is look for partner opportunities," she said.
-Write to Rhiannon Hoyle at rhiannon.hoyle@wsj.com and Francesca
Freeman at francesca.freeman@wsj.com
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