The Energy Transition Has A Gold Problem

The energy transition, a hoped-for shift from fossil fuels to battery metals, is getting more difficult as explorers maintain a focus on the metal which is easiest to monetize because it is already a form of money, gold.

A survey by the research firm S&P Global found that tight monetary policy has been a key factor in a 3.3% fall in total spending in the search this year for non-ferrous metals, a category which includes base metal used in batteries such as copper and nickel.

Gold saw a steeper decline with the budgets of 3100 mineral exploration companies down by 16%.

But even with less spent on the hunt for gold it still accounted for 46% of the global metal-exploration budget.

The easiest explanation for the $5.92 billion invested in the search for gold, out of a total of $12.8 billion outlaid in the overall search for metals, is that gold is the mining world’s equivalent of cash.

Little if any marketing is required. Demand is deep with layers of buyers from central banks to retirees worried about financial stability, all backed by at least 5000 years of value ascribed to a material which has universal value and can be worn as jewelry or stored

Not even the ultimate put-down of gold (“a barbarous relic”), by one of the 20th century’s greatest economists, John Maynard Keynes, has dimmed demand.

But the S&P survey of what explorers are looking for is a surprise given the amount of political and consumer noise about the importance of replacing oil, gas, and coal with renewable energy such as solar and wind power which require metals.

This year’s 3.3% overall decline in exploration spending brings to an abrupt end the recovery which started in 2021 when outlays jumped by 34% in the first year after Covid lockdowns, an upward trend which continued last year when there was a 17% increase.

S&P said monetary tightening has “taken a toll on exploration activity” though the overall contraction was relatively modest.

“We feel a similar story will likely emerge in 2024,” S&P said.

“Metal prices and financings have underperformed for most of 2023, which has directly impacted drilling activity.”

Drilling is the most important phase of exploration, the final test of high-tech physical and chemical testing, earning drill rigs the tag of “rotary lie detectors”.

“September drill activity was the lowest in three years and funds raised by juniors and intermediates currently sit 14% lower year to date.” S&P said.

“Financings will likely remain depressed given Federal Reserve statements indicating that interest rates are likely to remain elevated for longer.

“Countering the downside risk, however, are expanding country level net-zero (carbon emission) commitments which continue to fuel exploration programs for base (copper and nickel) and battery metals (lithium, cobalt and graphite).”

Despite that flash of optimism S&P expects a 5% decline in overall exploration spending next year, compounding the problems caused by this year’s 3.3% fall.

The search for green, or battery metals, is attracting a bigger share of global outlay but a breakdown of metals shows that gold’s 46% share of spending this year easily outshone copper at 24%, lithium at 8% and nickel at 6%.

If energy transition is to be achieved exploration spending must increase because there is a direct connection between what’s spent on discovery and the pace of development.

Right now, according to the S&P data, the search for critical and battery metals needed in EVs and static energy storage systems, is slipping into reverse.

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