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There is no doubt that the mining sector is under great pressure on a number of fronts, particularly those operating in the exploration and early development phases. These companies have historically been at the forefront of exploration activity in Australia and other key mining regions of the world such as Africa.

Many of these companies are now facing risk-adverse public markets and lenders and as a result, they are struggling to attract capital. This is having a flow-on effect when it comes to the level of exploration we are seeing in the sector.

Those in the mining sector understand the long-term value of exploration activities to increase our geotechnical understanding of prospective areas, and ultimately, support the discovery of new, low-cost mines.

However, matching this long-term value proposition with near-term funding needs for current exploration programs continues to be challenging in light of the depressed spot prices across a range of commodities and the associated constraints this places on fundraising.

This has led to a sustained downturn in exploration activities. The Association of Mining and Exploration Companies noted in October 2015 that investment in mineral exploration was at its lowest levels in the past 10 years and that the rate of new discoveries was not keeping pace with the depletion of existing mines. The Federal Government also recently acknowledged the risk of accelerated depletion of known deposits of non-bulk commodities leading to production declines over the next 15 to 20 years.

In light of these challenges, the Federal Government, as well as resource majors, have committed to supporting the exploration sector during this challenging period.

On the legal front, Herbert Smith Freehills has also extended its support to the sector and recently launched Extract - a free online legal portal for exploration companies.

Ensuring survival - The need for innovation

Managing cash flow continues to be a key challenge for exploration companies and many are taking measures to reset their cost base. Innovations that allow exploration companies to carry out more exploration for less financial outlay such as talent pooling and sharing infrastructure, have become an increasingly important part of commercially viable exploration activities.

Partnerships and collaboration within the exploration sector, between established mid-tiers and majors currently in production continues to be an important component of providing the financial and technical support necessary to support the ongoing viability of the exploration sector during this challenging period.

The pressure on cash flow is unfortunately not expected to abate in the near future. In addition to their own efforts, the junior end of the market needs external support from others in the industry, such as government, regulators, advisors and the majors to help them through this challenging time.

A helping hand during challenging times

The Federal Government has recently announced $100 million in funding for the Exploring for the Future program which will fund geotechnical data acquisition and analysis by Geoscience Australia, along with the ATO’s Exploration Development Incentive which became effective in July 2014.

One resource major is also assisting exploration companies by offering them the opportunity to have samples and drill cores analysed by their mineral analysis division.

As a global mining law firm, Herbert Smith Freehills wanted to alleviate some of the cost pressures for the exploration industry. As a firm, we view ourselves as being part of the industry and therefore having a responsibility to try and ensure the viability and sustainability of the industry going forward.

Exploration plays a very important role in that and after carefully considering how we could best assist, we created Extract, an innovative online resources portal.

Extract explained

Recently launched, Extract is an online resources portal that allows exploration companies to access free legal information, including basic documentation, on a range of issues relevant to exploration activities. Providing this sort of assistance will allow exploration companies to better advance their projects from exploration to implementation phase.

Providing access to legal documents and information free of charge was a first for Herbert Smith Freehills. Extract recognises the firm’s commitment to support the exploration sector during a challenging period and the pivotal role exploration companies play in the long term success of the mining industry as a whole.

Extract will allow junior to mid-cap miners to access a range of practical legal knowhow such as standard form contracts, confidentiality agreements and term sheets tailored to their sector while, at the same time, alleviating some of the pressure explorers are finding on their cashflow.

Users will also be able to obtain insights from the firm’s mining specialists on more detailed contracts such as joint ventures, farm-in and mining services agreements, which is intended to help fast-track the user’s understanding of key legal agreements.

The future? Collaboration

Effective collaboration between all industry stakeholders, including state and national governments, as well as mining majors, industry bodies, research institutions, landholders, traditional owner groups and service providers is increasingly important to ensure exploration and mine development remains viable.

Whilst Herbert Smith Freehills recognises that Extract will not be a panacea for the issues facing junior miners, it hopes to alleviate some of their legal cost pressures during this period of low commodity prices and also allow juniors access to the firm’s market-leading insights at an earlier stage of their exploration project.

More information on Extract is available at here.

This article first appeared in National Resources Review.

Key contacts

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Simon Reed

Partner, Perth

Simon Reed
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Geoff Kerrigan

Senior Associate, Perth

Geoff Kerrigan