The VM Group says $50bn less cash will be injected in the mining industry in 2009 than expected before the recession and the same amount could be cut from planned budgets in 2010. It said in its recent Fortis Metals Monthly that this would impact future production efficiencies, reduce metal supply, lead to the neglect of vital maintenance work, delay late-stage development projects and push future metal supply out. The lower investment will also cripple early stage production which will lead to another metal price boom within the next decade, said the VM Group. Major mining and metals companies have announced reductions in capital expenditure of $27bn this year, bringing the total to $48bn. Some of the now lost investment would have been directed towards greenfield exploration, expansions and maintenance of existing operations and corporate activities, including administration costs and corporate responsibility commitments. The VM Group said however that it suspected the amount of capex that has been cut this year was closer to $40bn, if one took the endless amount of project deferrals by mid-caps into account. It also expected capital in the junior sector to be severely reduced this year as this sector relied on equity and debt to finance exploration of which a large part is derived from the TSX-V and AIM markets. We estimate that junior nonferrous exploration expenditure will more than halve in 2009 and then halve again in 2010. Assuming the decline in mining financing in Toronto and London is mirrored across all mining-supportive exchanges, such as the Johannesburg Stock Exchange and the Australian Stock Exchange, we estimate that about $10bn less will be spent on non-ferrous exploration this year.This reduction was in addition to the $40bn reduction in the capital expenditure of mid-caps and majors. The VM Group said it was impossible to say how the lower capex spend would translate into the volume of metal lost or delayed. However, mergers and acquisitions were likely to increase as miners sought cost-saving synergies with their peers or predators made use of the opportunity to acquire assets cheaply. Lower capital spend would also have an impact on state-sponsored financing or equity stakeholding as the present was a good time for China and other emerging economies to secure long-term mineral resources at low prices. With many promising projects and operations now in jeopardy, we expect an increase in state-sponsored investment. There are already a number of examples of China's growing presence, such as Shenzhen Zhongjin Lingnan Nonfemet that recently took a 50.1% stake in Australian zinc and lead producer Perilya, and Chinalco that doubled its stake in Rio Tinto to 18% , following a cash injection of $19.5bn in February, the VM Group said.
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