Mining exploration budgets are being reined in this year as companies struggle to raise capital to fund the search for new reserves to meet surging Chinese demand for commodities from copper to iron ore.

Big miners need new deposits to offset falling output at mines that were discovered in the previous boom of late 1970s and early 1980s. But these companies have tended in recent years to leave exploration largely to small companies, known as “juniors”, which are now struggling to raise equity funding to drill.

The industry’s junior companies, which largely raise funds in London and Toronto equity markets and account for about half the industry’s annual exploration spending, are suffering after a prolonged period of volatility damped investor interest in initial public offerings. The equity market has been shut for about nine months, say industry advisers, over a period when companies would usually be refilling their coffers for the next year’s exploration plans.

Some industry advisers also expect debt financing for projects to become more scarce, as beleaguered eurozone banks cut back on their lending. Metals Economics Group, a consultancy that publishes closely watched estimates on exploration, expects that spending will rise as little as 5-15 per cent this year, a sharp slowdown after 40-50 per cent rises over the past few years. The slowdown comes in spite of near record prices for metals and minerals.

“Bigger companies should increase spending but they have largely abdicated responsibility to the juniors. That used to be a symbiotic relationship but the model has not been working very well in recent years,” said Paul Wright, chief executive of Eldorado Gold.

Exploration spending in the industry rose sharply last year, according to Metals Economics Group. Expenditure jumped nearly 50 per cent to about $18.2bn – more than doubling from the recent low in 2009 in the depths of the financial crisis.

While cost increases have played a part – with drilling costs estimated to be rising at between 7 per cent and 10 per cent a year – expenditure was also buoyed by strong market conditions which helped junior companies raise $7.4bn in the final quarter of 2010 and the first half of last year. However, the IPO market closed to new issues in the middle of last year and has stayed that way since.

“It is a very difficult, challenging market,” said one industry adviser.

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