Resources boom to end with a bang

The resources boom could end with a bang, according to data released today by the Bureau of Resources and Energy Economics (BREE).

71 projects in the planning stages of the investment pipeline have been delayed by a year, or more, in the past six months. Given commodity prices, market conditions, and the capital issues of Australia’s mining companies, many are also highly unlikely to proceed at all. BREE warned in May this year that investment in the resources sector could fall by as much as two-thirds over the next five years. Major miners such as BHP Billiton (ASX: BHP) and Rio Tinto (ASX: RIO) have cut back their non-core expansion plans, and are instead focusing on their core operations.

The value of projects at the feasibility stage has dropped by $24 billion to $208 billion, a big fall in just six months. BREE expects the value of committed projects to decline rapidly, although much of that is due to the completion of several mega-LNG projects in the next few years.

Minerals exploration expenditure has declined by 24% to just $3.1 billion in 2012-13, with falls across all mineral commodities. Coal and base metals projects recorded the largest declines, decreasing by 36% and 31% respectively. Iron ore and gold exploration investment were down 14% and 16% respectively. Partially offsetting those falls was the 47% rise in petroleum exploration expenditure to $4.9 billion, the highest level ever recorded.

But the mineral exploration expenditure falls could be a major concern. Mines generally take several years to progress from feasibility to production. But without significant exploration, replenishing existing mineral reserves will be difficult, and could see Australia struggle when the cycle swings back into high demand for resources again.

High value iron ore projects, including Aquila Resources (ASX: AQA) West Pilbara and Grange Resources (ASX: GRR) Southdown Magnetite project, have stalled and it’s unclear whether they will proceed any time soon. The main issue for these two projects is not the iron ore price, but a lack of export infrastructure, including railways, ports and their associated infrastructure.

Foolish takeaway

It means more pain is coming for the mining services companies. As we have warned several times, some could go bust under a worst case scenario. Now is not the time to be looking for bargains in that sector.

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Motley Fool writer/analyst Mike King doesn’t own shares in any companies mentioned. You can follow Mike on Twitter @TMFKinga

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