Upheaval in mining sector a test for private equity

LONDON, April 29 Mon Apr 29, 2013 10:49am EDT

LONDON, April 29 (Reuters) - With the world's largest miners flocking to sell assets, cost cuts across the industry and a virtual drought in buyers, private equity funds may finally be tempted into a sector long seen as potentially lucrative but risky.

Industry veterans say the coming months will be a test of whether private equity funds can turn intentions into investments and become more than niche players in an industry that has traditionally relied on public markets for cash.

"Interest from private equity in the sector is the highest I have ever seen," one veteran industry banker said.

Another senior industry adviser described a "now or never" moment despite volatility in commodity prices, citing what could be a drawn out period of low valuations in which traditional buyers - largely, other miners - are kept out by demands they refocus and cut back rather than grow.

Volumes certainly point to increased interest.

According to research and data group Preqin which studies private equity, eight natural resources funds focused solely on mining raised an aggregate $8.5 billion in 2012, more than the years 2006-2010 combined, though data did not show how much was spent on acquisitions.

Analysis by consultancy Ernst & Young suggests that private capital investors accounted for 21 per cent of mining deal activity globally in the nine months to September 30 last year, against just 12 per cent for the same period in 2011.

Smaller miners and developers are also eager to tap alternative sources for funding. In a sign of how tough the markets now are, the Toronto stock exchange - the prime destination for emerging producers - has not had one mining IPO in the first quarter, for the first time in a decade.

"There are a lot of buying opportunities, and for those who have the funds, you might find there is less competition, and that is what private equity looks for - a good deal," said Jason Burkitt, UK Mining Leader at PricewaterhouseCoopers.

GOLD RUSH?

Private equity firms have so far steered clear of mining because of the scale and political risk involved in many operations. Volatile commodity prices and long time horizons are also off-putting, not to mention that the investment firms often lack the manpower or expertise to cover global projects.

Typically, funds have stuck to niche assets, like high-end aluminium products for the aerospace and auto industry, in the case of Alcan Engineered Products, later Constellium, bought from Rio Tinto by funds led by Apollo in 2011.

Now, however, heavyweights like Apollo but also KKR and Carlyle are joining specialised energy-focused First Reserve, Denham Capital and Resource Capital in betting more heavily on the sector, drawn in by the prospect of an extended period of cheap prices and an unprecedented funding drought.

Apollo, which aims to invest $100 million to $500 million per transaction, closed a $1.3 billion natural resources fund in 2012 which will invest in areas including oil, gas and mining.

The fund was one of several to look at BHP Billiton's majority stake in Canadian diamond mine EKATI, which also elicited interest from rival KKR before being sold to miner Dominion Diamond Corp.

KKR has also been named as a potential suitor for Rio's majority stake in the Northparkes copper-gold mine.

SMALLER FIRMS IN POLE POSITION

However industry bankers and specialist funds both questioned whether big name private equity firms would be able to successfully compete in the mining sector.

"Size sometimes can be a disadvantage in our environment. You need to make decisions quickly - you need to have the coal face not too far removed from decision making process, so you can react quickly," Sierra Rutile's chief executive, John Sisay, said. The Sierra Leone-focused mineral sands producer's largest shareholder is specialist fund Pala.

"Smaller firms are able to do that better."

Traditional funds may also lack the extensive specialist teams needed to evaluate projects across commodities and across the world, and may be unable to invest for the longer term.

One of the top shareholders in EMED Mining, a London-listed company redeveloping the former Rio Tinto copper mine near Seville, is specialist Resource Capital.

"If you are playing the development game you are playing the development timeline," EMED's chief executive, Harry Anagnostaras-Adams, said.

Bert Koth, a Perth, Australia-based director at Denham Capital, also questioned the idea that traditional firms would step in. Although mining firms are shedding assets at a pace not seen for decades, many are doing so at auctions which can drive up prices - something private equity is likely to want to avoid.

"Generalist PE firms have a pretty poor track record as they don't fully understand the risks involved. I query whether they really appreciate what they are getting into," Koth said.

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Comments (1)
I think constitutional monarchies would benefit the development of many countries in Africa.
They way I see it there is a need for a non party political international representation of many African countries. A Constitutional monarchy (or limited monarchy) is a form of government in which a monarch acts as head of state within the guidelines of a constitution.
This form of government differs from absolute monarchy in which an absolute monarch serves as the source of power in the state and is not legally bound by any constitution and has the powers to regulate his or her respective government. Most constitutional monarchies employ a parliamentary system in which the monarch may have strictly ceremonial duties or may have reserve powers, depending on the constitution. For development It is important with a sense of continuity, independent of what political party is elected. A constitutional monarch could serve that purposes of continuity, and also be able to act as an international non political ambassador for the country.
I believe this would benefit trade, commerce and investment for many African countries. Also the monarch in his ceremonial duties would be able to create a sense of national belonging for the people, and act as a unifying symbol above party politics.

HSH Prince Leopold Donchield Zu Leone II, Sierra Leone

May 04, 2013 8:14pm EDT  --  Report as abuse
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A tourist takes a plunge as she swims at Ngapali Beach, a popular tourist site, in the Thandwe township of the Rakhine state, October 6, 2013. Picture taken October 6, 2013. REUTERS/Soe Zeya Tun (MYANMAR - Tags: SOCIETY) - RTR3FOI0

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