By Nicole Mordant and Euan Rocha
VANCOUVER/TORONTO, March 9 Private equity firms
are going underground.
In the past, they have largely shunned mining acquisitions,
as the volatility of commodities prices and cash flow made it
difficult to structure leveraged deals. Those concerns are on
Bankers, deal lawyers and some of the firms are predicting a
flurry of such transactions around the world this year, mainly
in the $50 million to $800 million range, with the possibility
of one or two substantially larger deals.
The prospect of cash-rich private equity players buying
into the potentially lucrative but risky mining sector, lured by
cheap valuations, has been talked about for the past two years.
Those predictions turned out to be more sizzle than steak.
Things have changed, in part because private equity firms,
whose money comes from big investors such as pension funds,
university endowments and charitable trusts, have had more time
to come to grips with the mining sector. A handful of new
mining-focused shops with in-house expertise has sprung up. And
in some cases, bankers and industry insiders say mining
companies may have few options.
An extended freeze in capital markets has left many small
and mid-sized miners starved of cash and willing to consider a
marriage of convenience with private equity firms, who need to
put massive amounts of unspent capital to work.
Industry tracker Preqin estimated they had $1.1 trillion
available at the end of last year. Of that, some $20 billion to
$30 billion could be available for deployment into mining,
industry players say.
"Last year, we were active but maybe not as active as I
would have liked to see us," said Isser Elishis, chief
investment officer at Waterton Global Resource Management, a
boutique, mining-focused private equity firm based in Toronto.
"This year I think it will pick up dramatically."
Waterton pulled the deal trigger last month when it launched
an all-cash C$59 million ($54 million) hostile bid for Chaparral
Gold Corp, a Nevada-focused precious metal explorer.
To be sure, no one is talking about a wave of big deals by
the larger private equity firms like Blackstone Group LP.
Concern about the risks that the cash flow that is needed to
fund a leveraged buyout will be here today, gone tomorrow,
remains a deterrent to mining deals for them.
And competition for the big, quality assets they may want is
fierce, and has already seen them beaten to the prize several
The deals will more likely be done by smaller,
mining-focused private equity groups, most of them based in
North America and London. Some mainstream firms like Warburg
Pincus are also bulking up their industry expertise by hiring
experts from within the mining sector.
In one testament to the level of private equity interest in
the mining industry, more than 50 private equity funds attended
the recent BMO Capital Markets mining conference in Florida. And
last week in Toronto, there wasn't even standing room at a
private equity panel discussion at the annual PDAC mining
Adding to the optimism, a survey conducted by BMO at its
recent conference showed that more than 12 percent of mining
executives believed that private equity firms will be the most
active acquirers of assets in the sector. And more than 20
percent of the investors saw private equity firms as the most
"Expectations are high," said Brian Graves, co-leader of
Canadian law firm McCarthy Tetrault's global mining group. But
he cautions that private equity's penetration into the mining
industry will depend on its appeal compared with alternative
financing opportunities such as royalty and streaming deals that
offer cash-starved miners other avenues of relief.
"I do think this year there is going to be at least one firm
that makes a significant investment. It could be two or three,
but probably no more than that," said Jason Attew, the managing
director of global metals and mining at BMO Capital Markets.
The current environment is ideally suited for three types of
private equity investment, said Ross Bhappu, a senior partner at
mining-focused private equity fund Resource Capital Funds. These
are buyouts of existing operations that large miners are
spinning out, the funding of construction-ready projects, and
the funding of early-stage companies that would normally look to
do a capital-raising on a stock exchange.
After a near decade-long mining boom driven by China's
growth-fueled appetite for metals and minerals ended in 2011,
large and small mining companies have been slashing costs and
ditching unprofitable, high-cost assets in an effort to adjust
to lower commodity prices and reverse depressed valuations.
Bhappu believes part of the appeal of private equity firms
for the industry is they are often willing to be creative in
their investment structure.
"You could use straight equity, but maybe convertible debt,
a bridge loan, or mezzanine financing may be a better fit for
the type of project being developed," he said.
The private equity firms that will be successful in the
sector are the ones with a long-term view, and that have the
expertise needed to run a mining company, said BMO's Attew.
"They are doing it right, they are being cautious and they
are trying to build mining companies, as opposed to just making
investments," said Attew. He cited firms like X2 Resources and
Magris Resources that are led by former mining executives, and
more traditional firms like Warburg Pincus that have been
building in-house expertise.
Waterton, several of whose employees previously worked for
the world's No. 1 gold miner, Barrick Gold Corp, offers
a suite of mining expertise including mine design, processing
and logistics, among others. These are skills and resources that
small mining companies do not usually have in-house.
"Where the rubber's going to meet the road are those PE
firms that are going to truly expect short-term hits even though
they are talking long term. They are going to be disappointed,"