| LAUSANNE, Switzerland, April 1
LAUSANNE, Switzerland, April 1 Private equity
firms, which have been showing an increased interest in
investing in the mining industry, will have a hard time even if
they are betting on recovery in the longer term, the bosses of
Anglo American and Glencore Xstrata said on
Private equity firms such as Warburg Pincus have hired
executives from the mining industry to start investing in the
sector and some top industry veterans such as Vale's
former chief executive Roger Agnelli and Mick Davies, head of
Xstrata before its takeover by Glencore, have also lined up
funding for new ventures.
X2, the investment vehicle run by Davies for example, said
on Monday it now has $3.75 billion backing his plans to create a
new medium-sized diversified mining company.
But the chief executives of the two biggest diversified
miners said choppy commodity markets and unpredictable returns
will make it hard for the highly geared private equity firms to
pay interest on their debt.
"Now there are a lot of private equity guys starting
companies, a lot of guys who left the industry and started
private equity groups. It's never worked in the past,"
Glencore's chief executive Ivan Glasenberg said at the FT
Private equity firms specialise in borrowing money to buy
distressed companies or assets in the hope of making a return
when they sell them after a few years.
But the high level of gearing also means companies need to
realise high level of return to pay the interest.
This model, however, might not succeed in the cyclical and
volatile mining sector, the executives said.
"The problem with the commodities space if you have a high
gearing is that you are not running Boots pharmaceutical where
you have a pretty constant earnings base," Glasenberg said.
"(In mining) you just don't know your earning base. When
you hit bad times, like we did recently, it goes down (quickly).
How are you going to feed your debt?"
Another difficulty for private equity firms or funds looking
to buy mining assets is that although large mining companies
have recently identified some assets they wish to divest, they
are not in a rush to sell unless they get a price that meets
"At the end of the day (private equity firms) will be making
pointed bets. There is still a lot of risk associated with those
bets. The assets that are being sold are probably not the best
assets in the portfolio," Anglo American's chief executive Mark
"You are taking narrow bets on potentially difficult
commodities. You have to be very good to be successful. And into
this market that is a bit choppy, it gets a lot tougher."
(Editing by Greg Mahlich)