Mining assets may be targeted by dormant US$8b private equity pool

Dormant US$8b may finally be put to use amid attractive valuations and demand forecasts

PUBLISHED : Tuesday, 04 February, 2014, 5:57am
UPDATED : Tuesday, 04 February, 2014, 5:57am

The world's mining assets may be the target of mergers and acquisitions as a US$8 billion pool of private-equity money that has lain dormant is stirred this year by attractive valuations and predictions of resilient demand for raw materials.

Some of the biggest names in the industry are keen to buy assets at the same time as the world's largest producers including Rio Tinto are looking to offload unwanted mines. Former chief executives Mick Davis of Xstrata and Barrick Gold's Aaron Regent are plotting a return to the business by buying mining projects, backed by private funds. Two new mining investment ventures were started last week, one backed by Warburg Pincus, the other founded by two former JP Morgan Chase bankers.

While buyout firms have targeted mining since 2012, only about 14 per cent of the almost US$10 billion raised in the past two years has been used. That could change if they face pressure from their investors to act, said Michael Rawlinson, co-head of mining and metals investment banking at Barclays.

"They've all set up, no one's done anything," Rawlinson said. "The sand is going through the hourglass and the money is going to get taken away if they don't start spending."

The optimism for a revival in M&A this year comes as nearly 8,000 executives, bankers and analysts descend on Cape Town this week for the annual Mining Indaba conference.

While valuations remain depressed, potential buyers are attracted by signs that the bottom might be near. Meanwhile, BHP Billiton, Rio Tinto and Anglo American are among major mining companies seeking to shed unwanted and higher-cost assets as part of an industry-wide push to trim expenses and bolster profits. This combination of reduced values and an influx of mines for sale is luring private equity investors.

"Private equity is now looking at the sector with stronger interest, which it hasn't really done before," said Raj Khatri, head of metals and mining for Europe at investment bank Macquarie. "There's an increasing wall of money now focused on the sector. For the right assets at the right price, it's a really excellent time to buy."

Citigroup upgraded its 12-month view on the industry to bullish from neutral last month, its first such call in three years. The bank cited rising optimism that demand for raw materials from China, the biggest buyer, will remain resilient.

M&A in the mining industry slumped by more than half last year to US$81 billion. According to an EY report out yesterday, private equity alone has the capacity to complete US$10 billion of mining deals this year.

Anglo American says it has identified as many as 15 assets for divestment, while Deutsche Bank has put the value of all projects that could be sold at US$35 billion. Mining companies are also looking for capital to fund new mines.

Michael Scherb, a former JP Morgan Chase banker in London, completed a US$375 million fund last week, called Appian Natural Resources Fund, to target mining assets including those being divested by the majors.

"We've hit the timing just right," he said. "It's mining companies and projects which simply can't get capital from traditional sources. We see a lot of value out there."