Private Equity Mining

Private equity might start ramping up investment activity in the mining sector, according to the Financial Post.  One industry executive is quoted saying, “Interest from private equity in the sector is the highest I have ever seen.”   There has been an uptick in interest in the sector, illustrated by the successful closings of several natural resources-focused private equity funds; 8 natural resource funds raised $8.5 billion last year, more than amount raised from 2006-2010.

It might surprise readers to learn that mining attracts relatively little interest from private equity firms due to scale and the potential political problems associated with the industry.  Moreover, mining simply hasn’t been a great fit for private equity firms that would have to invest significant capital in long-term projects and then hope for a profitable exit when commodity prices (which fluctuate often) are at a high.  But now it appears the timing might be right for private equity investing in the sector.  Low valuations and minimal competition has opened the window for private equity to revive the mining industry and grow an investing area that has long been largely ignored by top private equity firms.

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.

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 aluminum 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.

 

 

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