Can private equity reboot the mining sector?

David McKay | Fri, 25 Apr 2014 13:05

According to Glencore Xstrata CEO, Ivan Glasenberg, private equity will struggle. “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,” he said.

“The problem with the commodities space if you have high gearing is that you are not running Boots pharmaceutical where you have a pretty constant earnings base,” said Glasenberg.

Another analyst said it was noticeable that private equity couldn’t compete in the big deals. The sale of Glencore’s $5.5bn Las Bambas copper project in Peru went to China’s part-state-owned group, Minmetals, suggesting that start-up companies are battling against sovereign funds for big mining deals.

“Also, the traditional investment cycle of private equity is between five to seven years whereas mines are decade-long investments,” said another analyst.

Yet there has been a flowering of former mining executives and bankers seeking to breath new life into their careers, many of them South Africa. Here’s a taste of who’s out there.

Who’s who in the zoo

Mick Davis - X2 Resources Davis has yet to invest any capital but with $3.75bn lined up from backers that include the hefty commodity trading company, Noble Group, X2 Resources is clearly going to beat a path to deals at some point. The question is when. Davis may be conscious of former colleague Brian Gilbertson’s guile and composure when having listed Billiton in the UK, took the best part of a year before plumping for an acquisition.

Davis, too, has his own experience to draw from. The last time the mining market was under pressure – around 1998 - Davis was setting about building Xstrata which he subsequently merged with Glencore in 2013. At the time, Davis bought the chrome and coal assets formerly owned by Suddelektra and which had been pushed into Glencore. If anyone can make private equity work in the mining space, it would be Davis.

Lloyd Pengilly – QKR Corporation

Pengilly, a former banker with JPMorgan Cazenove of some 28 years standing, has raised $1bn with the support of Qatar Holding, a subsidiary of the country’s sovereign wealth fund, and Kulczyk Investments which is owned by Jan Kulczyk, Poland’s richest man.

The fund also includes former BHP Billiton executives, Andre Liebenburg and David Munro. Among their first investments was to take control of AngloGold Ashanti’s Namibian mine, Navachab, for $110m, although Pengilly hastens to add the fund is not wholy focused on gold.

Michael Scherb & Verne Grinstead – Appian Natural Resources Fund

Scherb and Grinstead are former JPMorgan Chase & Co bankers who founded Appian two years ago and have raised $375m to date for acquisitions. The team also includes two Anglo Americam emigres, Robin Mills who was last executive director of projects with Anglo American Platinum, and Tony Redman, a former technical director of Anglo American.

Scherb told Bloomberg News that he thought traditional sources of capital were going to dry up in the sector. So far, the company has completed three deals totalling $100m, including a stake in Red Eagle Mining Corporation. More acquisitions were planned for Latin America and Africa.

The others – KKR & Company, Magris Resources, Strand Advisors

Leigh Clifford, a former CEO of Rio Tinto is advisor to private equity firm KKR & Company which was considering bidding for the $1bn Australian copper mine Northparkes. Aaron Regent, fired as CEO of Barrick Gold in 2012, established Magris Resources which aimed at assets in the Americas.

Then there is SAS veteran, Ian Hannam, dubbed the king of M&A resources while at JP Morgan Cazenove and now a member of his own start-up, Strand Partners – although strictly-speaking this is an advisory firm.

The question is, however, whether private equity has ‘the legs’ to remain a valid alternative to traditional forms of lending, such as banks.

http://www.miningmx.com/page/news/markets/1641797-Can-private-equity-reboot-the-mining-sector#.U1rdF_ldWnY

http://www.republicofmining.com/2014/04/25/can-private-equity-reboot-the-mining-sector-by-david-mckay-miningmx-com-april-25-2014/