Big names and private dollars circle mining sector

Mining industry rock star and former Xstrata PLC CEO Mick Davis now has more than $1-billion (U.S.) in the pot to launch London-based mining firm X2 Resources, about half of which arrived through a private equity investment group.

But this is just the beginning – Mr. Davis is after more money for X2. And with private equity increasingly coming out to kick mining industry tires in Canada and around the world, he may get the investment he’s looking for.

It’s a buyers market, say sources familiar with the deal climate. Investors see what Mr. Davis does, that weak commodity prices have driven down share prices of mining companies, creating more attractive purchase prices. Some are loaded with debt. And many larger miners are looking to sell off business units to raise capital. As Mr. Davis told the Globe in an interview Monday, lower valuations will lead to takeover opportunities.

People in the private equity space know a deal when they see one, said Janet Howard, a partner at Norton Rose Fulbright Canada, who got her start as a lawyer working on private equity deals. Today she specializes in mining, infrastructure and commodities.

And right now, the opportunities look good. “You’ve got companies where share prices are low and they’re in production. They’re bargain-basement prices, it’s a fire sale, a ‘last call,’” she said.

Not only are private equity groups eyeing investment opportunities, there are also a great many experienced mining professionals in the industry whose management expertise makes them desirable prospective hires. Some of them may also want to make investments of their own.

A whopping 18 of the 20 largest mining companies operating in Canada have replaced their CEO since the beginning of 2012, data collected by PricewaterhouseCoopers shows. Aaron Regent of Barrick Gold Corp., Tye Burt of Kinross Gold Corp. and Roger Agnelli of Vale SA are just three of the big names appearing on that list alongside Mr. Davis.

And private equity groups will be talking to all of them, said one source.

“They have to be looking at the market now thinking, ‘Wow, what great valuations out there,’” said John Gravelle, Toronto-based global and Canadian mining leader for PwC. And with private equity dollars behind them, he added, the former CEOs may have more discretion to make deals than big mining companies, because shareholders just won’t support big acquisitions right now.

Some have already begun to make moves. Mr. Agnelli established Brazil-based commodities investment firm AGN Participacoes after leaving Vale, and Mr. Regent founded a mining investment venture called Magris Resources Inc.

Ms. Howard wondered for more than a year and a half whether the private equity investment that disappeared during the credit crisis might move back into mining. In the past four or five months, she says, interest has heated up. “It’s no longer the case that you can be listed on a public exchange like the TSX and rely on that as a source of financing,” Ms. Howard said.

But not all private investment is the same in the mining industry, said sources familiar with deal financing.

Private equity investments by pension funds, mutual funds and hedge funds have largely dried up. To fill the void, other investors have stepped in. These sources can handle more risk, and expect higher returns. They include limited partnerships, private companies, sovereign wealth funds, family funds and other mining-focused groups such as Blackstone Group LP, Apollo Global Management Inc. and the Carlyle Group LP.

Their enthusiasm won’t likely translate into funding for exploration-stage projects that are riskier and have longer time horizons. Instead, expect PE investors to focus on divestitures of non-core assets by bigger companies, as projects that are approaching or in production will be the most attractive.

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