Picture: THINKSTOCK
Picture: THINKSTOCK

THE world’s mining assets may be the target of mergers and acquisitions, as an $8bn 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 while the world’s largest producers, including the Rio Tinto Group, are shunning unwanted mines.

Former Xstrata CEO Mick Davis and former Barrick Gold Corporation boss 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 JPMorgan Chase bankers.

While buy-out firms have increasingly targeted mining since 2012, only about 14% of the almost $10bn raised in the last two years has been deployed, according to data compiled by Bloomberg Industries. That could change if they face pressure from their investors to act, said Barclays co-head of mining and metals investment banking Michael Rawlinson.

"The sand is going through the hourglass and the money is going to get taken away if they don’t start spending," he said in London.

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

While valuations remain depressed, potential buyers are attracted by signs that the bottom might be near.

At the same time, BHP Billiton, Rio Tinto and Anglo American are among the 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," Macquarie Group senior MD and head of metals and mining for Europe Raj Khatri said in London. "There’s an increasing wall of money focused on the sector. For the right assets at the right price, it’s a really excellent time to buy."

Last month Citigroup upgraded its 12-month view on the industry to bullish from neutral, 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. Improving growth out of the US and Europe may also support prices, Citigroup said.

Mergers and acquisitions in the mining industry last year slumped more than half to $81bn compared with a year earlier, data compiled by Bloomberg shows. According to an EY report yesterday, private equity has the capacity to complete $10bn of mining deals this year.

Anglo American has said 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 $35bn. Mining companies are also looking for capital to fund new mines.

Former JPMorgan Chase banker Michael Scherb completed a $375m fund in London last week, the Appian Natural Resources Fund, to target mining assets including those being divested by the majors. "We’ve hit the timing just right. It’s mining companies and projects which simply can’t get capital from traditional sources. We see a lot of value out there."

Brookfield Asset Management Incorporated is spending more time looking at mining opportunities today than in the past five years, said managing partner in the firm’s private-equity group Peter Gordon. "I’m hopeful and confident that we’ll be able to transact on one or more," he said last month.

Mr Regent started investment company Magris Resources last year, seeking mining assets mainly in the Americas, with backing from institutional and private-equity investors, a person familiar with the situation said in May.

Magris studied a bid for Glencore Xstrata’s Las Bambas copper project in Peru last year, a person with knowledge of the matter said at the time. Investec said last week that the project, which is still for sale, may fetch $4.5bn.

Sanford C Bernstein mining analyst Paul Gait said this year "is a great time to be buying assets". "Mining is still unloved," he said.

X2 Resources, led by Mr Davis and a team of former Xstrata executives, is seeking to raise at least $3bn from investors before it starts buying mines, people with knowledge of the plan said last week.

Mr Davis has raised $1bn from Noble Group, Asia’s largest raw-materials trader, and private-equity fund TPG. X2 is targeting mines already in operation or close to producing, said the people. An X2 spokesman declined to comment.

Other new mining funds include Toronto-based Waterton Global Resources Management and Greenstone Resources, which was founded in London last year by former Xstrata executive Mark Sawyer and former JPMorgan banker Michael Haworth.

"Private capital funds spent 2013 raising capital and we expect that to be deployed in 2014," global mining transaction chief Lee Downham said in EY’s report.

Warburg Pincus is looking at assets owned by small mining firms in addition to the unwanted projects of the major companies, said recently appointed executive-inresidence Peter Kukielski, who was appointed last week to focus on mining investments. He previously ran steel making giant ArcelorMittal’s mining business.

"There are a lot of smaller companies which are unable to implement their development plans because of their lack of access to finance," he said.

Share sales of mining companies in Europe raised $3.5bn last year, less than half of 2011’s total, as investors’ appetite for the industry declined, according to data compiled by Bloomberg.

The influx of private equity follows criticism of mining executives for swamping the world with an oversupply of raw materials from copper to coal.

Almost a year ago, billionaire coal trader turned Glencore Xstrata chief Ivan Glasenberg said his CEO peers had "screwed up" through years of overinvesting in mines that eroded prices and profits. "There is a general hope that deal flow from these private-equity houses will start to be seen in the second half of this year," Berwin Leighton Paisner global co-head of mining Alexander Keepin said in London.

Bloomberg