(Updates with CEO’s comment in 24th paragraph.)
Feb. 3 (Bloomberg) -- The world’s mining assets may be the target of mergers and acquisitions as an $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 Group are shunning unwanted mines. Former chief executive officers Mick Davis of Xstrata Plc and Barrick Gold Corp.’s Aaron Regent are plotting a return to the business by buying mining projects, backed by private funds. Last week two new mining investment ventures were started, one backed by Warburg Pincus LLC, the other founded by two former JPMorgan Chase & Co. bankers.
While buyout firms have increasingly targeted mining since 2012, only about 14 percent of the almost $10 billion 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, Michael Rawlinson, co-head of mining and metals investment banking at Barclays Plc.
“They’ve all set up, no one’s done anything,” London- based 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 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 conference.
While valuations remain depressed, potential buyers are attracted by signs that the bottom might be near. At the same time, BHP Billiton Ltd., Rio Tinto and Anglo American Plc 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,” Raj Khatri, senior managing director, head of metals and mining for Europe at Macquarie Group Ltd.’s investment bank in London, said in an interview. “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.”
Last month Citigroup Inc. 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 U.S. and Europe may also support prices, Citigroup said.
M&A in the mining industry last year slumped more than half to $81 billion compared with a year earlier, data compiled by Bloomberg show. According to an Ernst & Young LLP report today, private equity alone has the capacity to complete $10 billion of mining deals this year.
Anglo American has said it’s identified as many as 15 assets for divestment, while Deutsche Bank AG has put the value of all projects that could be sold at $35 billion. Mining companies are also looking for capital to fund new mines.
Michael Scherb, a former JPMorgan Chase banker in London, completed a $375 million fund last week, called Appian Natural Resources Fund LP, 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.”
Brookfield Asset Management Inc., which has about $180 billion in assets under management, is spending more time looking at mining opportunities today than in the past five years, said Peter Gordon, a managing partner in the firm’s private-equity group.
“I’m hopeful and confident that we’ll be able to transact on one or more,” he said in an interview in Toronto on Jan. 8. “We’re prepared to do anything and be quite creative about the situation.”
Former Barrick CEO 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. Investment bank Investec Plc said last week the project, which is still for sale, may fetch $4.5 billion.
“2014 is a great time to be buying assets,” Paul Gait, a mining analyst at Sanford C. Bernstein Ltd. in London said. “Mining is still unloved.”
X2 Resources, led by Davis and a team of former Xstrata executives, is seeking to raise at least $3 billion from investors before it starts buying mines, people with knowledge of the plan said last week.
Davis has so far raised $1 billion 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, asking not to be identified because the plans aren’t public. A spokesman for X2 declined to comment.
Other new mining funds include Toronto-based Waterton Global Resources Management and London-based Greenstone Resources, which was founded 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,” Lee Downham, global mining transaction chief at E&Y in London, said in today’s report from the firm.
Warburg Pincus, which has an $11 billion global private equity fund, is looking at assets owned by small mining firms in addition to the unwanted projects of the major companies, said Peter Kukielski, who was appointed executive-in-residence at Warburg Pincus last week to focus on mining investments. He previously ran the mining business of the world’s biggest steelmaker, ArcelorMittal.
“There are a lot of smaller companies who are unable to implement their development plans because of their lack of access to finance,” he said.
Alufer Mining Ltd., a closely held company seeking about $305 million from debt and equity investors by year end to build a bauxite mine in Guinea, has been speaking to private equity funds, CEO Danny Keating said. The influx of private money looking at mining and the dearth of transactions to date may aid Alufer’s ability to attract finance, he said.
“The pressure will start to mount on them to deploy in some way,” Keating said in an interview in Cape Town today. “We might see more pressure toward the second half of the year if people haven’t been investing, which from our side works well in terms of timing.”
Share sales of mining companies in Europe raised $3.5 billion 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, Ivan Glasenberg, the billionaire coal trader turned CEO of Glencore Xstrata, said his CEO peers had “screwed up” up through years of over-investing 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,” Alexander Keepin, global co-head of mining at Berwin Leighton Paisner LLP in London, said in an interview.
--With assistance from Firat Kayakiran in London and Liezel Hill in Toronto. Editors: Larry Reibstein, John Viljoen