There has been a lot of buzz lately in the private equity world about the formation of new funds and the raising of capital specifically aimed towards acquiring assets in the mining industry. Specifically, in their article on Bloomberg.com, Jesse Risenborough and Ruth David talk about how this recently created pool of private equity money looks like it may well finally be deployed this year on the news of “attractive valuations and predictions of resilient demand for raw materials.”1 Risenborough and David report that in the past two years, close to $10 billion has been raised specifically for deployment in the mining sector.2 However, of that $10 billion, only 14 percent had actually been deployed as of the beginning of February, 2014.3 Risenborough and David hypothesize that with mounting pressure from investors, and with predictions that the valuations of mining assets may be nearing their bottom, the time may be now for these deals to start to materialize.4 However, Risenborough and David only tell one side of the story.
While the M&A world is brimming with excitement about the formation of new funds targeted exclusively toward acquisitions in the mining sector, as may be expected, the players in the mining sector themselves are singing a different tune. On February 18th, 2014 Natalie Greve published an article on MiningWeekly.com detailing how a junior mineral explorer Delrand Resources, which focuses on exploration in the Democratic Republic of the Congo, reported major deficits to their shareholders and detailed their expectations that they would need to turn to the private equity market in order to continue to operate over the next 12 months.5 Furthermore, Delrand expressed questions as to whether such avenues were going to be available, saying “there is no assurance such financing will be available on acceptable terms, if at all. In general, market conditions have limited availability of funds.”6 Unfortunately for companies like Delrand Resources, who occupy a sector of the mining market comprised of immature operations, the influx of operating capital from the private equity markets may be slow to come.
According to Frik Els, who wrote an article for Mining.com entitled “$100bn in Private Equity Stalking Mining Assets”, the major private equity firms like Apollo Global Management ($1.3 billion raised for resource focused investment), KKR, and Blackstone “all want the same thing: Companies that are late stage, low cost, low risk, producing or close to production and with all permitting in place.”7 Reading between the lines of Els’ article, he seems to suggest that this large influx of private equity money that is sitting on the sidelines is destined for neither the smaller, younger companies like Delrand, nor for the massive players in the mining world. So what are the ideal acquisitions for these new funds? The mid-sized, low risk, companies that have established operations. As Philip Heywood, director for transaction services at consultants PwC in Vancouver says “there aren’t too many of theses around.”8
So, in one sense, it sounds like Risenborough and David are right: these newly formed, large funds are eager to jump into the mix and start targeting companies in the mining industry. However, their suggestion that this year will be the year for the deployment of all this money sitting on the sidelines seems to be a little optimistic. Perhaps a more realistic representation of the picture is that the heads of these funds are nervous that the prices for natural resources have in fact not yet hit their bottom. As a result, all of these funds are looking at acquiring the same small subset of the mining industry and, at the moment, it looks like there are not enough suitable targets to merit the deployment of any significant portion of this earmarked capital.
Jesse Risenborough and Ruth David, Mining’s $8 Billion of Private Equity Seen Reviving M&A, Bloomberg.com (Feb. 3, 2014), http://www.bloomberg.com/news/2014-02-03/mining-s-dormant-8-billion-of-private-equity-seen-reviving-m-a.html. ↩
Id. ↩
Id. ↩
Id. ↩
Natalie Greve, DRC Explorer Warns of Impending Funding Crunch, Narrows Half-Year Loss, MiningWeekly.com (Feb. 18, 2014), http://www.miningweekly.com/article/drc-explorer-warns-of-impending-funding-crunch-narrows-half-year-loss-2014-02-18. ↩
Id. ↩
Frik Els, $100bn in Private Equity Stalking Mining Assets, Mining.com (Oct. 3, 2013), http://www.mining.com/100bn-in-private-equity-scouring-for-mining-assets-43133/. ↩
Id. ↩