By Anjuli Davies and Clara Ferreira-Marques
LONDON, April 29 (Reuters) - With the world's largest miners
flocking to sell assets, cost cuts across the industry and a
virtual drought in buyers, private equity funds may finally be
tempted into a sector long seen as potentially lucrative but
Industry veterans say the coming months will be a test of
whether private equity funds can turn intentions into
investments and become more than niche players in an industry
that has traditionally relied on public markets for cash.
"Interest from private equity in the sector is the highest I
have ever seen," one veteran industry banker said.
Another senior industry adviser described a "now or never"
moment despite volatility in commodity prices, citing what could
be a drawn out period of low valuations in which traditional
buyers - largely, other miners - are kept out by demands they
refocus and cut back rather than grow.
Volumes certainly point to increased interest.
According to research and data group Preqin which studies
private equity, eight natural resources funds focused solely on
mining raised an aggregate $8.5 billion in 2012, more than the
years 2006-2010 combined, though data did not show how much was
spent on acquisitions.
Analysis by consultancy Ernst & Young suggests that private
capital investors accounted for 21 per cent of mining deal
activity globally in the nine months to September 30 last year,
against just 12 per cent for the same period in 2011.
Smaller miners and developers are also eager to tap
alternative sources for funding. In a sign of how tough the
markets now are, the Toronto stock exchange - the prime
destination for emerging producers - has not had one mining IPO
in the first quarter, for the first time in a decade.
"There are a lot of buying opportunities, and for those who
have the funds, you might find there is less competition, and
that is what private equity looks for - a good deal," said Jason
Burkitt, UK Mining Leader at PricewaterhouseCoopers.
Private equity firms have so far steered clear of mining
because of the scale and political risk involved in many
operations. Volatile commodity prices and long time horizons are
also off-putting, not to mention that the investment firms often
lack the manpower or expertise to cover global projects.
Typically, funds have stuck to niche assets, like high-end
aluminium products for the aerospace and auto industry, in the
case of Alcan Engineered Products, later Constellium, bought
from Rio Tinto by funds led by Apollo in 2011.
Now, however, heavyweights like Apollo but also KKR and
Carlyle are joining specialised energy-focused First Reserve,
Denham Capital and Resource Capital in betting more heavily on
the sector, drawn in by the prospect of an extended period of
cheap prices and an unprecedented funding drought.
Apollo, which aims to invest $100 million to $500 million
per transaction, closed a $1.3 billion natural resources fund in
2012 which will invest in areas including oil, gas and mining.
The fund was one of several to look at BHP Billiton's
majority stake in Canadian diamond mine EKATI, which also
elicited interest from rival KKR before being sold to miner
Dominion Diamond Corp.
KKR has also been named as a potential suitor for Rio's
majority stake in the Northparkes copper-gold mine.
SMALLER FIRMS IN POLE POSITION
However industry bankers and specialist funds both
questioned whether big name private equity firms would be able
to successfully compete in the mining sector.
"Size sometimes can be a disadvantage in our environment.
You need to make decisions quickly - you need to have the coal
face not too far removed from decision making process, so you
can react quickly," Sierra Rutile's chief executive,
John Sisay, said. The Sierra Leone-focused mineral sands
producer's largest shareholder is specialist fund Pala.
"Smaller firms are able to do that better."
Traditional funds may also lack the extensive specialist
teams needed to evaluate projects across commodities and across
the world, and may be unable to invest for the longer term.
One of the top shareholders in EMED Mining, a
London-listed company redeveloping the former Rio Tinto copper
mine near Seville, is specialist Resource Capital.
"If you are playing the development game you are playing the
development timeline," EMED's chief executive, Harry
Bert Koth, a Perth, Australia-based director at Denham
Capital, also questioned the idea that traditional firms would
step in. Although mining firms are shedding assets at a pace not
seen for decades, many are doing so at auctions which can drive
up prices - something private equity is likely to want to avoid.
"Generalist PE firms have a pretty poor track record as they
don't fully understand the risks involved. I query whether they
really appreciate what they are getting into," Koth said.