Upheaval in mining sector a test for private equity – by Anjuli Davies and Clara Ferreira-Marques (Reuters U.S. – April 29, 2013)

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LONDON – (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 risky.

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.

GOLD RUSH?

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.

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