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TORONTO – During the past couple of years, private equity firms have quietly grown into key players in the mining industry. And with mining valuations in the gutter and equity financing all but dried up, their role could soon get bigger.
In a presentation in Toronto on Wednesday, private equity insiders noted that the firms are raising huge dollars for mining investments. They argued that it is a potential source of financing for many distressed companies.
“It’s a financial buyer’s market,” said Peter Gordon, a managing partner at Brookfield Asset Management Inc. He pointed out that there is very little competition from strategic buyers right now.
Howard Burshtein, a partner at Baker & McKenzie LLP, said private equity firms could raise $10-billion to $15-billion for mining investments in 2013. That builds on the $8.5-billion that eight mining-focused funds raised in 2012. By comparison, Canadian miners are expected to raise roughly $2-billion on the equity markets this year, down from a five-year average of $9.3-billion.
Historically, private equity firms have avoided the mining sector for a variety of reasons: high volatility in earnings and cash flows, pricey valuations, and the fact that they lacked the technical expertise needed to understand the sector.
The extremely low valuations in the sector today have given them more confidence that they can invest and generate a good return. And they are now working with some of the mining industry’s top people, which erases the expertise gap.
Mick Davis, the former chief executive of Xstrata PLC, recently raised US$1-billion of private equity money for a mining investment vehicle. Aaron Regent, Barrick Gold Corp.’s former CEO, is searching for assets for his new company Magris Resources Inc., with likely support from private equity. In a recent report, the Financial Times listed several other senior mining executives who are dipping their toes in private equity as well.
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