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Mining and metals attracting private capital investors
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11th December 2012
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PERTH (miningweekly.com) – Private equity funds were increasingly looking at the mining and metals market for possible investment, advisory firm Ernst & Young (E&Y) Australia and Asia-Pacific mining and metals transaction leader Paul Murphy said.

“There is increasing interest in mining and metals from private equity funds, other specialist funds and sovereign wealth funds and we see this trend continuing into 2013,” Murphy said this week, which was despite the challenging market conditions facing junior and midtier miners.

“Private capital is increasingly looking to take advantage of low equity valuations to take opportunistic or strategic noncontrolling equity stakes in mining and metals assets at what they perceive as an opportunistic time in the cycle.”

Murphy said preliminary analysis by E&Y suggested that private capital investors accounted for 21% of mining mergers and acquisitions (M&A) globally in the nine months to September 2012 compared with just 12% for the same period in 2011.

He noted that, typically, financial investors were seeking “toehold” investments of between 10% and 15% that could mitigate risk with a combination of debt and equity. Convertible debt had also been a popular financial instrument for the sector in Australia, which Murphy said exhibited the characteristics of both.

Furthermore, State-owned enterprises were increasingly adopting a larger “foothold” investment strategy with the ultimate objective of securing longer-term strategic supply.

Data to the end of September suggested that 2012’s capital raisings in the mining and metals sector globally could be the lowest since 2009, with a sizeable proportion of this year’s raisings from record corporate bond issues from larger companies.

“Outside the largest mining companies, financing remains extremely difficult, which, when combined with low equity valuations is creating opportunities for those with cash – and increasingly this cash resides with the private wealth community, including specialist sector funds,” said Murphy.

However E&Y Debt Advisory practice joint leader Sebastian Paphitis said that companies trying to find finance had their work cut out getting the right deal.

“Big or small, public or private, finding finance is no longer a simple equation, but the good news is there are a bunch of alternative options that are available.

“While the very largest players have the depth of internal expertise to navigate the options, for everyone else it can be a bit like trying to put together a 1 000-piece jigsaw puzzle.”

Paphitis said that picking the right funding solution was critical and would most likely involve considering multiple options.

He added that private equity and specialist credit funds looking to invest have bespoke mandates, with some looking for investment-grade deals, while others were willing to consider opportunities down the risk curve in order to chase higher yields.

“The bottom line is there are options available if you know where to look,” he said.

Murphy added that, for junior miners vulnerable to unsolicited takeover, some of these investors could provide much-needed capital not available to them on the public debt and equity markets.

“However, value may be given away if they are not proactively communicating to the market,” he warned.

Advanced juniors were best placed to seek alternative funding providers and structures, particularly strategic investors for the longer term, Murphy said, adding that each option was not without its risks, and that juniors needed to explore multiple options in order to raise finance at the right price on the least onerous terms.

“Early stage juniors are faced with limited options, and we expect to see examples of companies raising capital however they can. However, this may come at some sacrifice to financial flexibility and control over their project,” Murphy concluded.

 

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Picture by: Reuters