(Bloomberg) — The slump in commodities to the lowest in more than a decade is likely to spark a surge of deals this year by mining-focused private equity groups that have so far bided their time on the sidelines.
A swathe of funds including X2 Resources, headed by former Xstrata Plc Chief Executive Officer Mick Davis, were started at the tail-end of a decade-long commodities boom, raising more than $12 billion in the last two years, according to Bloomberg Intelligence. To date, they have largely kept their powder dry.
“We believe the opportunities are stronger now than they have been over the past couple of years, given the decline in commodity markets,” Lloyd Pengilly, who spent almost 30 years at JPMorgan Chase & Co. before starting mining fund QKR Corp. in 2012, said in an interview. “Private equity firms have watched the market decline and would have adjusted their strategies according and will be looking to rifle-shot opportunities.”
Funds spent a fraction of the money at the their disposal last year. A total of 50 deals totaling more than $2 billion were reported by private interests in the mining sector, according to analysis by law firm Berwin Leighton Paisner released Monday. Gold was the most popular for dealmakers with a total of 15 transactions completed followed by coking coal with 6 deals, the analysis showed. The average investment was $43.8 million.
“This is really the time to be going out and making acquisitions,” Neil Gregson, who manages about $3 billion of natural resource stocks at JPMorgan Asset Management in London, said by phone. “Don’t wait for the peak of the cycle in the game, strike while things are bombed out.”
2011 Peak
The reluctance of private funds to engage in deals has proven to be fortuitous. The Bloomberg Commodities Index fell to the lowest since 2002 last month as prices for iron ore, coal, oil and copper slumped. The Bloomberg World Mining Index of 104 stocks has tumbled 54 percent from a 2011 peak.
“As these funds seek to deploy their capital we can expect further, more significant, private equity investment in the mining industry in the next 12 months,” law firm BLP said in the report.
Davis’s X2 has raised about $4.8 billion from equity investors and has been hunting for assets to buy from the world’s largest miners such as Vale SA, BHP Billiton Ltd. and Anglo American Plc. His financial backers include Asia’s largest raw-materials trader Noble Group Ltd., private-equity fund TPG Capital and sovereign-wealth and pension funds.
X2, Vale
The 56-year-old South African and former cricket umpire, is considering a bid for the nickel assets of Brazil’s Vale, the world’s third-biggest mining company, people with knowledge of the situation said last month. X2 declined to comment.
“They’ve been patient and I think they are going to find opportunities,” Jeff Couch, head of metals andmining in Europe, Middle East and Africa for Bank of Montreal Ltd., said in a phone interview. “You’ll see increased activity from those private equity houses with a mining focus.”
Pengilly’s QKR is backed by Qatar’s sovereign wealth fund and Poland’s richest man, Jan Kulczyk. They completed their first deal last year, acquiring the Navachab mine in Namibia from AngloGold Ashanti Ltd. for $110 million in July. It’s also considering a bid of about $1 billion for Canada’s Nevsun Resources Ltd., people with knowledge of the situation said in November.
‘Long-term Players’
“Our shareholders are long-term players and have made the decision to commit capital to the miningspace,” Pengilly said. “They have been patient for the right deal.”
Of the deals completed last year, 11 were acquisitions, 22 were purchases of strategic stakes, 14 were increasing holdings and three were backings of management teams, according to BLP.
Private-equity firm Warburg Pincus has set aside about $1 billion for mining deals, two people with knowledge of the matter said last month.
Warburg, which manages more than $37 billion, has pooled the money from a mix of new investors and existing funds, including a $4 billion energy vehicle it raised last year, one of the people said, asking not to be identified as the matter is private.
“We expect private capital to play a more meaningful role this year including in Africa because the valuations quite frankly have moved in their favor and they have capital to offer which is not easily available from other sources,” Rajat Kohli, head of metals and mining at Standard Bank Group Ltd., Africa’s largest lender by assets, said last week.
Appian Capital Advisory LLP, headed by former JPMorgan banker Michael Scherb and Verne Grinstead, raised $375 million from investors a year ago to target mining assets. They’ve completed four investments to date, deploying about 25 percent of the fund, Scherb said in an interview. He’s seeking to have deployed 60 percent to 70 percent by the end of this year.
“This year is going to be a very, very active year,” he said. “This is a fantastic time to build a mine because real costs are going down, there is availability of drill rigs, you have machinery.”
