Former JPMorgan Chase & Co. bankers Michael Scherb and Verne Grinstead raised $375 million from investors to target acquisitions of mining assets through their Appian Natural Resources Fund LP.
“The whole thesis was really created when I was at JPMorgan, when I could see that traditional sources of capital were going to dry up to the industry,” Scherb, who founded Appian two years ago after leaving the bank, said in a phone interview from London yesterday. “I thought that private equity made sense. I thought it made sense to match long-term capital to a long-term industry.”
Declining prices and a tapering in commodities demand has dried up financing for new mining projects as investors retreat from the industry. Appian started raising funds a year ago and got commitments of $1 billion from investors, Scherb said.
“We think our real firepower is probably actually double what our fund size is, so we want to deploy around $750 million in the space,” he said. “We have a very strong co-investment component, a lot of that from investors who didn’t make it into the fund, or overflow from investors who did make it into the fund but wanted to invest more.”
Appian joins a swathe of new private equity funds focused on the mining industry that are betting on a resurgence in demand for key commodities like copper, coal and zinc. X2 Resources, led by former Xstrata Plc Chief Executive Officer Mick Davis, is seeking to raise at least $3 billion from investors before it starts buying mines, people with knowledge of the plan said last week.
Jersey-based Appian is run by a six-member management team including founder Scherb, Grinstead and managing partner Vincent Jacheet, who was part of setting up Bain Capital LLC in Europe. The team also includes three former mining industry executives to provide operational experience to the fund, Scherb, who advised mining firms while at JPMorgan, said.
Appian has completed three deals, including an acquisition in Red Eagle Mining Corp. in September that boosted the fund’s stake in the company to 15.3 percent, and plans to invest about $100 million this year, he said. Two more acquisitions, one in Latin America and one in Africa, will be announced by the end of March, he said.
“We really want to deploy our capital over the next two years, our pipeline is pretty robust,” he said.
BHP Billiton Ltd. and Rio Tinto Group, the two largest mining companies, are among mineral producers making or planning mine disposals that may total a combined $35 billion, Deutsche Bank AG has estimated.
The fund is actively bidding on assets being disposed of by major mining companies, Scherb said. Appian is seeking acquisitions in North America, Latin America, Africa and Europe with an investment size of about $10 million to $100 million and targeting those where first production can be realized within three years, he said.
Appian is looking at five to seven projects or companies every week and declining about 90 percent of them, he said.
The Bloomberg World Mining Index of 108 companies declined 26 percent last year as prices fell amid an oversupply of some raw materials.
“We see a lot of value out there, we see valuations having dropped off tremendously and it allows us good entry opportunities,” Scherb said. “There are good assets out there that are just unloved by the market or undiscovered by the market.”