Private Equity Eyes Base-Metal Deals as Rally Buoys Gold Miners

  • Waterton expects to do half a dozen base-metal deals this year
  • Gold rally causing gold miners to shift from sellers to buyers

Private equity firm Waterton Global Resource Management is finding the best investment opportunities are in industrial metals as surging gold prices give precious metal companies some “breathing room.”

The Canadian firm, whose billion-dollar investment fund focuses on North American mines, expects to do half a dozen base-metal deals this year as producers continue debt-reduction efforts after prices slumped, Chief Investment Officer Isser Elishis said. In contrast, gold’s 16 percent rally this year is taking pressure off miners to sell assets, at least for now.

“The opportunity set looks better at the base-metal side at this point, but that could change on a dime,” Elishis said in an interview at his Toronto office on Wednesday. “In the precious space, in North America especially, there are a few things that are actionable, but not as many as I would like.”

Some mid-tier gold miners with a market value of $500 million to $2 billion are even considering buying assets, as they worry production pipelines may not be wide enough to justify the recent run-up in their share prices, he said.

“We’re fielding a bunch of those inbound calls from people saying, ‘Hey, would you do a deal, would you sell?’,” Elishis said.

The BI Global Mid-Tier Gold Valuation Peers index has surged 60 percent this year, led by Golden Star Resources Ltd. and Resolute Mining Ltd., which soared more than 200 percent. In the same span, gold, silver and platinum prices gained 16 percent, 17 percent and 11 percent, respectively.

Elishis said he has been “shocked” by gold’s rally, with prices more likely to fall to $1,000 an ounce than rally to $1,300. He said the metal, now at about $1,226, probably will trade in a $1,250 to $1,500 range sometime after 2018.

Waterton’s fund has 50 percent to 60 percent of its capital left to invest and the firm is engaged in 30 active negotiations to buy or sell assets, Elishis said. He expects to sign 12 to 15 deals this year. Investors are sovereign wealth funds, university endowments, public pensions and foundations.  

Too Big

The firm’s favored approach is to buy assets that require some redesign to extract value, are nearing the final stage of permitting, or are tangled up in bankruptcy proceedings. “An ideal situation for us is something that the market is not giving value to today, that we have the in-house expertise to give value.”

Last year, the company did about 15 deals ranging in size from $17 million to $135 million. The latter was the price tag to buy the Ruby Hill and Spring Valley mines from Barrick Gold Corp., including a 30 percent share in Spring Valley that had been tied up in bankruptcy proceedings by Midway Gold Corp., he said.

Waterton has shied away from chasing tier-one base metals assets, even as the collapse in copper has forced some of the world’s biggest miners to start selling core assets. Freeport-McMoRan Inc., for example, sold a $1 billion stake in its Morenci mine in Arizona to Sumitomo Metal Mining Co. in February.

The difficulty for private-equity investors, Elishis says, is that banks backing large, heavily indebted base metals companies won’t allow assets that generate cash flow to be sold cheaply, no matter how desperately the miners need to reduce leverage.

‘Crazy’ Prices

“Everything is on the table and I’m not telling you they’re not going to sell,” he said. “I’m just telling you the price they’re going to get is going to be crazy high.”

The same pressure from banks is preventing many base metals producers from cutting supply, Elishis said. He expects copper prices to go as low as $1.75 a pound from $2.17 now before recovering to $3 in three to five years.

In the meantime, mining executives may start to push back against their banks, arguing they have no assets left that they can afford to sell, and no equity left to issue, he said.

“It becomes a classic game of chicken. Either the bank backs off or these companies go into restructuring.”

As companies run out of assets to sell and risk “gutting” their production to stay afloat, base metals investors may start demanding an end to this cycle before their investments are destroyed, he said.

“The base metals space saw a mini revolt but nothing has happened,” Elishis said. “The precious metals space saw a massive revolt, things happened. And now people are more calm.”

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