Leon Black Follows Denham in Buyout Firm Mine Push: Commodities

Billionaire Leon Black’s Apollo Global Management LLC is among the private-equity firms gearing up to invest in mining after valuations fell and a decline in financing left some companies short of cash.

Apollo, which is setting up its first natural-resources fund, is assessing at least four potential mining deals, said Gareth Turner, a senior partner in London. Commodity trader Trafigura Beeher BV is planning its first metals and mining private-equity deals and firms Denham Capital Management LP and Waterton Global Resource Management say they have billions of dollars to deploy in the industry.

“There are very few places mining companies can go to today to raise $100 million to $500 million of long-term equity capital with one phone call,” Turner said in an interview. “This dislocation of equity prices relative to fundamentals should persist for a good portion of 2013, which creates the perfect backdrop for private-equity capital.”

Buyout firms are helping to fill a funding gap after mining-industry equity sales dropped for a third straight year in 2012 and bank lending slumped. Producers of metals and other mined commodities such as coal and diamonds still face the challenge of completing tens of billions of dollars of capital projects to meet a forecast increase in global demand.

‘Serious Problems’

“Mining ventures in the public space at the moment have serious problems funding themselves, no matter if they are in Canada, Johannesburg or Australia,” said Bert Koth, a director at Boston-based Denham Capital, which raised $3 billion last year for resources deals.

Examples of mining companies burning through their cash include U.S. coal producers James River Coal Co. and Consol Energy Inc. Their cash and near-cash holdings fell 27 percent and 51 percent respectively in the year through Sept. 30, according to data compiled by Bloomberg, after coal demand and prices slumped. U.S. gold company Jaguar Mining Inc. has seen an 80 percent decline.

No one was immediately available for comment at James River and Consol. Jaguar declined to comment.

Private-equity acquisitions of mining companies are still rare, accounting for $1.03 billion of the $109.7 billion of industry transactions announced last year, according to data compiled by Bloomberg.

Activity in 2012 included the A$830 million ($876 million) bid for Australian copper miner Discovery Metals Ltd. led by Cathay Fortune Corp., a Chinese buyout firm founded by billionaire Yu Yong. If completed, the Discovery deal would be the largest mining takeover by private equity, the data show.

Understanding Investor

Despite a boom in commodities demand, mining stocks have trailed the broader equity markets in the past 12 months. The Bloomberg World Mining Index is down 7.8 percent, while the Bloomberg World Index has gained 11 percent. With no improvement in the market, more miners will seek out private capital, according to Waterton, a Toronto-based firm that has $1 billion to invest in precious-metals projects and companies.

“The outlook for the equity market is not good” for gold companies, said Isser Elishis, chief investment officer at Waterton. “We have our catcher’s mitt there ready to go.”

For mining companies trying to bring their first project into production, private-equity backing can be ideal, said Tim Crossley, chief executive officer of Trans-Tasman Resources Ltd., a New Zealand iron-ore mine developer partly owned by Denham.

“You need an investor who has a good understanding of investments at this early stage and is skilled in weighing up the risk-reward elements,” Crossley said in an e-mail.


Mining projects sometimes run late and over budget, or are derailed by political upheaval. It takes 12 years on average for a copper mine to enter commercial production, according to Peter Richardson, chief metals economist at Morgan Stanley Australia Ltd.

“You need to get comfortable with quite risky jurisdictions,” Koth said in an interview. “If you get it right, you can get five, six times your money back.”

The cyclical nature of commodity prices can run counter to the private-equity industry’s typical three- to five-year investment horizon. To solve that problem, the companies can fix future cash flows by hedging commodities production, according to Apollo’s Turner, something publicly traded mining companies typically avoid.

Private-equity may also hold on to mining assets longer than other kinds of investments, said Michael Elliott, sector leader for global mining at Ernst & Young in Sydney.

‘Cumbersome’ Loans

“If the fund rules do allow for an exit period that would be longer than that five-year period, then we see more and more of a role for that private capital,” Elliott said.

The leading mining companies have the widest choice of funding options. Australia’s BHP Billiton Ltd. and London-based Rio Tinto Group, the two largest, raised a combined $22.1 billion selling bonds in 2012. Smaller competitors, including the so-called junior companies that explore and develop mines, must instead rely on share sales and bank loans.

Lending to metals and mining companies fell 21 percent last year to $111.8 billion, a three-year low, data compiled by Bloomberg show. Project finance facilities are expensive and time-consuming for smaller companies because of “cumbersome and onerous” documentation, said Egizio Bianchini, vice-chairman at BMO Capital Markets in Toronto.

The decline in equity financing has been even more precipitous. The mining industry last year raised $17.4 billion via equity sales, down 49 percent from 2011, according to the data.

Gold Deals?

At the same time, miners of certain commodities have become steadily cheaper, particularly in gold. The S&P/TSX Global Gold Sector Index of 54 producers trades at about 17 times earnings, compared with a five-year average of 31, according to data compiled by Bloomberg. The price of gold, meanwhile, posted its 12th straight annual gain in 2012.

“The difference between the price of the metal and the valuations of these companies has just gone to such an extreme,” said Ken Hoffman, a metals and mining analyst at Bloomberg Industries in Skillman, New Jersey. “The best deal for private equity would probably be a single-mine asset, hopefully gold, because that’s the easiest to hedge.”

The undervaluation of mining companies relative to commodities’ “fundamentals” is probably at its greatest since the height of the global credit crisis, Apollo’s Turner said. He sees the cycle continuing for six to nine months.

Diamonds, Coal

Turner sees three types of mining deals where private capital is likely to be deployed: buying so-called second- and third-tier assets that the largest miners no longer want; funding development companies; and buying stakes in established miners in order to fund acquisitions or a new project.

Marc Spilker, Apollo’s president, said in November the firm expected to complete raising funds for its natural resource fund in the fourth quarter. The fund had just under $1 billion in commitments, he said. Turner declined to comment on how much money has been raised and if the fund has been completed.

Apollo has looked at several mining assets in the past year. It was among prospective buyers in talks for BHP’s controlling stake in the Ekati diamond mine in Canada, people with knowledge of the matter said in March.

Market Performance

In November, Apollo announced a $100 million investment in Denver-based potash exploration company Prospect Global Resources Inc. The firm also said Jan. 14 it will provide $300 million to a partnership with NRI Management Group LLC of the U.S. to buy coal-mining assets.

Unlike mining companies, U.S. private equity stocks have outperformed general indexes. The 21-member Yorkville PTP Financials index of LBO firms, real estate partnerships and asset managers has gained about 28 percent during the past year, with Apollo up 41 percent.

Trafigura’s Galena Asset Management Ltd. investment arm raised $275 million for its Private Equity Resource Fund and may do three to four deals this year, Galena CEO Jeremy Weir said Jan. 9. It will target stakes of 25 percent to 60 percent in companies involved in coal mining, industrial, ferrous and precious metals, he said in an interview from Geneva.

“The pitch that the private-equity firms are giving is that they’re open for business and can be a lot more flexible than the traditional syndicated loan or project finance,” said Dan Barnholden, a managing director at Cormark Securities Inc. in Toronto. “A lot of companies are really happy to have an alternative.”

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