There are only a few private equity firms that have a real interest in the mining space and they are taking their time looking for new investments.CHRIS WATTIE/Reuters
Contrary to popular belief, private equity is not going to be the saviour for mining companies desperate for cash to fund their exploration and projects.
There are only a few private equity firms that have a real interest in the mining space and they are taking their time looking for new investments.
"The industry has developed a level of exuberance around private equity which isn't well researched and certainly overblown," said Michael Scherb, general partner with London-based Appian Capital Advisory LLP, which has raised $375-million (U.S.) to invest in mining assets.
"The real capital dedicated to the space is really only in a handful of dedicated mining specialist investment houses," said Mr. Scherb on the sidelines of the Prospectors and Developers Association of Canada conference in Toronto.
He is looking to deploy his fund's capital over the next few years and recently made an investment in a Toronto-listed junior miner.
Private equity funds have about $1-trillion of so-called "dry powder" funds that have been promised to investors but not yet invested, according to the most recent global private equity report from tracking firm Preqin.
Much of that is not specifically set aside for the mining sector, which has been hit hard by the slump in commodity prices.
In addition, mining projects and companies are highly complex and do not fit the traditional private equity "buy-out" model of buying a distressed company, fixing it and then selling it over a fairly short period of time.
That shrinks the pool of serious buyers to those that have experience in the mining industry.
Toronto-based Waterton Global Resource Management is dedicated to investing in mining assets and has a team of miners who have worked for some of the biggest Canadian mining companies such as Barrick Gold Corp. and Teck Resources Ltd.
Mr. Scherb's Appian has a team that includes former executives from mining giants Rio Tinto and Anglo American.
New York-based Orion Resource Partners, which has $1.1-billion under management and focuses on junior mining companies, said the private equity industry is going through an education process.
"Leverage works a little bit differently in the mining space than it does in the areas private equity has been comfortable," Oskar Lewnowski, Orion's chief investment officer, told delegates at the mining conference.
"Private equity has needed to educate itself a little bit on that," he said, adding that there is a growing acceptance from private equity firms and mining companies "on the need for each other."
The idea of private pools of capital in the mining space is foreign to many miners, which traditionally have raised funds on the public markets.
With the commodity downturn, mining companies had a hard time tapping equity markets and were loathe to issue stock because it was dilutive and their shares were trading at multiyear lows.
Gareth Turner, a senior partner with Apollo Management, sees similarities between the mining industry and the oil and gas sector, which used to shy away from private equity.
"Fifteen years ago, if you are in West Texas and you came from Wall Street, they would sort of run you out of town. But today they welcome you with open arms," Mr. Turner told delegates at the mining conference.
"While you haven't seen
the rapid deployment of capital in metals and mining like you have seen in oil and gas, I think it is going to take time for producers and ourselves as financial intermediaries to learn how to work with each together," he said.
So are there any deals? Waterton's chief investment officer, Isser Elishis, said the firms are disciplined, a lesson the mining industry had to learn quickly in 2013.
His firm recently launched a $58.8-million (Canadian) hostile bid for Arizona-based Chaparral Gold Corp.
The company has rejected the bid, which has become an unwelcome development for Chaparral and other junior miners that see more value in their assets.
Rachelle Younglai