Waterton Global Resource Management is planning on making 10 to 15 acquisitions primarily in North America over the next four years.Getty Images/iStockphoto
Private equity firm Waterton Global Resource Management Inc. has raised just over $1-billion for a fund to buy distressed precious metal assets, increasing the competition for those hoping to take advantage of the rout in mining stocks.
The Toronto-based firm is planning on making 10 to 15 acquisitions primarily in North America over the next four years.
The mining sector's reliance on the public markets hasn't allowed for the long time horizons and discipline that private equity brings to the space, Cheryl Brandon, Waterton's senior partner in investment management, said in an interview. "As a result of that, you have seen a lot of distress, a lot of valuations coming down, which obviously creates an opportunity for private equity investors to come in and really get involved in the space."
The demand for Waterton's second precious metals fund blew past the firm's own expectations, and it is now the largest of its kind in Canada.
The company initially planned to raise $750-million. But demand was so strong that the fund closed at about $1.02-billion after nine months of fundraising. Investors were ready to pour in $2-billion, the company said.
"What surprised me is that, if you look historically, you really haven't seen a lot of capital going into the mining sector from private equity and now you're really starting to see this pick up," said Ms. Brandon. "Investors see long term potential in the sector," she said.
The interest from sovereign wealth funds, pension funds and endowments came as many gold mining companies lost about half their value last year as the price of bullion dropped nearly 30 per cent.
Private equity investment in the mining sector became a hot topic in recent years as it became increasingly difficult for miners to tap public markets – a traditional source of capital for the resource industry. New funds from high profile miners Mick Davis, the former chief executive of Xstrata, and Aaron Regent, the former CEO of Barrick Gold Corp., also injected excitement into the space.
Some money is starting to trickle in, even if the private pools of capital have not plugged the funding gap. In addition to Waterton, N.Y.-based private equity firm Orion Resource Partners recently told The Globe and Mail it is close to announcing a couple of transactions.
Ms. Brandon said the institutional investors who were interested in Waterton's strategy "saw the fact that we had a large technical team and they believed in our ability to deploy that capital."
Waterton, which has extensive investments in gold properties in Nevada, has poached many of its mining experts from Barrick, the world's largest gold producer.
Its team has sifted through hundreds of gold and copper assets in North America and now Waterton has 35 non-disclosure agreements with parties, including with miners hoping to divest assets that aren't part of their core business.
Waterton's investments will be divested by the nine-year maturity date in 2023. Exit strategies include selling assets to companies, selling to other PE firms or taking the company public.
Exploration-stage projects need not apply, since Waterton is looking to limit risk by investing in assets in later-stages of development within two years of production, or mines that are already operating.
Waterton will avoid transactions below $20-million, but plans to invest in many different companies and projects in its portfolio, rather than putting all its eggs into a large asset.
That rules the company out of bidding on some of the bigger ticket mines, such as Detour Gold Corp. or Osisko Mining Corp., which is already embroiled in a hostile takeover battle with Goldcorp Inc.
But the company doesn't shy away from conflict. While it has never taken over a whole board of directors, it currently has a hostile bid out for Arizona-based Chaparral Gold Corp.
Ms. Brandon would not disclose Waterton's rate of return. But the fund told Chaparral's previous owner that its target rate of return on any investment was a minimum of 20 to 25 per cent a year, according to a Chaparral filing on the bid.
Private equity financing in the mining space has picked up in recent years. There were $363-million in investments made in mining and minerals in 2010, but that climbed steadily to $1.1-billion in money flowing into the sector in 2013, according to figures from Thomson Reuters.
The data shows that investments are set to climb even higher this year, with $930-million already deployed by private equity groups as of April 3.
Rachelle Younglai