Private equity financing fills mining holeGetty Images/iStockphoto
Private equity interest in mining is surging as Canada's cash-strapped miners look for financing alternatives to fill the hole left by reluctant debt and equity financing markets.
In 2012, such financings jumped by $54-million to a total of $743-million – and have soared thirtyfold in the four years since 2009, when the recession sent resource and share prices falling fast.
Private investors and researchers say that figure is set to increase significantly this year.
Private equity firms, drawn to the disparity between commodity prices and knocked-down company valuations, are on the prowl. If a miner's fundamentals look good, there's an opportunity for the firm to buy in now and exit at a higher valuation a few years down the road. That puts the bull's-eye on development-stage projects, not prospectors, with management teams that have been proven on previous projects.
Some international private equity players, such as Sydney-based Pacific Road Capital Management, have done recent deals in the sector; others, such as New York-based Apollo Global Management LLC are setting up new funds. Apollo closed a natural resources fund with $1.3-billion in commitments in February, with some of that earmarked for mining opportunities. Canada's own firms have also been active.
Industry watchers first saw private equity interest in Canadian mining companies in 2006, when just nine deals worth $84-million were done, according to data from Thomson Reuters LLC. That dropped to just $24-million in the dark days of 2009.
But the past two years have offered a real boost, with 45 deals done in 2012 alone.
Still, private equity isn't a blank cheque, noted Stephen Mullowney, director of corporate finance consulting and deals at PricewaterhouseCoopers.
"In the past, it has kind of hamstrung management and it hasn't been beneficial to the industry.
"Private money in the mining space has traditionally been what I'll call 'non-friendly money' relative to public markets," he said. Miners who don't want their resource project becoming just a source of cash for a financial institution have resisted this type of funding in the past.
But these days, it's the capital markets that have been giving the cold shoulder to miners.
"Many of the juniors have been reticent to go to the market because their own share prices are not great," said Jurgen Beier, Deloitte Canada's national mining leader. "We're starting to see private equity step up a lot more."
And, in some cases, the management team is one of the most attractive assets for private equity investors.
That's the case for Pinetree Capital Ltd., which has made private-placement investments in several Canadian miners since the beginning of 2013 alone, and calls itself an opportunist.
Pinetree looks for experienced leaders who understand the company's assets and geography, with a good grasp on capital budgeting – key to identifying a solid miner that has been dragged down by the sluggish marketplace. Pinetree also likes operations in mining-supportive jurisdictions with the right combination of deposit size, quality and mine feasibility.
There's no room for short-term players, Pinetree analyst Mat Wilson said.
"It's impossible to know when the resource market will turn around, but we find with a long-term focus of three to five years or even longer, there are companies that are extremely undervalued – ones that haven't traded at this level since early 2010, despite huge in advancements in their projects that we think are very strong."
And it's not just the juniors that are looking to private placement funding. In January, steel and mining giant ArcelorMittal sold a 15-per-cent slice of its iron-ore-focused Canadian subsidiary and infrastructure assets to a private equity consortium for $1.1-billion.
The buyers were led by Posco, a South Korean steel maker, and Taiwan-based China Steel Corp., and will have long-term iron ore agreements proportionate to their investment.