Davis leads line as private equity mulls mining

And it’s more than just in the name. According to analysts, Davis will probably look to buy unloved assets in the coal sector, most possibly metallurgical coal assets owned by the Anglo-Australian miner, Rio Tinto, which has been making short work of a disposal programme as it strips out its non-core assets.

Coal is exactly where Davis started with Xstrata, buying some of Glencore’s South African and Australian coal assets and then quickly adding other commodities at cheap levels in a rising market that effectively meant normal payback periods contracted from three years to 18 months.

In the last year, the major mining companies have been going through a process of lopping off the less desirable projects, the vanity ventures that once seemed value-adding, and were able to creep through the credit approval process at a time when commodity prices were sky-high.

The savvy mining executives, including those kicked off their perches when the mining market suddenly turned about a year ago, have taken up the guise of private equity to take advantage of the process. Buying cheaply at the bottom of the market and waiting for the up-cycle to begin again is the name of the game.

“Private equity has never been keen on mining resources in the past owing to the cyclicality of the market,” said head of Macquarie Research’s mining research in South Africa, Kieran Daly. “But there have been a number of former mining CEOs popping up running them such that Mick is likely to have decent competition for these assets,” he says.

Leigh Clifford, a former CEO of Rio Tinto is advisor to private equity firm KKR & Company which was considering bidding for the $1bn Australian copper mine Northparkes, also the target of another private equity investor, Carlyle Group. There’s even talk that Tom Albanese, the former CEO of Rio Tinto, is considering private equity.

Of course, going private for mining bosses is not exactly the newest idea in the world. There’s a form of it in former Impala Platinum CEO Keith Rumble’s Sun Mining which aimed at finding assets in India and Russia while Aaron Regent, fired as CEO of Barrick Gold in 2012, established Magris Resources which aimed at assets in the Americas.

This is not to speak much of bankers who specialised in mining also taking to private equity such as SAS veteran, Ian Hamman, dubbed the king of M&A resources while at JP Morgan Cazenove and now a member of his own start-up, Strand Partners.

Another JP Morgan star, Lloyd Pengilly, who helped drive the Glencore Xstrata deal that eventually put pay to Davis’s future there, is establishing a $2bn African mining fund.

Then, of course, there are the Oppenheimers operating through the great-great-grandaddy of all private equity investors, the prototypical Oppenheimer & Sons. They are reputedly considering bursting back into the diamond business, a development that De Beers CEO, Philippe Mellier, said should be welcomed.

The move by private equity into mining is not entirely new, but it is now concerted putting fresh life back into global private equity.

A study by Preqin, a consultancy that provides information on private equity, real estate and hedge funds, showed that eight natural resources funds focused solely on mining raised an aggregate of $8.5bn in 2012, more than the years 2006 to 2012 combined.

Returning to Davis, it has been rumoured some $1.5bn worth of funds has been thrown at him to build his fund, but there are some who doubt he will find it as easy as in the days when he founded Xstrata in 2003.

“There was a lot of luck in establishing Xstrata,” says one analyst who asked not to be named. The famous example is Xstrata’s purchase of Canadian nickel producer, Falconbridge, at a time when the nickel price was $6 per pound ($/lb). It soon after raced up to $22/lb and made pay-back on the asset a simple process.

There are some mischievous voices whispers in the market that even then Glencore was closer to Xstrata’s business than it should have been. As a one third investor in Xstrata it’s thought Glencore tightened the nickel market adding to the ease with which Xstrata could subsume Falconbridge.

These days it’s a much harder business. “No mining business can claim to be truly diversified while it has exposure to China,” says Maquarie’s Daly. The implication is that private equity wealth development on the scale of Davis’s Xstrata is nearly impossible. “It’s very hard today,” said an analyst. “They will have to be very selective about the minerals in which they invest,” he added.