Small's beautiful as hedge funds mull mining, farm deals

Hedge funds and Asian buyers, especially from China, are analysing mining companies and agricultural businesses including dairy, cattle and wheat farms that are in distress with a view to take controlling or minority stakes.

Turnaround and insolvency experts, lawyers, bankers and hedge funds themselves say they expect the mining and agricultural sector to be subject to further distress. The immediate major Australian mining projects have all but been completed.

Mining services are piquing interest after a raft of earnings downgrades made across the sector, a trend that could create a powerful new economic presence at the lower end of town. The funds, which are sector agnostic, have cut the value of transactions they are prepared to consider.

"They are saying ‘show us everything’, and are now happy to look at deals between $20 million and $30 million, or anything south of $30 million really,” one insolvency expert says.

While the assets may be a brave buy at the low point of the mining cycle, the funds have a history of success in Australia. They are banking on a fresh wave of distress and the relatively low penetration for debt traders in the market.  

Despite mining services companies being asset lite, funds eyeing the sector are taking a long-term view of around five years in the hope of selling at a big profit when mining activity rebounds. 

If distressed debt investors can buy the companies’ debt at a steep discount to face value then such businesses may be attractive. Steel fabrication and electrical services need professional management teams to help run their business, as well as an injection of capital into companies that have annual turnovers of as much as $1 billion.

Hedge funds, by buying stakes in such distressed businesses, may force engineering and construction firms to merge to cut overhead costs in order to meet reduced demand.

“Hedge funds are really part of an alternate banking system,” Mark Korda, partner at restructuring advisors KordaMentha, told DataRoom. “They may not only buy the debt but also invest additional money if they believe the company is going to be successful.”

At the Turnaround Management Association conference in Melbourne, which attracted global distressed debt funds, some told DataRoom that although they have traditionally not invested in the mining sector they have to examine all potential investments brought to them if the returns are forecast to be compelling.

Bankers say many hedge funds still view the valuations of mining services companies as too high.

Earnings before interest, tax, depreciation and amortization for mining services companies may not reflect the cash flow the company uses to pay for equipment. There is a gap between how the companies view their value and what potential investors think is the more accurate cash flow figures for such companies. 

Some mining executives doubt whether hedge funds will be willing to invest in their businesses. 

“I’m not sure the funds understand the space well enough on an operating level and I’m not sure they want to be involved in small mining projects,” Ulendo Roode, commercial manager of copper miner Tritton Resources Ltd, told DataRoom. “The funds need to rely on the mining executive team to be their eyes and ears on the ground.”

Tim Williams, head of group strategic business services at National Australia Bank, says some dairy farms in Victoria’s Gippsland region as well as Queensland cattle farms and Western Australian wheat farms are distressed and may want investors. Chinese investors are looking at a number of these situations, he says.

“Lots of people want to get into it (agribusiness),” says Williams. “But how do you run it?”