Veteran-led PE firms prepare to snap up mining assets

Senior investment bankers say a new breed of private equity funds run by mining's old guard are emerging as keen buyers of resource assets.

Buyers have proved elusive for billions of dollars of unwanted assets the major miners have put on the block, with traditional private-equity firms kicking the tyres hard this year but shying away on execution. Now local bankers say an alternative class of PE fund is sniffing around the sector - firms run by mining veterans that are preparing to make cyclical plays.

Senior investment bankers say PE interest in resources is higher than ever before. Cashed-up private equity is a logical source of funds for the suite of assets and it is a good time to capitalise on poor stock valuations in the sector. BHP Billiton could look to sell about $US25 billion of non-core assets and Rio Tinto about $US10 billion of assets.

Firms that have been sniffing around the assets for sale include X2 Resources, set up by former Xstrata boss Mick Davis and other senior Xstrata executives, and Canadian outfit Magris Resources, set up by ex-Barrick Gold chief executive Aaron Regent. Another firm on the hunt is QKR Resources, set up by former JP Morgan mining banker Lloyd Pengilly and backed by Qatar money.

The firms are preparing to make a cyclical play for the assets, and will take a longer-term view on their investment. The model will see them build the mining business and get most value from the rate of return, rather than the traditional PE approach of restructuring the asset and selling it at a premium three to seven years later, one banker explained.

Traditional players chase an internal rate of return of 20 per cent to 25 per cent. That requires a material change to the cost structure of mining assets to be achieved. The failure of traditional firms to follow-through on deals can be put down in part to the fact the assets are not distressed and  the vendors don’t have to accept fire sale prices. In addition, traditional private-equity firms don’t have the mining expertise to add value to these assets. They can’t be confident they could run them more effectively than the current owners.

KKR and The Carlyle Group were among the suitors for Rio Tinto’s copper-gold mine Northparkes in New South Wales. Rio sold its 80 per cent stake in the mine to China Molybdenum Co Ltd.  for $US820 million in July this year.

Meanwhile, Apollo and KKR both made a tilt for BHP's Ekati diamond mine, which was sold to Dominion Diamond Corporation.  

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