X2 jostles to be the next Xstrata

X2's latest equity raising could signal the next chapter of the resource sector's boom-bust cycle, but the company's success will hinge on the timing of its acquisitions and the outlook for commodities.

A key moment in the boom-bust cycle of the resources sector may be about to get underway with Mick Davis’ announcement that his new X2 Resources has raised another $US1.5 billion of equity and will now focus on “starting the investment process”.

The raising, from three unnamed private equity band sovereign wealth funds, adds to the existing $US1bn of initially non-binding equity commitments X2 had already secured from private equity giant TPG and Hong Kong-headquartered commodities trader Noble Group. Those commitments are now available for immediate drawdown.

X2 may also be able to draw on a further $1.25bn of conditional equity from its five investors, giving it a potential war chest of $US3.75bn of equity to pursue a “straw hats in winter” strategy of snapping up unwanted resource assets.

Davis was a former key player in Billiton before it merged with BHP in 2001. He was briefly BHP Billiton’s chief financial officer before leaving to start up Xstrata which, seeded with Australian and South African coal assets vended in by the Swiss-based trader Glencore, grew rapidly through a series of acquisitions until it was acquired by Glencore for about $US30bn last year.

Davis therefore has a demonstrated history of making well-timed acquisitions and has made it clear he thinks the moment is right for X2 to become active.

“We have attracted a very prestigious core group of large-scale, high-quality investors who share our vision of building a new mining group with the potential to generate attractive returns through the cycle. We believe the timing for this venture remains very opportune and we will now focus increased attention on starting the investment process,” he said in a statement.

With the downturn in commodity prices, the major resource houses have been undergoing major house-keeping of their assets, carving into their cost bases and re-defining what are core and non-core assets. Their problem has been a paucity of buyers for the assets they want to shed at prices that make sense from their perspective.

The lack of activity is despite the fact that private equity firms have raised quite substantial funds to invest in the sector and are known to have ‘’kicked the tyres’’ on a number of assets.

Their lack of experience in resources and a lack of confidence in their ability to manage big resource assets (and perhaps because commodities and private equity’s traditional leveraged strategies make an uncomfortable pairing) may explain their inaction.

Davis and his team of key former Xstrata executives supply the necessary expertise and the commodity price cycle supplies the leverage.

There are many assets that could be available. BHP has made it clear that its nickel business -- which includes the Nickel West business in Western Australia and the Cerro Matoso mine in Colombia -- is non-core, as are its South African aluminium assets. Rio has put its Canadian iron ore operations, its diamond business, some aluminium assets and various coal assets on the block.

X2 won’t be the only interested party. Glencore’s Ivan Glasenberg last month made it clear that, with the merger with Xstrata now bedded down and greater-than-expected synergies being extracted, he is also back in acquisition mode. He identified Nickel West and some of Rio’s Australian coal projects as assets of interest.

Davis knows BHP’s nickel and aluminium assets and the Cerro Matoso mine well. He started the bidding for WMC Resources that saw that company and its nickel business acquired by BHP. The aluminium assets in South Africa and Cerro Matoso were once part of Billiton. He also knows the Australian coal sector intimately, given they were the foundation assets for Xstrata.

Australia, South Africa and South America are the obvious regions of interest to him, given his history.

Davis’ statement -- that the timing for the raising is opportune -- is perhaps significant given that his history at Xstrata showed a prescient understanding of the commodities cycle and the China-inspired boom that began after he had gone on something of a spending spree.

As discussed recently (Rio Tinto sees the silver lining in aluminium, March 28) there are structural changes occurring at a surprising pace within China as its new leadership seeks to drive out uneconomic activity. This could have particular implications for the outlook for aluminium and, perhaps, iron ore.

If Davis gets his commodities and timing right, if he reads the implications of the changes occurring within China correctly and targets the best of the unloved assets the majors want to discard without over-paying, he could reprise the Xstrata success story.

His five private equity and sovereign wealth fund backers are backing him to do so to the tune of as much as $US3.75bn, which is no small bet.

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