mining

$5.6 Billion Private Equity Vehicle to Shake Up the Mining Industry

by

March 6, 2015

One of the mining industry’s most famous faces is looking to make a comeback with a bang. On Thursday, the ex-Xstrata boss, Mick Davis, announced his private equity vehicle has raised $5.6 billion and the fund is looking for lucrative deals in the industry.

 

Mick Davis is looking to partner with his old team and make some large-scale investments in the mining industry. Davis has been planning the move with his new project, the X2 Resources, since he left Xstrata in 2013, after the company was taken over by commodities trader Glencore.

 

Announcing the Big News
X2 Resources released a statement on Thursday, saying the firm has “successfully completed its initial capital raising process”. The private equity vehicle was able to fundraise $5.6 billion in “equity capital from a small number of world-class investors to finance the creating of a new mid-tier diversified mining and metals group”.

 

Mick Davis said in the statement, “We would like to thank our investors for their support and vote of confidence and look forward to rewarding them through superior returns. The blue-ship nature of our investors and the scale of their commitments to date are clear endorsements of the X2 Resources team’s strategy and our record of creating value.”

 

The Telegraph pointed out, the X2 Resources team includes many from the previous Xstrata management team. These include the former finance director Trevor Reid and executives Thras Moraitis, Andrew Latham and Ian Pearce.

 

One of the Largest Funds
Analysts immediately noticed the raised equity is one of the largest and shows that there is strong investor commitment towards the commodities sector. It is also a testament to Mr Davis’ success as the head of Xstrata. According to the press release, $4 billion from the total fund is committed equity capital, available for ‘an immediate draw down’. The remaining $1.6 billion is conditional equity capital. The Financial Times also noted, X2 Resources is willing to put debt finance to work for the future deals if necessary.

 

The Wall Street Journal wrote the private equity vehicle was able to raise the capital from sovereign wealth funds, pension funds as well as the private equity firm TPG Capital among others. When Mr Davis took over at Xstrata in 2001, the company was valued at $500 million. When he left the business to create X2 Resources, Xstrata was valuated at $30 billion. It now remains to be seen whether Mick Davis is able to recreate the same successes, as the commodity market is currently going through some tough changes.

 

Going After Targets
Sources close to the matter have said the new fund is already looking at potential deals. The Wall Street Journal wrote the fund might be after some big targets. According to the article, the fund is set to look at mining giants like Rio Tinto PLC, BHP Billiton and Anglo American PLC. The paper’s sources believe X2 Resources is already in talks with all three firms.

 

But as well as targeting these major mining assets, the statement said the fund is also interested in ‘mid-tier miners’. Many medium mining assets are currently in financial distress and these are believed to be among the targets the vehicle hopes to invest in. X2 Resources are considering mining assets working with commodities such as zinc, copper and nickel.

 

Furthermore, the fund is keeping an eye on a variety of regions from Latin America to the US. According to the Wall Street Journal, there is an advisory board set up to review the firm’s future investment deals.

 

Paul Gait, a mining analyst at Sanford C. Bernstein Ltd, analysed the current deal-making mood in the mining industry in a Bloomberg interview. “Spinning assets off through a publicly listed vehicle seems to be the most preferred route because they can divest non-profitable assets too. The large mining executives don’t want to be blamed for low valuations of their assets after a sale and shareholders will decide on valuations when the public market route is chosen,” Gait said.

 

Struggling Industry
But Mr Davis is going to have to deal with a different industry. During his time at Xstrata, the industry was having a great time, with the commodity market riding on a wave of high prices and booming demand. But the industry has been going through a tough period. Demand in China has decreased which has caused problems for many of the big firms. According to analysts, the industry has been going through an extremely quiet period in terms of deal-making activity.

 

Ernst & Young consultants have reported that the deal volume declined by 23% in 2014, making it the fourth straight year in a row of decreasing volume. According to the data, only 11 deals were worth over $1 billion in 2014, when the previous year had seen 18 of such large-scale deals. Furthermore, the total valuation of deals dropped by 49%, meaning deals were worth $44.6 billion last year.

 

Activity Going Up
Despite the struggles, some experts believe activity will pick up later this year. Although the commodity prices are still volatile, there is plenty of dry powder looking for deals in private equity especially. So far, mining companies like Rio Tinto and BHP Billiton aren’t staying quiet about possible future acquisitions. In fact, BHP Billiton has announced it is going to be spinning off some of its assets. Furthermore, Rio Tinto has already announced it is looking into restructuring of its assets, with many analysts expecting it to exit from its coal operations.

 

X2 Resources definitely has capital to deploy in the coming months, which might further increase deal activity in the industry. Interestingly, it might see Glencore pitting against X2 Resources for Rio Tinto. Glencore had reportedly tried to reach a deal with Rio Tinto last year, but the discussion was turned down quickly. But the prospect of a possible head to head has gotten many experts interested.

 

It will be interesting to see what assets the private equity vehicle targets first and whether the mining industry can get out of the current slump. For private equity firms, this is an interesting period whether firms are looking for investment or exit strategies in the sector.

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