Is the Mining Industry the Goldmine Private Equity was hoping for?


April 7, 2014

In February of this year, we reported that many private equity (PE) firms were looking at the mining industry as a potentially lucrative destination where they could offload the huge sums of dry powder many are sitting on.


There was a real feeling throughout the PE marketplace and particularly with buyout and merger & acquisition (M&A) focused firms that there were opportunities here. However, against the backdrop of a slow start to 2014 in terms of PE deal making, this analysis is now being reassessed.


Reuters UK has an article posted on its website that casts doubt over whether PE can succeed in the mining industry within today’s market conditions.


Several PE firms have already started bringing in respected executives from the mining industry to help them start targeting and securing investments, while some experienced businesspeople from the mining world have even gone to the lengths of looking to start their own PE funds in order to invest.


The Chief Executives of Anglo American and Glencore Xstrata, two of the world’s biggest mining groups, say that volatile conditions and the high level of debt being taken on as part of most of these deals could prove dangerous. High returns will be needed just to service the debt and interest, and if cash flow suddenly becomes a problem investments could run into trouble.


Ivan Glasenberg of Glencore told Reuters, “[In the mining industry] you just don’t know your earning base. When you hit bad times, like we did recently, it goes down [quickly[. How are you going to feed your debt?”


While acknowledging that mining companies are indeed selling assets, Mark Cutifani of Anglo American gave his views on the risks associated with the assets they’re selling, adding, “At the end of the day [PE firms] will be making pointed bets.


There is still a lot of risk associated with those bets. The assets that are being sold are probably not the best assets in the portfolio.” There is still the feeling that PE firms will take a chance on the mining industry, although they may well be betting on a sustained, long-term recovery, which itself will carry a degree of uncertainty for at least the next 24 months.

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