MINING

Private equity affair

Blast

Coinciding with the 2015 Investing in African Mining Indaba in February, international law firm Berwin Leighton Paisner (BLP) released a report which revealed that over $2 billion (R24 billion) of private equity funds was injected into mining projects during 2014.

The report further highlights that there is significant scope for further investment in the market, following previous calculations in February 2014, which indicated that $8 billion (R94 billion) had been raised by private equity funds for mining projects. The research goes on to show that there were 50 private equity investments in mining companies in 2014, executed by 30 different private equity funds.

BLP’s report also illustrates that half of the money invested was in 11 acquisitions with an average transaction size of over $110m (R1,3 billion). The acquisition of strategic stakes was the next most significant with over $380m (R4.5 billion) invested across 22 deals. The average size of the strategic stake taken was 21%.

According to Investopedia.com, “Equity capital that is not quoted on a public exchange. Private equity consists of investors and funds that make investments directly into private companies or conduct buyouts of public companies that result in a delisting of public equity. Capital for private equity is raised from retail and institutional investors, and can be used to fund new technologies, expand working capital within an owned company, make acquisitions, or to strengthen a balance sheet.

“The majority of private equity consists of institutional investors and accredited investors who can commit large sums of money for long periods of time. Private equity investments often demand long holding periods to allow for a turnaround of a distressed company or a liquidity event such as an IPO or sale to a public company.”

Alexander Keepin, Partner and Co-Head of Mining at BLP, who spoke to us, following the 2015 Investing in African Mining Indaba about this growing trend, says private equity is one of the traditional sources of funds in the investment arena alongside the equity capital markets and debt.

“Whilst there have been a number private equity funds involved in the mining industry, in the last two to three years Bloomberg has estimated that a further $12 billion (R140 billion) has been raised for investment into the mining industry. This is made more significant by the difficulties, which have been facing mining companies in accessing the equity capital markets around the world and accessing debt.

“On the African continent, as well as many established mines, there are many development projects which can benefit the local communities and have the potential to make a significant contribution local economies. For these development projects, international investment is one of the key sources of finance, especially for those bulk commodities which require huge infrastructure investments too,” Keeping says.

According to Keepin, of the US$ 2 billion (R24 billion) invested in 2014 nearly half of the money was invested in North American projects, which received over US$1 billion (R12 billion) of investments. These were typically characterised by a number of acquisitions of producing assets and so were higher value transactions with an average investment size of $153.7 million (R1.8 billion) he explains.  By number, North America only saw two more investments than Africa, however by value North America saw three time more invested than Africa.

“Of the $302 million (R3.5 billion) invested in African projects, the majority of these were acquisitions of strategic stakes where the private equity fund becomes a significant shareholder, typically with between 20 -30% of the company. These acquisitions of strategic stakes are typically made in development projects and so have a smaller average size – the average size for the acquisition of a strategic stake was $22.2 million (R260 million). The average size of investment in strategic stakes in Africa of $22.2 million is above the global average of $17.1 million (R 200 million) which shows that African projects have been successful in attracting investment,” he says.

Looking at some of the minerals and metals that received the most attention, Keepin indicates there was a diverse spread among the commodities that the private equity funds invested in. He however points out that gold was the most popular commodity with nearly a third of all deals being gold projects. After this, the next most popular was coking coal, which represented about 12%. He says when looking at the individual funds, this is not all together surprising as one would expect funds to spread their exposures across a range of commodities rather than focussing on a particular commodity.

Keepin says while African projects have been successful in attracting private equity investment, there has not been as many investments in bulk commodities in Africa compared to the rest of the world. This is in part due to the infrastructure, which needs to be developed in many parts of Africa to support bulk commodity projects. He says many of the smaller funds will not invest in bulk commodity projects as the size of the investments they can make will not fund the infrastructure required.

“A number of mining companies have been suffering with the recent falls in commodity prices which have impacted the values of many projects. As a result, a number of investors have been seeking returns in other sectors. At the same time, the continued impact of the global financial crisis has resulted in a reluctance of a number of banks to provide debt finance. The result of this is that it has been difficult for many mining companies to find the investments they need to develop their projects.

“At a time when the industry has been suffering from a lack of investment, the ability of private equity funds in the last couple of years to raise an estimated US$12 billion (R140 billion) for investment in the industry has created a lot of interest. The US$2 billion (R24 billion), reported to have been invested in the industry in 2014, is great newsnand represents a significant investment. Momentum is building and we expect to see greater sums invested in 2015 and 2016 as funds typically seek to deploy their capital in the first two to three years,” he says.

Keepin concludes by referring to the Mining Indaba as having always been an important event for attracting investment in African mining projects. “This year’s event had a number of sessions on private equity in mining and emphasising the importance of private equity for funding projects. This could also be seen by the number of funds which were present at the conference and how busy they were during the conference.”

Ameera Daniels

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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