Private capital pursuing mining and metals investments
Monday 10 December, 2012 — Financing for junior and mid-tier miners may be challenging but it is not impossible, according to Paul Murphy, Ernst & Young’s Australia and Asia-Pacific Mining & Metals Transaction Leader.
“There is increasing interest in mining and metals from private equity funds, other specialist funds and sovereign wealth funds and we see this trend continuing into 2013,” he says.
“Private capital is increasingly looking to take advantage of low equity valuations to take opportunistic or strategic non-controlling equity stakes in mining and metals assets at what they perceive as an opportunistic time in the cycle.”
Preliminary analysis by Ernst & Young suggests private capital investors accounted for 21% of mining M&A globally in the nine months to 30 September 2012 versus just 12% for the same period in 2011.
Murphy says typically financial investors are seeking “toehold” investments of 10-15% that may mitigate risk with a combination of debt and equity.
Convertible debt has been a popular financial instrument for the sector in Australia which exhibits the characteristics of both.
State owned enterprises are increasingly adopting a larger “foothold” investment strategy with the ultimate objective of securing longer term strategic supply.
Data to the end of September suggests full year 2012 capital raisings in the mining and metals sector globally could be the lowest since 2009, with a sizeable proportion of this year’s raisings from record corporate bonds issues from larger companies.
“Outside the largest mining companies, financing remains extremely difficult, which when combined with low equity valuations is creating opportunities for those with cash – and increasingly this cash resides with the private wealth community, including specialist sector funds,” says Murphy.
However Ernst & Young Debt Advisory practice joint leader Sebastian Paphitis says companies trying to find finance have their work cut out getting the right deal.
“Big or small, public or private, finding finance is no longer a simple equation but the good news is there are a bunch of alternative options that are available,” says Paphitis.
“While the very largest players have the depth of internal expertise to navigate the options, for everyone else it can be a bit like trying to put together a 1000-piece jigsaw puzzle.”
“Picking the right funding solution is critical and it most likely will involve considering multiple options.”
Paphitis says the private equity and specialist credit funds looking to invest have bespoke mandates, with some looking for investment grade deals and others willing to consider opportunities down the risk curve in order to chase higher yields.
“The bottom line is there are options available if you know where to look.”
Murphy says that for junior miners, vulnerable to unsolicited takeover, some of these investors can provide much-needed capital not available to them on the public debt and equity markets.
“However, value may be given away if they are not proactively communicating to the market,” he says.
Murphy says advanced juniors are best placed to seek alternative funding providers and structures, particularly strategic investors for the longer term. Each is not without its risks however, and juniors need to explore multiple options in order to raise finance at the right price on the least onerous terms.
“Early stage juniors are faced with limited options, and we expect to see examples of companies raising capital however they can. However, this may come at some sacrifice to financial flexibility and control over their project.”
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