Increasing interest in mining and metals from private equity funds, sovereign wealth funds and state-owned enterprises is set to be a key trend in the sector in 2013, according to Lee Downham, Ernst & Young’s Global Mining & Metals Transactions Leader.
“Private capital investors are increasingly looking at the sector, typically through non-controlling equity stakes. The reasons for investment range from security of strategic minerals supply to pure financial returns from investors who believe the sector is undervalued right now,” he says.
Preliminary analysis suggests private capital investors accounted for 21% of mining M&A in the nine months to 30 September 2012 versus just 12% for the same period in 2011.
“What we are seeing in the market suggests this will continue into 2013 as capital remains constrained and many corporates focus on cost reduction and recycling capital.”
Further analysis of private wealth investments in the sector suggests there are a wide range of investors – from state owned enterprises looking to secure strategic minerals supply through to downstream customers looking for offtake, and financial investors seeking opportunistic shorter term returns or counter-cyclical value hunting.
Downham says typically financial investors are taking “toehold” investments of 10% to 15% while state owned enterprises are commonly adopting a larger investment strategy.
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 companies, financing remains extremely difficult, which when combined with low equity valuations is creating opportunities for those with cash – and increasingly this is privately held capital,” says Downham.
“For junior miners, vulnerable to unsolicited takeover, some of these investors can provide much-needed capital not available to them on debt and equity markets.”
Downham says advanced juniors are the most likely to consider 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,” he says.
“Early stage juniors are faced with limited options, and we expect to see examples of companies raising capital in increasingly sophisticated ways. As always, the right balance needs to be found between developing a project and maintaining financial flexibility and control.”
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