$8bn mining private equity needs to be spent. And soon
Countercyclical investors sitting on $8 billion unspent funds have been waiting for clear signs of a market bottom. The wait may well be over.
The mining M&A market is not exactly in robust health at the moment.
Mining and metals deal values during the first half of this year tanked 69% to $16.7 billion, deal volumes are down 34% and nearly 9 out of every ten agreements were were valued at less than $50m according to the latest Ernst & Young market barometer.
One reason for the slackness, the consulting firm notes, is that "the much anticipated influx of substantial capital from new mining-focused private funds is taking longer than expected to hit the market."
Back in February Michael Rawlinson, co-head of mining and metals investment banking at Barclays the Indaba conference in Cape Town put it this way:
"They’ve all set up, no one’s done anything. The sand is going through the hourglass and the money is going to get taken away if they don’t start spending."
Ernst & Young said much the same in its report – "contributors to these funds are unlikely to wait much longer to see their investments put to use":
There should be a flurry of activity within the next 6-12 months, as these countercyclical investors who have been waiting for clear signs that we are at the bottom of the market begin to make their move when assets prices are at their lowest.
Fast forward eight months and the flurry of activity is yet to emerge.
The $3.8 billion war chest built up by former Xstrata chief executive Mick Davis' new venture X2 Resources has yet to be put to use (although X2 may be close to announcing: as CFO of Billiton at the time of the merger, Big Mick, may be severely tempted to pick up assets in the split).
Private equity firms like Apollo Global Management which raised $1.3 billion for resource assets last year has not announced any major deals, while other funds active in the mining and metals industry including Brookfield Capital Partners ($1 billion), Resource Capital Funds ($2 billion) and Warburg Pincus ($11 billion across sectors) appear to be on the sidelines.
Bloomberg estimates funds raised $1.1 billion for investments in mining and metals this year, compared to about $8.8 billion in 2013. Others put the figure as high as $15 billion.
However, according to data compiled by Bloomberg Intelligence less than $2 billion has been spent by PE investors on mining assets in the past two years.
Those who've been waiting for the mining and metals market to bottom may finally be spurred into action.
Bloomberg's broad commodity index last week sunk to a five-year low as gold continues to slump, silver retreats to near multi-year lows, and even previously high-flying metals including palladium, down 6.8% for the week, and nickel (–5.7%) are marked down sharply.