Mining private equity: It’s Davis or bust?

After years of talk, the private equity billions destined for the sector remain mostly on the sidelines (or are seeking greener pastures). The deals that have been pushed through from outsiders (or ex-insiders to be more precise) have been small, highly targeted and often go unnoticed (it’s called private equity for a reason).

All eyes are on Mick Davis and his $5.6 billion X2 fund to open the floodgates (or at least set the ball rolling).  But the ex-Billiton CFO has so far failed to pull the trigger despite the likes of Anglo-American, BHP Billiton and Vale putting assets up for sale.

With X2 Davis, who is a cricket fanatic, appears to be taking a five-day test approach (which often ends without a result), rather than going for a quick Twenty20 win.

Still, the caution seems somewhat uncharacteristic. Davis built Xstrata over less than a decade through a series of billion dollar transactions into a company with 70,000 employees in 20 countries. Xstrata’s market value peaked in 2008 at $85 billion.

But even before then Davis was a formidable dealmaker who with fellow South African Brian Gilbertson created Billiton. Davis left for Xstrata after Billiton was sold to BHP in 2001 (Gilberston moved into emeralds of all things). That whole saga has of course now come full circle.

A report from the Mines and Money meetup in Hong Kong by the usually restrained Australian Financial Review repeats the (of unknown provenance) $60 billion number “earmarked” for resources and salivates over the prospect of a “likely very large” deal from Davis which would be followed by “many more as a base would have been set”.

Great. But the same things were said a year or more ago.

Without Davis to set the pace, the current PE and mining debate seems to pit wishful thinkers against (unhealthy) sceptics with little in between:

[Private equity]  could provide a potential exit for battered Australian mining stocks which have too much debt at a time of falling commodity prices.

“I think you are going to see more mining companies being privatised,” said Jason Chang from EMR Capital.

“I think you are also going to see more money allocated to private equity funds in the mining space.”

But the chief executive of Sirius Resources, Mark Bennett, was sceptical.

“With the exception of someone like Mick Davis I don’t think private equity is a natural fit for the mining sector,” he said.

Mr Bennett said the long-term nature of the mining industry and its exposure to commodity prices meant it was not suited to private equity which usually looked to exit investments in five to seven years.