Private Equity in the Mining Industry?

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Commodities, Macroeconomics

At the mining market’s earlier peak, private equity funds steered clear, avoiding miners and their high valuations. “Valuations were too high to provide the returns they sought, while booming demand from institutional and individual, or Ëœretail,’ investors for mining shares meant smaller companies could easily obtain capital for their projects through stock sales,” the Wall Street Journal recently reported. But declines have hit the industry hard, halting development of new projects after the credit crunch and drop in metal prices.  Through high interest rates, private equity financing could provide a solution to the troubles facing mining companies and save the companies from debt.

WSJ predicts a “shake-out” for mining stocks in the approaching year, citing hedge-fund groups that “had been providing funding withdraw.” Several private equity firms now plan to spend several hundred million dollars on investments in the mining industry. Sentient Group, Pacific Road Capital Management, Resource Capital Funds, Black River Asset Management LLC and Emerging Capital Partners are some of the investment groups that expect the next seven years to yield returns more than two to five times their investment. Other private equity funds are looking at pre-existing metals and mining operations. “Last year, U.K.-based Klesch & Co. agreed in principle to purchase a 290,000-metric-ton aluminum smelter in the Netherlands from Alcan, now owned by Rio Tinto, and is in talks with European steelmaker Corus to buy its two aluminum smelters in Germany and the Netherlands,” the WSJ reports.

Earlier this summer, Seeking Alpha’s Michael Dawson shared his own insight on the private equity issue, surprised that private equity might consider such a cyclical business. “The day a private equity firm buys a mining company will signify to me that we are in phase two of a bull market in mining stocks,” he wrote. “Phase two is when the institutional money such as private equity starts buying … Once we enter phase two, the computer goes off and I am going fishing.” If this new trend takes hold, it might not be long until that fishing trip takes place.

–Amy Edwards

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