The fact that X2, the mining vehicle set up by Sir Mick Davis in 2013, is releasing its financial backers from their commitments says quite a lot about the state of the global mining Industry.
X2 was set up by Sir Mick after he successfully merged —or shall we say sold — the $50 billion mining giant Xstrata to Glencore International in May 2013. His plan was to create a new mining and metals group by acquiring assets that he believed would be sold at knockdown prices as the commodities bust unwound from 2011 onward.
Even though commodity prices plummeted in late 2011, the expected distress sale of mining companies’ assets did not come to be. Somehow, miners found ways to lower costs and reduce debts without massive divestments or fire sales. Over the last three years, X2 has purchased a grand total of zero assets.
Not that he hasn’t tried, according to a FT the purchase of Rio Tinto’s coal assets valued at some $2 billion, fell foul of North American pension investors dismayed at the prospects for carbon based resources.
Why Can’t X2 Make a Deal?
Assets have been sold by mining firms, sure. Sir Mick’s previous partners Glencore International successfully sold various assets and paid pay down debt as a result, but for whatever reason the valuations didn’t attract X2’s interest. Meanwhile, BHP Billiton demerged its aluminum business South 32 but did so via taking the business to market which would then have forced X2 to pay a premium if they wanted to acquire the assets.
X2 didn’t exactly have the $5.6 billion sitting in the bank. Its fund is made up as a number of pledges, six of which were said to be of $500 million each. Noble Group, the commodities trading house, and U.S. private equity firm TPG this summer indicated they will not renew their commitments for next year. This was said to be what prompted Sir Mick’s reassessment of near-term opportunities.
The fund’s other contributors included Abu Dhabi Investment Council, and three Canadian pension funds — PSP Investments, Ontario Teachers’ Pension Plan, and Caisse de Depot et Placement du Quebec —as well as a number of smaller investors, according to the WSJ. One of the problems seems to have been not just a lack of suitable targets, but that investors have the right to veto deals on a case-by-case basis, rather tying X2’s hands.
Sit Down, You’ll Rock the Boat
The lack of fire sale opportunities may also suggest that commodities as a class have not fallen completely out-of-favor. Lenders have remained supportive of the sector and the WSJ says fewer than the expected firms have gone bust as they rode out the downturn by stripping back operations and cutting costs.
Indeed, X2’s decision to release their backers from commitments may mark recognition the commodities market has bottomed. Commodities like Iron ore, coal, gold, nickel and tin have all picked up from recent lows this year, reflected in a 22% rise in the S&P global natural resources index. X2 may have missed the boat, at least for now