Saturday, 5 October 2013

Private Equity Target Natural Resources ? Denver Gold Show Best Attended in History as Institutions look for value?

A number of PE companies are raising funds with mining targets, 77 funds solely targeting natural resources
according to Preqin, and discussed in the FT following Mick Davies' launch of X2 after his departure from Xstrata post Glencore. Further reporting at Mining . com
Small- and midsized miners, suffering from capital shortfalls as commodity prices fall, need funds. This is an opportunity, but there are risks attached to earlier stage assets.
Philip Heywood, director for transaction services at consultants PwC in Vancouver, says although there hasn't been that many big deals announced, interest in mining from private equity players is strong and picking up."There has always been a niche interest from private equity in mining, but now larger players are entering the market," says Heywood, adding that private equity players are seeing opportunity in the sector now that valuations have come down, sellers expectations are diminished and competition for good assets are much less. 
all want the same thing: Companies that are late stage, low cost, low risk, producing or close to production and with all permitting in place."There aren't too many of these around and everyone wants to do their first deal right and be highly regarded for it. Down the line, once good quality, stable cash producing assets are acquired, private equity investors may look at higher growth, earlier stage companies to diversify their portfolios." 
And according to Jordan Roy-Byrne 
Interestingly, more than a few mining companies told me that at the recent Denver Gold show, one of the most respected and prestigious industry events there were some generalist fund managers. While the gold bug funds lick their wounds and retreat, in come the mainstream and generalist funds to pick up the bargains of a lifetime. 
Having said that, both companies independently commented to me that this year's gold forum was the most well-attended in the history of the conference.  I found this quite surprising, considering that the market sentiment toward gold, silver and the mining stocks is near all-time lows.  XRA specifically said that their one-on-one investor meeting schedule was fully booked this year, vs. last year when it was completely empty.  Both XRA and AAU told me that the majority of the attendees - aside from the usual bankers, analysts and mining stock fund analysts - were "generalist" fund analysts, meaning analysts and portfolio managers who run the large macro-oriented diversified institutional stocks funds.  They said that this cohort of investors was there because they think the mining shares have become too cheap relative to their fundamental value and that these large macro funds are looking at taking their allocation to the sector up significantly.One of the primary components of my investment thesis for this sector has always been that eventually the big institutional investment funds would significantly increase their allocation to the mining shares - as in from almost nil to at least 5%.   

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