Private equity tipped to move into mining
Views on risk changing
canada.com.
Drew Hasselback and Lori McLeod, Financial Post
Published: Friday, October 27, 2006
Private-equity investors are expected to make an unprecedented move into the historically volatile Canadian mining business.
Toronto-based Aur Resources Inc., Inmet Mining Corp. and HudBay Minerals Inc., which are churning out hefty cash flows due to record base-metals prices, are being named by analysts as ideal candidates for a private-equity takeover. At least three company executives at other companies have told the Financial Post their firms have been approached in recent months.
"Everybody is talking about this," said the chief executive of another mid-tier Canadian mining company who admits his company has held detailed talks with private-equity investors. "A deal is definitely going to happen."
Private-equity investors, such as pension funds or privately held capital pools, have traditionally shunned the mining business because of the volatility of commodities prices. Copper, nickel and zinc prices fluctuate with supply and demand. In lean years, this would reduce mining companies' ability to generate the stable cash flows private-equity firms desire.
Industry observers say two things have changed investor attitudes during the past two months.
Firstly, base metals prices are now so high that investors could easily forego some of the current market prices and fund their purchases by locking in cash flows at lower price levels.
Secondly, a boom in private equity funds is forcing investors to look beyond the traditional destinations for their capital, such as utilities or commercial real estate investments. Every industry, including the traditionally volatile mining sector, has emerged as a target.
Much of the interest in Canadian miners emanates from private funds in New York. The U.S. private equity business is worth about US$200-billion a year.
The Canadian mining CEO confided that his company was seriously looking at a private equity deal three weeks ago. The investors would have chipped in about $600-million of their own cash equity, then borrowed another $1.5-billion that would be paid back by hedging the future production. "The fund seemed to be looking for a deal in the $2-billion range. That seemed to be the sweet spot for them."
The chatter comes as no surprise to Orest Wowkodaw, mining analyst with Canaccord Adams. He has been predicting a private equity deal in the mining business for at least a month. He said private equity is warming up to the mining industry because current metal prices make cash flows a sure thing.
The names of other Canadian miners are making the rounds, but Mr. Wowkodaw says Aur, Inmet and HudBay are likely targets because of their growing cash positions. By the end of 2008, their net cash positions will be equal to an average 60% of their current share prices.
Current metal prices are so far above their long-term averages that a conservative buyer could easily agree to sell several years' worth of future production at a price that is below the current market, but well above the historical average.
"If one could take away the metal price risk, and effectively control operational and asset development risk, mining companies would effectively become predictable cash flow generators," Mr. Wowkodaw said.
Copper sold for US$3.38 a pound yesterday on the London Metal Exchange. The forward curve for copper forecasts a price of US$3.32 a pound during 2007, just under US$3 a pound for 2008, and US$2.65 a pound in 2009. By contrast, the price of copper averaged US$1 a pound from 1990 to 1995.
A well-run copper miner should be generating a comfortable stream of cash flow even with a copper price selling as low as US$1 a pound. So, locking in future sales at those much higher prices along the forward curve should make it possible for any private equity buyer to generate the cash flow needed to fund a purchase.
Aur is expected to produce between 220 million pounds and 260 million pounds of copper until 2009, when the new projects will boost production to almost 400 million pounds. Inmet is expected to produce about 175 million pounds, with that figure rising to well above 300 million pounds by 2009.
Another chief executive looking for capital to help fund a development project said New York private equity has expressed interest in his company. "The level of mining expertise at the funds in New York is unlike anything I'd ever seen before."
Further, executives say going private is advantageous because management would no longer be bound by the constraints of the Sarbanes-Oxley corporate governance law in the United States.
dhasselback@nationalpost.com |
