Private buyers to lead Aussie mining deal wave

With an eye on reducing the number of failed resources deals, Asian buyers are likely to focus on smaller targets which have a greater need for capital.
Asian buyers hope to apply lessons learned from the past
Asian buyers hope to apply lessons learned from the past

The next wave of investment in Australia’s mining sector will be larger and driven by more nimble investors including private equity, according to Adam Goern, director of advisory firm TPA & Co in Hong Kong.

The coming wave is also expected to bring a higher rate of success as buyers apply lessons learned from the past including that they must abide by Australia’s tough industrial relations and environmental rules, and that it can be expensive to build the necessary infrastructure to transport materials from site to ship.

So instead of focusing on mega-deals involving large state-owned enterprises, the bulk of the action will be in the smaller end of the market, with private companies from Asia buying mid-tier Australian targets. These junior miners have a greater need for capital to fund their struggling projects.

“I see an increase in the number of small deals that can be scaled up and become part of the fabric of the existing business relationship,” says Goern at TPA, which is currently advising an early stage private investment vehicle in Hong Kong targeting the Australian resources sector.

Goern’s prediction is already playing out. In December China’s Kingo Energy made a bid for Queensland coal producer Carabella Resources. Last week the private Chinese mining company sweetened its offer and, while the price of A$71 million isn’t much, Kingho is expected to spend up to $900 million to fund Carabella’s various projects.

“The second wave may surprise on the upside because it will contain buyers and sellers with more experience and the deals will focus more on physical rather than purely financial returns,” says Goern.

“When investors in China look for assets abroad they want to mirror return profiles seen at home – rates of return averaging around 11%-13%. But it isn’t easy to find such opportunities outside of China, so I expect the second wave of investment will focus more on securing a source of product.”

Reviewing the field of potential targets, Matthew Moore, senior companies analyst at Moody’s, said there is some stress in the mid-tier mining sector where earnings compression is more evident.

“Smaller companies face greater issues with project execution challenges such as increased project costs, schedule delays and difficulties ramping up existing operations to achieve higher production and recovery rates,” said Moore. “All of this requires them to have an adequate liquidity buffer. If they are liquidity constrained and in the middle of trying to reach first shipment on a project then bringing in an investor is one way of ensuring completion.”

Smaller deals with realistic goals will reduce the number of deals that end in failure. Australia’s M&A landscape is strewn with aborted deals, from Chinalco’s attempt to buy a $19.5 billion stake in Rio Tinto in 2009 to Sichuan Hanlong’s $1.2 billion pitch for Sundance Resources in April last year.

It is estimated that between mid-2008 and mid-2013 as many as 42% of all mining deals by value ended in failure.

Another developing trend in resources investment is the emergence of Asian private equity buyers. Goern says there is a lot of talent within Chinese private equity firms and a broadening acceptance of the role private equity can play. “China’s third plenum in November last year reportedly introduced the idea that private equity will be able to increase their holding in state-owned enterprises to 15%,” says Goern, indicating a growing sophistication among Chinese regulators.

There are already a couple of examples of successful PE investments in Australian mining companies, including Hong Kong-based Sprint Capital’s 25% stake in Stanmore Coal and Noonday Asset Management’s holding in lithium miner Talison (an investment it exited last year when Talison was bought by China’s Chengdu Tianqi).

¬ Haymarket Media Limited. All rights reserved.
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