PE firms dig the mining sector

In January, London-headquartered Appian Capital Advisory held a $375 million final close on its debut fund, which will target investment in the mining and metals sector. The Appian Natural Resources Fund, which came to market in January 2013, will invest in metals and mining companies or projects in selected regions in Latin America, North America, Africa and Europe.

Appian’s maiden fund attracted seven investors from Europe, North America and Latin America. “Investors are looking for different ways [to play] the commodity space. Private equity makes sense because you are matching long-term capital to a very long-term industry,” Appian’s founder and general partner Michael Scherb told PEI at the time.

Investing in mining is a strategy that’s becoming more popular in the current environment, according to Enrique Cuan, managing partner at Mercury Capital Advisors, which helped Appian to raise the fund. “Interest in mining has recently increased. Given the sharp declines over the last year investors are starting to see deep value in the sector. For many it’s an attractive entry point.”

Institutional investors only have a few ways to gain exposure to mining, he argues. “You could buy a position in a public stock, but that’s a diluted way to participate, because a public company can own a lot of different non-core assets and the performance of that stock is not always correlated to a specific underlying mine. You could also buy metals directly but that type of investing carries a risk profile that may not be appropriate for everyone. The advantage of investing through private equity is that it gives you direct ownership and more control over specific mining assets.”

Appian, which will look at deals between $10 million and $100 million with average ticket sizes ranging between $30 million and $50 million, has already made one investment, backing Colombia-based Red Eagle Mining early last year. For this transaction, it co-invested alongside Liberty Mutual, a US-based life insurance company, and used seed capital from the partners involved plus some other seed investors.

And it’s not just Appian that sees opportunities in the mining space. In January, Warburg Pincus hired Peter Kukielski, former chief executive of ArcelorMittal Mining, as an executive-in-residence to explore investment opportunities in the mining industry.

“The reduction in capital available to the mining sector and greater uncertainty in the commodities environment create a compelling investment environment for experienced operators with available capital and a long-term, patient view,” Kukielski said in the accompanying statement.

What’s more, the recent steady improvement in market conditions should see a gradual return to deal-making in the mining and metals sector in 2014, after it recorded a seven-year low in global M&A volume in 2013, according to a recent study from EY. The consultancy estimated that there’s more than $10 billion in deal capacity across all the private capital funds looking at the sector, and said that it expected to see some big deals being done over the next year.

But while mining is clearly becoming more popular, for most investors it remains too complicated and too reliant on volatile commodity prices.

“Investors feel it is simply too niche and the risks are very high”, one source tells PEI.

“It’s a commodity play, rather than a private equity play,” another source adds.

There may be one area where the risk/reward does make sense, however, the second source adds: investing in companies that service the mining space. As he put it: “Supplying the equipment is another matter.”