A small flurry of private equity (PE) investments in the resources space may be suggesting the time is right to take advantage of some turnaround in the sector.
Most recently, this activity included global PE firm KKR & Co (NYSE:KKR) and its affiliate Thorpe Holdings buying a combined A$1.5 million worth of OZ Minerals (ASX:OZL) shares last week at $3.577 per share, which represented an 8.1% premium to OZ’s closing price the prior day.
This move preceded a recent announcement by OZ that it had defined the high-grade core of its Carrapateena project in South Australia as holding 61 million tonnes at 2.4% copper and precipitated a further investment of $53.1 million by Thorpe and KKR.
Thorpe entered into a cash-settled equity swap with Deutsche Bank which related to a notional 15.1 million OZ shares, equivalent to about 5% of OZ shares.
This vote of confidence in Carrapateena’s multi-generational potential as well as recent scoping-level development optimisations at the site are expected to streamline the project’s realisation with a more consolidated ownership structure.
Other PE activity in this domain of late has included Denham Capital-backed Auctus Chillagoe Holdings’ takeover offer for Atherton Resources (ASX:ATE), previously known as Mungana Goldmines.
The $0.20-per-share offer on September 18 sent Atherton shares flying 64%to a high of $0.205 the following week.
Auctus’ offer followed immediately on exploration hits at Atherton’s King Vol project in Queensland which recorded zinc grades up to 50.3% across a 1.65-metre intercept.
Atherton is developing base metal and copper-gold properties in the northern part of the state, where King Vol holds 3 million tonnes at 11.9% zinc, 0.8% copper, 0.6% lead, and 29.9 grams per tonne silver. The project area’s nearby Red Cap resource totals 3.8 million tonnes at 4.8% zinc, 0.7% copper, 0.2% lead, 0.1g/t gold and 19g/t silver.
Meanwhile, Owen Hegarty's EMR Capital has indicated more PE faith in the imminent return of base metal markets by purchasing Aditya Birla Minerals’ (ASX:ABY) Mt Gorgon copper operation in Queensland via a deal with EMR affiliate Lighthouse Minerals.
The transaction included a cash payment of $5 million plus a further $10 million payment contingent on medium-term copper pricing.
On completion of the transaction, about $41.7 million of encumbered cash balance of Aditya will become unencumbered. Together with the cash proceeds from the sale, this increase in the Aditya’s unencumbered cash balance will provide the copper producer with considerable flexibility while it assesses options in relation to capital management and an ongoing strategic review.
Notably, EMR was also an early investor in Highfield Resources (ASX:HFR) and now owns 33.5% of the Spanish pre-production multi-project potash company.
Highfield’s Muga, Vipasca, Izaga, Pintanos and Sierra del Perdon projects in a potash producing potash basin in northern Spain cover a project area of more than 550 square kilometres and are suitable for conventional underground mining.
The company recently defined an exploration target at Pintanos of 1.04 billion tonnes at 11.5% potassium oxide. Pintanos is potentially twice the size of Muga, which currently supports a 24-year mine plan at 1.1 million tonnes of potash per annum.
These recent developments in resource investments by PE firms not only suggest that several sectors in industrial-use raw materials may have reached their respective market bottoms, it also suggests a fundamental evolution in mining investment patterns.
Unlike other venture capital plays, PE usually aims to take asset control in deals, targeting cash-generative businesses with light capex requirements. As such, recent PE interest in speculative exploration plays and yet-to-be-developed mines indicates juniors in this sector are making progress in getting the attention of a more diverse range of financiers.
Sometimes this trend suggests PE firms are following a control-and-command strategy to steer promising but unsuccessfully developed assets to their deserved economic fruition. Most of the time, however, these investments represent a more traditional vote of confidence, taking strong minority interests in the choice cuts of undervalued sectors.
This may be particularly encouraging for copper players as much of the latest PE action seems to indicate the red metal has already seen its worst days. Copper was last trading aroundUS$5190 a tonne, representing a more than 40% slide off the peaks of 2011.
But as difficult commodity pricing has necessitated an all-of-the-above approach to mineral project financing, industry ploys to attract PE are starting to pay off – and signalling solid prospects for a number of cyclic turnarounds.
Bank turns bullish on big miners
Morgan Stanley has upgraded their view on Australia's big two miners BHP Billiton (ASX:BHP) and Rio Tinto (ASX:RIO) to overweight from equal weight.
The bank views a re-rating of the resources sector with a future uplift in commodity prices as a primary reasons as well as cyclical demand and historically attractive valuations.
With the miners' share prices falling 13% and 9% respectively this year, it is a big call. Although is it such a big call?
Even dead cats bounce and with both BHP and Rio sitting at or near 5 year lows downside might be limited if China can limp along at current GDP levels.
In addition, big miners have used the downturn in the resources sector to their advantage, selling non core assets as well a taking advantage of lower prices of everything from shovels to automated miners to take costs out of the system to become ruthlessly efficient low cost producers.
The other factor at play not mentioned is that at current prices the big miners are attractive dividend yield plays in their own right. BHP with a dividend yield of 6.7% and Rio at 5.3%, sweetens any downside pricing risk considerably.
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