TORONTO (miningweekly.com) – The growth in private equity investment within mining and metals has provoked greater debate about its role as a driving force within the sector over the past year. However, private equity is selective about when and where it deploys capital; it cannot be viewed as an industry panacea.
“It’s also fair to say that private equity funds usually approach the sector with a long-term perspective,” Norton Rose Fulbright partner Janet Howard told Mining Weekly Online.
Howard specialises in mergers and acquisitions, corporate and securities law, with emphasis on the mining and natural resources sectors. “Private equity firms view themselves as part of the team directed at problem solving,” she said. “They might say: ‘tell us what you think the potential problems are and we’ll help you fix it’.”
“Their money is sophisticated, deliberate, focused and professional. Often they’ve worked in other sectors during difficult times, so they understand where the risks are and form the necessary solutions,” she added.
But agreements take time to formulate as due diligence conducted by private equity firms is stringent. “It might take a year [to complete an agreement]. The diligence private equity firms do will be more robust than what a law firm might even consider,” Howard said.
“They take their time and get involved in the technical information to understand the potential costs and liquidity risks, something they flag as an important focus. However, they also recognise that mining is inherently risky, with unforeseen events often occurring,” she added.
As part of the diligence, a private equity company will also consider the jurisdiction in question and its perceived political risk. It will note the regional infrastructure, project accessibility and the permitting levels achieved.
There are numerous ways an agreement can be structured, with private equity firms carefully considering overall prospects of return. “Sometimes it can be a joint venture arrangement,” Howard said. “There are lots of different elements, such as convertible preferred shares.”
“Otherwise, it could be debt, where an interest is secured without diluting the underlying shareholder base. Or it could take the form of royalty or a stream,” she added.
The assessed risk will often be central in determining the type of structure an agreement will take. “At the same time, one can only have limited certainty because of issues relating to cost, the accuracy of the modelling involved and whether you’ve factored in all the variables appropriately,” she added.
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