[miningmx.com] – WHEN NEWS FILTERED through last year that Mick Davis was planning to establish his own firm, the natural assumption was that he was joining the ranks of other former mining executives in private equity.
Davis’s former banker, for instance, Ian Hannam has established an investment firm of his own aimed at capitalising on opportunities in Zimbabwe. There are a bunch of others.
Then in April, Ivan Glasenberg and Mark Cutifani, the CEO of Anglo American, told Reuters at the FT Commodities conference that private equity and mining was like mixing oil and water.
Private equity gears up assets with steady cash flows which are used to repay interest. Then the asset is sold for a higher value after a six to seven year investment period.
“The problem with the commodities space, if you have a high gearing (debt), is that you are not running Boots pharmaceutical where you have a pretty constant earnings base,” said Glasenberg. “In mining you just don’t know your earning base.” Davis, however, said X2 Resources differs from private equity.
“X2 Resources’ proposition is that of building another diversified mining company. We’re not taking portfolio investments where we’re going to take 15% of that company, have a bit of influence on the board, drive them in terms of a second strategy which drives up their share price.
“When their share price gets up to a certain level, basically trade out of them. That would be a perfectly legitimate and a valid way of running a business, but it’s not what we’re doing.
“What we’re doing is we want to build another mining company because we think that our thesis is a good thesis and we see this as a great opportunity. So all of us, Thras [Moraitis, head of strategy], myself, Trevor [Reid, CFO]and all the rest of the team are quite excited about doing this because this is what we’ve done before.”
Tim Clark, a mining analyst at SBG Securities in Johannesburg takes the view there are specific reasons why the private money has taken a position in X2 Resources. “For Noble, it most likely wants the marketing offtake rights that would help it compete with Glencore,” he said. Goldman Sachs is lining up for the deal flow while TPG may view X2 as it’s ‘risk trade’ since the firm has no track record of mining investment.
Davis said he had been approached by a number of private equity firms. “TPG were just ahead of the game. They took the view that their best way of extracting the value was to invest behind a team which had done it before and with great experience.”
“The people who invested in us, and the people we’re still talking to today, fundamentally agreed with our thesis and they’re prepared to put money down and wait for that to come to fruition. It has become increasingly difficult for many public-market investors, who have short-term performance measures and incentives, to support growth companies” he said.
Said Des Kilalea of RBC Capital Markets: “There are a number of private equity plays in mining out there, but on the face of it you’d probably go for Mick”.
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