In market conditions where mining M&A has stalled, some miners are looking to execute M&A deals with private equity investors. This is contrasted with the more traditional off-takers seeking a minority non-operator stake and off-take.

As costs pressures and falling commodity prices adversely impact the M&A appetite of off-takers, private equity players may take advantage of competitively priced mining assets.

What does private equity bring to the table?

Private equity brings significant financial ingenuity to structuring equity and debt investments. This flexibility may be attractive to miners since private equity may be interested in taking a large stake in a project but will not typically be interested in an operator role.

Private equity investors also have significant expertise on the cost management side (which may assist miners in the currently challenging cost environment).

Junior miners and private equity

Junior miners may be more able to access private equity through the use of convertible debt as opposed to equity. This is because private equity investors may be reluctant to invest pure equity in an early stage mining project. 

If a miner is accessing funds from private equity using convertible debt, a couple of key issues to consider include:

  • accurately calculating the true cost of the funding (both from a debt service and equity conversion perspective), and
  • what restrictions are placed on the use of the funds and the longstop date to debt repayment (taking into account the likely availability of a refinancing).

What tempts private equity?

The possible attraction of mining projects to private equity is low-cost entry in a low interest environment with an upside in commodity prices as demand improves. 

Upon making an investment, a private equity player will usually seek an exit within 3-7 years to align with investment fund time horizons (or a lesser period if market conditions are favourable).

An established mining project with high fixed costs and the need for significant injections of capital is unlikely to attract private equity when compared with a successfully operating project that does not need major capital investment in the short to medium term.

At the junior end of town, a miner is more likely to be successful in attracting private equity investment where there is some comfort around the nature and quality of the resources in the ground as well the prospect of viable infrastructure.

Front of mind issues for miners 

When considering partnering with private equity, we recommend the following issues should be taken into account:

  • near term and medium term funding needs and what alternative forms of funding are or may be available (noting the repayment time horizon for the convertible debt)
  • mining project status and key decisions (e.g. annual budget, removal of operator and exit provisions) which may be controlled by veto rights granted to investors, and
  • impact of dilution of equity interests in a mining project through convertible note conversion.

Should miners embrace private equity?

In a challenging market, miners should be open to considering all forms of investment in order to move mining projects forward. The key is to ensure that there is a clear discussion with any prospective investor to address all critical issues upfront (such as exit time horizons and capital commitments pre-exit) so as to avoid nasty surprises mid-investment.