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 Overall deal volume in mining and metals last year sank to its
lowest level globally since 2003, according to Thomson Reuters data,
as the industry's sellers, crippled by more than $1 trillion in
debt, crowded a market with very few buyers.
Bankers, funds and investors, however, say that could change in
2016, as specialist buyers rethink a market where prices are
languishing, mines are losing money and the traditional competition
is weak.
Funds sidelined and waiting for the right deals could amount to as
much as $3 billion, according to a ballpark figure from corporate
finance and restructuring firm FTI Consulting.
"The longer this commodity rout continues, the greater number of
restructures," David McCarthy, national leader for restructuring at
Deloitte in Sydney, told Reuters.
"Some of those will be by existing financiers and existing equity
holders. For others, the risk will be too great - and that's where
distressed opportunities will (be)."
Oaktree Capital, the world's largest investor in distressed debt,
opened an office in Sydney this month, in part at least because of
the strain in mining, it said, particularly iron ore, where it sees
potential for deals.
Others are targeting existing mines where the geology has already
been proven - and not development projects - for gold, copper, zinc
and rare minerals, all exposed to the later stages of the economic
cycle and renewable energy.
"I think it will be a busy year for everyone in the industry," said
Michael Ryan, a senior managing director of FTI Consulting in Perth.
"I expect to see a lot of restructuring and cost cutting work, debt
for equity transactions, restructuring balance sheet type
transactions, sales of assets, divestiture of non-key assets to
further shore up (distressed miners') balance sheets."
In Australia's struggling iron ore sector for example, existing
lenders to Atlas Iron <AGO.AX> agreed to take a haircut on
repayments in return for a larger equity stake.
But steel and iron ore group Arrium , with nearly $2 billion of
debt, had to look outside for help, turning to GSO Capital Partners,
the global credit and alternative investment arm of PE behemoth
Blackstone Group.
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Earlier this month, it secured $927 million in funding to help
Arrium retire debt and overhaul its business.
Media reports have said Cerberus Capital Management, another major
U.S. investor in distressed assets, also considered a move on Arrium
and remains on the sidelines. Cerberus did not respond to an emailed
request for comment.
In November, global PE group Denham Capital backed Perth-based
Auctus Minerals and its management team of mining restructure
specialists with $130 million, as it bought battered Atherton
Resources, which holds zinc and gold-copper resources in Queensland.
"If you invest equity into what makes money at current price levels,
you also have the unlimited upside if, during the holding period,
the market recovers," Denham Capital Managing Director Bert Koth
told Reuters.
But the key question is how long these new financial investors can
hold on to mining assets, given futures prices that suggest metals
prices could languish for as long as another decade - the very
cycles that have long kept private equity out of mining.
"People are saying we're probably at the bottom but what they don't
know is how long we're going to stay at the bottom," FTI's Ryan
said.
(Reporting by Melanie Burton in MELBOURNE and Swati Pandey in
SYDNEY; Editing by Richard Pullin)
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