One of the most aggressive deal makers in the mining industry has tapped the private equity markets to bankroll the launch of a new company in a bet that the resources industry is set to be revived.
Mick Davis, the former chief executive officer of Xstrata, and his team of Xstrata refugees on Monday announced that they had raised $2.5-billion (U.S.) for X2 Resources from five investors, each of which has contributed $500-million. The same five have have agreed to contribute another $1.25-billion in conditional equity funding, raising the potential total to $3.75-billion.
The identities of only two of the five investors, Noble Group and TPG Capital, have been disclosed. Noble Group, based in Hong Kong and listed on the Singapore exchange, is one of the world's largest commodities trading and infrastructure companies. It competes with Switzerland's Glencore, the new owner of Xstrata. Mr. Davis was CEO of Xstrata until early last year.
TPG is a private American investment firm, with more than $55-billion in assets under management in a broad range of businesses, from energy to biotechnology.
The other three investors include sovereign wealth funds and pension funds. In an interview in London last fall, Mr. Davis said Canadian pension funds were potential investors in X2. The company would not confirm or deny that Canadian money was part of the $2.5-billion raised so far.
In a statement, Mr. Davis said: "We believe the timing of this venture remains very opportune and we will now focus increased attention on starting the investment process."
The launch of X2 comes as private equity takes an interest in mining assets that they believe are undervalued as the big mining companies clean house and focus on high-return projects that can win back the affections of investors.
Apollo Global Management recently raised $1.3-billion and Resource Capital Funds has $2-billion on tap for mining investments. But almost no privately funded mining deals have been done. That could change in the next few months as the funds' investors look for some action.
X2's goal is to create a mid-tier mining and metals group. The company consists of a small office in central London and five executive partners, all of whom worked with Mr. Davis at Xstrata. They include Trevor Reid, who was Xstrata's finance director, Thras Moraitis, Andrew Latham and Ian Pearce. Mr. Pearce, of Toronto, was the CEO of Xstrata Nickel, formerly Falconbridge Ltd., the Canadian nickel miner bought by Xstrata in 2006 for about $22-billion (Canadian).
With ample funding in place, X2 is expected to move quickly on the acquisitions front. The company won't say where it is looking, though the team has intimate knowledge of the mining scene in Australia, Canada and South Africa. Mr. Davis is a South African and was the chief financial officer of Australia's Billiton before its merger with BHP in 2001.
X2 will consider buying operating companies or assets that are being discarded by the big players such as BHP, Rio Tinto and Anglo American, which overpaid for assets before the 2008 collapse in the belief that the upward commodities cycle was unstoppable. They have taken billions of dollars of writedowns in the past couple of years.
"We had all ended up chasing growth bubbles, some were real, some were imaginary," Sam Walsh, the recently installed CEO of Rio Tinto, owner of Montreal's Alcan, said in an interview in December.
Australia looks particularly promising, with various nickel and aluminum assets on the auction block.
Although the private investors believe the worst of the commodities slump is over, risks remain. Commodity prices have recovered somewhat since the 2008 financial collapse, but some are still well below their peak and remain volatile. Copper prices have fallen substantially in recent months.
Mrs. Davis was a proponent of the "stronger-for-longer" theory, a long-term bullish view on commodities based on urbanization in China, India and some parts of sub-Saharan Africa, home to eight of the 10 fastest-growing economies in the world. That vision was rudely interrupted by the 2008 commodities bust.
Mr. Davis thinks the commodities selloff has been overdone, although he does not see a return to the "explosive" demand that turned Xstrata and mining companies into some of the biggest wealth generators on the stock market in the pre-2008 era. "We still have a lot of conviction about the resources industry," he said in the autumn. "We're seeing ongoing demand in the developing world and he rise of consumer markets there."