Private equity firms are increasingly pursuing assets in the mining sector, as higher costs and industry volatility have made assets available at cheaper prices. In some cases, these private equity firms are edging out major mining groups in their acquisitions.
Waterton Global Resource Management Inc.'s purchase of Nevada's Hollister gold mine and Esmeralda Mill announced Tuesday offers access to a high-grade mine being sold in bankruptcy restructuring. Waterton beat out several traditional mining companies, including runner-up Hecla Mining Co., the largest primary silver producer in the United States.
But the deal comes at a time when gold prices are particularly volatile, dropping to the lowest level in two years just a couple of weeks ago, and up just 7 per cent from that dip.
Still, the instances of private equity financing in mining have been steadily rising, both within and beyond the realm of precious metals. In 2012 there was $743-million worth of financing in the sector, an increase of $54-million from a year earlier. The increase is even more dramatic looking back to 2009, when the recession battered resource and share prices and investment interest was low.
It's easy to see the appeal of an outside party to smaller miners and developers, which need funding but are up against hesitant debt and equity financing markets. No resource IPOs were priced in Canada as of April 22, for example, and it has been a decade since we've seen a situation like that.
Toronto-based Waterton is purchasing the Hollister property and assets from a subsidiary of Great Basin Gold Ltd., which filed for Chapter 11 bankruptcy restructuring this year.
Great Basin said in a release that its auction of the Hollister assets amounted to $15-million up front with other payments of up to $90-million in the next nine years, but the final price has not been announced.
One of the criticisms against private equity's participation in the mining space is the lack of technical knowledge and expertise needed to improve operations at these troubled sites. That's a non-issue for Waterton, which is focused on resources, particularly in precious metals.
Waterton avoids pitfalls such as scale, timelines and political risk by investing in producing and late-stage development assets in politically stable geographies, usually through joint ventures and partnerships, but in this case, through acquisition.
But there may be more competition for Waterton soon. Even firms with less experience in mining and resources have been considering dipping their toes in the market. U.S.-based private equity group KKR & Co. made news this week after the Wall Street Journal reported it was interested in purchasing Rio Tinto Group's majority stake in an Australian copper and gold mine.