By Anjuli Davies and Clara Ferreira-Marques
LONDON, April 29 (Reuters) - With the world's largest minersflocking to sell assets, cost cuts across the industry and avirtual drought in buyers, private equity funds may finally betempted into a sector long seen as potentially lucrative butrisky.
Industry veterans say the coming months will be a test ofwhether private equity funds can turn intentions intoinvestments and become more than niche players in an industrythat has traditionally relied on public markets for cash.
"Interest from private equity in the sector is the highest Ihave ever seen," one veteran industry banker said.
Another senior industry adviser described a "now or never"moment despite volatility in commodity prices, citing what couldbe a drawn out period of low valuations in which traditionalbuyers - largely, other miners - are kept out by demands theyrefocus and cut back rather than grow.
Volumes certainly point to increased interest.
According to research and data group Preqin which studiesprivate equity, eight natural resources funds focused solely onmining raised an aggregate $8.5 billion in 2012, more than theyears 2006-2010 combined, though data did not show how much wasspent on acquisitions.
Analysis by consultancy Ernst & Young suggests that privatecapital investors accounted for 21 per cent of mining dealactivity globally in the nine months to September 30 last year,against just 12 per cent for the same period in 2011.
Smaller miners and developers are also eager to tapalternative sources for funding. In a sign of how tough themarkets now are, the Toronto stock exchange - the primedestination for emerging producers - has not had one mining IPOin the first quarter, for the first time in a decade.
"There are a lot of buying opportunities, and for those whohave the funds, you might find there is less competition, andthat is what private equity looks for - a good deal," said JasonBurkitt, UK Mining Leader at PricewaterhouseCoopers.
GOLD RUSH?
Private equity firms have so far steered clear of miningbecause of the scale and political risk involved in manyoperations. Volatile commodity prices and long time horizons arealso off-putting, not to mention that the investment firms oftenlack the manpower or expertise to cover global projects.
Typically, funds have stuck to niche assets, like high-endaluminium products for the aerospace and auto industry, in thecase of Alcan Engineered Products, later Constellium, boughtfrom Rio Tinto by funds led by Apollo in 2011.
Now, however, heavyweights like Apollo but also KKR andCarlyle are joining specialised energy-focused First Reserve,Denham Capital and Resource Capital in betting more heavily onthe sector, drawn in by the prospect of an extended period ofcheap prices and an unprecedented funding drought.
Apollo, which aims to invest $100 million to $500 millionper transaction, closed a $1.3 billion natural resources fund in2012 which will invest in areas including oil, gas and mining.
The fund was one of several to look at BHP Billiton'smajority stake in Canadian diamond mine EKATI, which alsoelicited interest from rival KKR before being sold to minerDominion Diamond Corp.
KKR has also been named as a potential suitor for Rio'smajority stake in the Northparkes copper-gold mine.
SMALLER FIRMS IN POLE POSITION
However industry bankers and specialist funds bothquestioned whether big name private equity firms would be ableto successfully compete in the mining sector.
"Size sometimes can be a disadvantage in our environment.You need to make decisions quickly - you need to have the coalface not too far removed from decision making process, so youcan react quickly," Sierra Rutile's chief executive,John Sisay, said. The Sierra Leone-focused mineral sandsproducer's largest shareholder is specialist fund Pala.
"Smaller firms are able to do that better."
Traditional funds may also lack the extensive specialistteams needed to evaluate projects across commodities and acrossthe world, and may be unable to invest for the longer term.
One of the top shareholders in EMED Mining, aLondon-listed company redeveloping the former Rio Tinto coppermine near Seville, is specialist Resource Capital.
"If you are playing the development game you are playing thedevelopment timeline," EMED's chief executive, HarryAnagnostaras-Adams, said.
Bert Koth, a Perth, Australia-based director at DenhamCapital, also questioned the idea that traditional firms wouldstep in. Although mining firms are shedding assets at a pace notseen for decades, many are doing so at auctions which can driveup prices - something private equity is likely to want to avoid.
"Generalist PE firms have a pretty poor track record as theydon't fully understand the risks involved. I query whether theyreally appreciate what they are getting into," Koth said.
