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Private-Equity Investors Sleepy On Mining Assets

A sure cure for sleeplessness over the past three years has been waiting for Mick Davis' X2 Resources Ltd. Partners LP Inc. to buy something with its US$5.6 billion war chest. Scarcely any less soporific has been the M&A efforts of Lloyd Pengilly's QKR Corp. Ltd. and Aaron Regent's Magris Resources Inc.

Eating lettuce is also soporific, or so we are told by Beatrix Potter in The Tale of the Flopsy Bunnies. Today, July 28, is the 150th anniversary of the birth of the revered children's author and illustrator. Born in 1866, Potter is celebrated worldwide for such beloved literary characters as Peter Rabbit and Jemima Puddle-duck.

Potter was a remarkable lady. She was a keen natural scientist, with a particular interest in archaeology, entomology and mycology, producing accurate watercolor drawings of archaeological artifacts, unusual fossils and fungi.

In 1901, after being rejected by publishers, she privately produced 250 copies of a picture letter she had written to a child. Chastened by the booklet's popularity, Frederick Warne & Co. republished The Tale of Peter Rabbit the next year, followed in 1903 by The Tale of Squirrel Nutkin. The rest of her legendary tales followed, and more than two million Beatrix Potter books are still sold around the world every year.

Potter designed the first Peter Rabbit doll herself in 1903, and registered it immediately at the patent office. This made Peter Rabbit the world's first licensed literary character. Potter went on to explore other merchandise options, including tea sets and bedroom slippers, and also invented a Peter Rabbit board game. Potter died in 1943, leaving 15 farms and over 4,000 acres of land in the U.K. to the National Trust.

Of a rather different hue, Davis, the former head of Xstrata Plc, established X2 Resources in 2013 as a private equity-style fund to pick up bargains in the mining bear market. He secured commitments of US$500 million from each of six key sponsors, plus numerous other investors.

Partly because the sponsors had veto rights on acquisitions, X2 has failed to secure a single significant deal. Earlier this month, the company announced that Noble Group has withdrawn its US$500 million commitment, and U.S. private equity firm TPG will not renew its own commitment when it expires in the first quarter of next year. Understandably, X2 is now being restructured.

Davis is not alone in his predicament. At the end of 2012, the former J.P. Morgan resources banker Lloyd Pengilly started a venture called QKR, backed by the Qatar Investment Authority and Polish billionaire Jan Kulczyk. However, QKR's spending has been restricted to the US$110 million spent in 2014 for the Navachab gold mine in Namibia. Aaron Regent, the former chief executive of Barrick Gold Corp., formed Magris Resources in 2013. Its main acquisition has been the Niobec niobium mine in Canada, purchased from IAMGOLD Corp. for US$500 million in January 2015.

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Neither QKR nor Magris has been conspicuously active in the mining sector, and nor have the giant private equity firms, such as Blackstone Group and Apollo Global Management. Analysts attribute the dearth of deals to fewer mining companies than expected having gone out of business, and high asset valuations despite the falling metals prices.

Not that M&A has stopped completely. In its imminent State of the Market report, SNL Metals & Mining notes that both the number and value of deals increased in the three months to end-June. SOTM documents 50 deals in the June quarter valued at a total of just over US$8 billion, compared with only 25 deals valued at US$3.5 billion in the March quarter. Unusually, deals for copper dominated during the most recent quarter, with the 13 acquisitions accounting for 70% of the total value.

Taking a longer-term perspective, it is gold that has dominated the mining industry's M&A effort, and last year was a bumper one for transactions in the precious metals sector. In a recently published report on gold M&A activity since 2006, SNL Metals & Mining reports that the total spent on the acquisition of gold reserves in 2015 was the third-highest in the 10-year period.

Gold M&A Activity 2006-15 also reports that gold acquired in company deals was almost twice as expensive as gold in project-specific deals, and that Latin America was the most expensive region in terms of ounces acquired.

The report notes that the price paid for gold in all resource-focused deals last year was down by over two-thirds since 2011. This reflects, of course, the falling gold price over that period. Gold prices are now rising, and Davis, Pengilly and Regent will be kicking themselves — if their investors haven't beaten them to it.

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Sep 02, 2016