Definitely a theme in the news this week: the continued resource dominance of China.
Despite all the concerns the last couple of years about a China slowdown, data emerging for 2016 shows very strong Chinese resource demand. Evidenced by surging copper exports out of Latin America, and rising oil shipments from Russia.
But perhaps the most interesting China item was BHR Partner’s $1.14 billion buy-in to the Tenke copper project in the Democratic Republic of Congo. A move notable for a number of reasons.
Einhorn’s FOF Re-positions Portfolio, Makes New Seed Investment In Year Marked By “Speculative Exuberance”
It has not just been rough year for David Einhorn's own fund. Einhorn's Greenlight Masters fund of hedge funds was down 3% net for the first half of 2020, matching the S&P 500's return for those six months. In his August letter to investors, which was reviewed by ValueWalk, the Greenlight Masters team noted that Read More
First, it’s one of the biggest private equity buys we’ve seen out of China for resources. Yes, there have been some huge mining and energy purchases by Chinese state companies. But this is different — representing private money, sourced dominantly from within China but also with foreign capital in the mix.
Even more important is the location of the deal. With BHR stepping into an African country that’s viewed by many international operators as a challenging place to do business.
It’s almost assured that DR Congo would be outside the comfort zone for more-traditional Western private equity. But BHR seems to have no problems buying in here.
Part of that may be the deal structure. With the fund investing alongside major miner China Molybdenum Co — and reportedly receiving financial guarantees from that company, perhaps softening the risk of losses due to political instability.
Or it may simply be that Chinese investors have a more pragmatic view of the world. Being willing to go where the opportunities are.
And that could make such investors transformative for the global mining industry.
As I’ve discussed in the past, Western mining private equity has been struggling the last few years. With several high-profile funds unable to deploy billions in capital raised from investors.
A big part of that failure comes down to jurisdiction. With many of these funds reportedly considering only acquisitions in “safe” mining countries like Canada, Australia and perhaps Mexico.
That creates a very skewed market. There are only so many good mining projects globally — and even fewer that fall within the borders of the world’s go-to mining nations. And the fact that so many investors are looking at the same spots means bidding is likely to be intense for any possible acquisitions that do come up.
The obvious solution is to step out geographically. But that’s a strategy few private equity groups can pull off, due to strict covenants — official or unofficial — on their political risk profiles.
This week’s news suggests China’s BHR has no such qualms. Potentially signalling a new kind of mining private equity investor emerging — the high-impact buyer, searching for big projects wherever they may fall on Earth.
Recent reports suggest that China’s Power Capital is preparing a $3 billion mining fund — which would be the largest on the planet. And that big cash pool could have the same global scope that BHR is demonstrating.
Chinese buyers are almost certain to be more comfortable with Asian projects. And Africa is definitely on the table. Even jurisdictions like the Stans might get considered, given strong Chinese business connections in many of those countries — places Western private equity would never greenlight.
That’s great news for project developers in spots a little outside of the geographic mainstream. And could be very good for Chinese PE investors — who can benefit from China’s strong political influence in accessing quality projects with little competition.
We’ll see if the Power Capital fund gets done, and if more PE investors start popping up in the Chinese resource space. If so, there could be a major shift coming in the M&A profile of the global mining sector.