Exclusive: Warburg Pincus
Closes $1bn Mining Fund

Issue 174, December 2016

Private equity group Warburg Pincus has wound-down its $1bn mining fund, two years after it was founded, having failed to land any deals.

The fund was run by Peter Kukielski, the former head of mining at steel group ArcelorMittal, plus several up-and-coming bankers from RBC, including Seil Song, a former mining engineer at Rio Tinto. Kukielski's team were eying three deals, Global Mining Observer reported in November. Warburg Pincus pulled the plug on funding this week.

Kukielski, who ruffled feathers at ArcelorMittal by suggesting it should spin-off its mining division, joined Warburg Pincus at the beginning of 2014. He also sits on the board of Perth-based South32.

One mine his fund was looking at was Rio Tinto's IOC operation in Canada, but complications included a $900m lawsuit hanging over the asset, brought by Inuit groups. Don Lindsay, the head of Vancouver-based Teck, also looked at buying the mine under Rio's former chief executive Sam Walsh.

Several other mining bigwigs, including former Xstrata boss Mick Davis, have launched private equity funds in recent years, hoping to pick-off assets as prices tumbled. Instead, they largely sat on the sidelines as prices rallied throughout 2016.

Critics say that funds launched to capitalise on the downturn were pre-destined to fail: because they were bearish, they were using flat price decks to weigh each deal, so struggled to take a leap of faith when it came to making offers and were repeatedly outbid. Kukielski's team used spot prices plus an IRR target of 15 per cent in weighing each offer it made, which is roughly in line with “what the majors go for”, according to analysts.

One mining success story in the private equity space has been Aaron Regent, the former CEO of Barrick Gold, who launched Magris Resources in 2012. Rather than raise capital upfront, before going after deals, Regent has lined-up funding for acquisitions as they happen, to avoid any pressure to deliver too quickly. Magris paid $500m for a niobium mine in Quebec in 2014, which is quietly raking-in operating margins of 50 per cent.

Melbourne-based mining boss Owen Hegarty has followed a similar model, raising money in tranches for his private vehicle, EMR Capital. Last month, EMR pulled-in $860m from new investors, having already closed deals in potash, copper and gold. Other well known mining bosses are understood to have raised large amounts of capital for private equity ventures in recent months, with plans to unveil them in the weeks ahead.

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