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Private equity threat for miners recedes
Allan Seccombe
Posted: Tue, 17 Jun 2008
[miningmx.com] -- THE threat of private equity firms raiding major mining companies has receded in the current economic climate in which costs eroded profit margins for the top 40 resource firms for the first time in at least five years, PriceWaterhouseCoopers (PWC) said.
A year ago, PWC suggested the low gearing levels of the top 40 companies by market capitalisation could spark the interest of private equity firms that could come in to realise the value of components of companies that are higher than the market capitalisation.
The picture has altered somewhat over the past year, with gearing rising to 24.7% in 2007 from 19.2% a year earlier. The level of net debt has nearly doubled to $107bn in that period. Cash holdings have grown to $44bn from $39bn.
The top 40 companies have been pouring money into investments, outpacing net operating cash flows for the first time in
the study’s history, said Huge Cameron, African Mining Leader at PWC at the release of the 2008 review of global trends in the mining industry.
Net investment cash flows totalled $126bn in 2007 – an 88% increase from the previous year -- against net operating cash flows of $95bn.
The sub-prime issue has dried up a source of funding for private equity deals. Another factor is the shortage of
skills and highly experienced people needed to replace management and restructure a company to affect a quick and profitable exit, Cameron said.
There was talk a year ago that private equity groups could be looking to take out BHP Billiton or Anglo American, selling off various divisions. That appears to have vanished, particularly now that large banks have multi-billion dollar exposures to mortgages lent to individuals with no or poor credit histories.
“They are ruled out for a while because of the situation we’re in. The gearing of 24.7% is not high… there’s room there but the money is not available at the moment. The credit contagion has closed down anything we might have seen in that area in the short term,” Cameron said.
If costs aren’t closely monitored and controlled companies could see their profit margins come down further, he said. For the first time since 2002, the net profit margin has slipped, albeit by a small amount.
In 2007, the
margin was 26% for the 40 largest companies, down from 27% the year before. In 2002, the margin was just four percent.
“We think there is going to be a bit of a tapering off and certain of the companies are going to be under a bit of pressure,” Cameron said.
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