M&A set heat up in mining sector as ex-Xstrata boss hunts deals

M&A activity in the mining sector is set to heat up following reports on Thursday that former Xstrata boss Mick Davis is looking to take advantage of cheaper commodity prices to snap up some assets.

According to a report in Wall Street Journal, Mick Davis, who was formerly the chief executive of Xstrata before it was gobbled up by Glencore, has raised $5.6bn for his mining fund, X2 Resources, and plans to start deploying cash in the next few months.

The WSJ cited people familiar with his plans, reporting that X2 has closed itself to new investors after having raised cash from sovereign-wealth funds, pension funds and private-equity firms such as TPG Capital.

That means assets from potential targets like Rio Tinto, BHP Billiton and Anglo American are on X2’s radar. The WSJ report states that Davis has held talks with all three companies. All three however, have declined to comment.

X2 is expected to disclose on Thursday that it has wrapped up fund-raising. The news comes as commodity prices continue to decline across the world, which in turn, has pressured profits at mining companies.

As a result, there’s a greater willingness by mining firms to dispose of assets, particularly those that are no longer part of core operations. For funds like X2, there’s an opportunity to snap up some cheap assets.

According to a person familiar with the terms, X2 reportedly has $4bn in committed capital, which it can immediately deploy for deals. The remaining $1.6 billion in capital is conditional upon certain undisclosed requirements by the firm’s investors.

Activity could heat up later this year, especially if firms such as X2 begin to deploy capital. Atif Latif, director at Guardian Stockbrokers said there’s a big opportunity for M&A activity in the months ahead given the relative underperformance of the mining sector on the back of turmoil in commodity prices together with heavy investment into infrastructure projects that have not yet materialised.

“Short term visibility remains weak but further out we see potential for a rebase of core assets (without a dividend rebase) and cost guidance improvements, which will lead to earnings upgrades, making the current low valuations an compelling opportunity on the long side,” said Latif.