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Davis to raise funds, invest in resources

Keywords: Tags  Mick David, Xstrata Glencore, Ivan Glasenberg, investment fund, mining assets, acquisitions, Las Bambas, Goldman Sachs International Ferro Metals

LONDON — Former Xstrata Plc chief executive officer Mick Davis has hired Goldman Sachs Group Inc. as part of a plan to raise a major mining fund—potentially worth billions of dollars—and could make a play for the Las Bambas copper project in Peru, AMM sister publication Metal Bulletin understands.

"First up is likely to be Las Bambas, being sold by Glencore as part of the Chinese (authorities’) condition (for approving the merger between Glencore and Xstrata)," an analyst said.

Davis viewed the 400,000 tonne-per-year Las Bambas project, which was due to be commissioned at the end of 2014 after an estimated $5.2 billion investment, as a flagship project for his former company.

"Second choice (could be) International Ferro Metals (Ltd.) for its ferrochrome—that’s where Xstrata started in the ferrochrome business," the analyst added.

"There is so much opportunity coming out of Rio Tinto (Plc), BHP (Billiton) and Anglo (American Plc)—it’s like feeding chum to a school of starving sharks," the analyst said.

"I heard Davis’s team had been offered an initial $200 million, but I suspect their broker will turn this into pledges of $1 billion in fairly short order and this will leverage, with revolving credit and a bond issue, into several billion on the back of a decent asset acquisition," he told Metal Bulletin.

The total fund is likely to be in the region of $3 billion to $5 billion once the structure is in place, the analyst said, but added that he is not sure whether Davis will use a "pure fund structure."

"I’m not sure it is so flexible for managing mining assets," he said.

It has been thought likely since last year that Davis would raise funds to invest in mines and mining projects.

Davis fuelled such speculation when he told Metal Bulletin in an interview earlier this year that there is still great scope for creating value in the resource sector.

"I think there are a number of companies out there that are starved of capital and maybe don’t have sufficient management expertise and experience, that a combination of the right amount of capital, the right amount of management, would help them actually move up the value curve significantly. So I think there are great opportunities there, and I think there’s a space to play," he said shortly before the deal with Glencore was complete.

Davis’s experience and backing could help make him a "true master" in the industry, according to the analyst, with the potential to bring about major performance improvements for mining assets—as he did at Xstrata.

Brian Gilbertson—like Davis, one of the executives instrumental in creating London-based BHP Billiton—set up St. Peter Port, Guernsey-based Pallinghurst Resources Ltd. to invest in natural resources in 2007. It had assets of around $400 million at the end of 2012.

But other analysts have been quiet on the subject so far, as further concrete information on Davis’s plans has yet to emerge.

New York-based Goldman Sachs declined to comment on the reports.

"I know the common speculation—a fund, with Goldman Sachs onboard to help, maybe some Middle Eastern money, but in any case, not publicly listed, to buy mining assets—I don’t have any other insight than these public rumors," another analyst said.

A number of others declined to venture even this far.

"His new company is called X2 Resources, I believe—there must be a clue in that," a third analyst said.

Aside from Las Bambas, there are numerous possibilities for Davis’s as-yet-hypothetical fund, especially as mining companies look to trim their portfolios by divesting non-core assets.

The majors, such as London-based Rio Tinto and Anglo American, are already in the process of selling off certain assets. Indeed, Ivan Glasenberg, now the chief executive officer of Baar, Switzerland-based Glencore Xstrata Plc, has said the company’s greenfield assets will be the first to go.

This means Davis will be presented with a vast array of potential acquisitions.

However, the state of the sector–which has been blighted by falling grades, diminishing returns, declining prices, weak demand and even weaker investor interest–means that such a venture is not without risk, industry observers pointed out.

In his exit interview, Davis highlighted the way in which he had tackled a comparable challenge through the development of Xstrata.

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