Article from The Australian: EMR Capital’s Hegarty – We’re private equity with a soul

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Australian-7July2018By: Matt Chambers (Resources Reporter | Melbourne | @mattchambers1

Owen Hegarty calls it mining ­private equity with a soul.

After a flurry of deals in the past year buying unloved assets from the majors, the Australian mining luminary, best known for building Oxiana Resources into a $6 billion miner during the China boom, has succeeded where former Xstrata boss Mick Davis couldn’t.

He has turned his Melbourne/Hong Kong private equity vehicle, EMR Capital, into a fund that will operate 10 mining assets in seven countries with a combined asset value of $US6bn ($8bn) once its recent acquisitions of Rio Tinto’s Kestrel coking coal mine in Queensland and BHP’s Cerro Colorado mine in Chile are completed.

The object is not to cut costs.

“We aren’t slash-and-burn-style private equity. We’re not ‘Chainsaw Al’ Dunlap, we are mining private equity with a soul,” Mr Hegarty, who recently turned 70, told The Weekend Australian from his Hong Kong office, after jetting back from London in the wake of closing the latest BHP deal.

“We like to make improvements and get the volume up without slashing and burning, that’s where we see the opportunities, to improve, to ramp up, to ­expand, to get productivity up to make technological change, to make cultural change.”

EMR was established in 2011, with Mr Hegarty as executive chairman and Jason Chang as chief executive. This was three years after Oxiana merged with Zinifex to form what was briefly the $12bn Oz Minerals, before its value was crushed within months by the global financial crisis and most of the assets were sold to China Minmetals in a rescue deal.

EMR launched its first, $US450m fund in 2013 and its second, at $US860m, in 2016, bringing in mainly US investors.

“We’ve sort of burst on to the scene recently in terms of those deals, but we’ve been going at this for a long time,” Mr Hegarty said. “Once we got a bit of momentum and made some investments, we closed fund one, then we opened fund two and closed it to raising fairly quickly.”

Operating mine purchases, bolstered by debt at the asset level, have come quickly since the second fund closed.

EMR bought what is now a 70 per cent stake in the Martabe gold and silver mine in Indonesia (previously owned by Oxiana) as part of a $1bn sale in 2016.

It followed up the next year with acquisitions of 80 per cent of the Lubambe copper mine in Zambia from Vale ($US97m) and the $US210m purchase of all of the Golden Grove base and previous metals mine in Western Australia (also previously owned by Oxiana) from MMG.

In March this year, it struck its biggest deal to date, agreeing to take 52 per cent of Kestrel in a $US2.25bn purchase with Indonesia’s Adaro, followed up by last month’s $US260m Cerro Colorado agreement.

“We’ve got a fairly full dance book,” Mr Hegarty said when asked if there was capacity for more purchases. “Some people would say you are doing too much, too fast, but we test ourselves all the time on this and we said we could do Kestrel and Cerro Colorado at the same time.”

Mr Hegarty and Mr Chang are now both based in Hong Kong while most of the technical, operation and valuation work is done in Melbourne.

In mining, private equity companies have been less prevalent than in other sectors, such as oil and gas, particularly among funds prepared to be operators.

Former Xstrata boss Mr Davis gathered $US5.6bn of commitments in 2013 for his X2 Resources fund but was unable to find an asset at the right price and reportedly closed it last year.

Former WMC boss Hugh Morgan’s Arete Capital, formed in 2015 with a goal of gathering $1bn of investor funds, has now made a start, buying the mothballed Stawell goldmine in Victoria for $US6.25m and investing more as it gets ready to restart it.

“Capital tends to be available only every now and then, so you have to have a bit of good luck and good timing,” Mr Hegarty said.

“One of our core strengths is we’re operational people looking for control-type positions — we want to be in the coach’s box or on the field, as opposed to in the bleachers shouting instructions.”

On Kestrel, the former Rio executive rejects suggestions from some analysts that EMR paid too much. “At big companies, if there is something that is off the scale or somehow outside the strategy, over time it generally doesn’t get the capital, exploration, development, attention, in some cases the people it needs,” Mr Hegarty said.

“Then you can make some improvements, it doesn’t have to be rocket science, you can go in and do the things that maybe haven’t been done for some time because the company knows it’s not going to be there. By simply making the acquisition (of an unloved asset) and giving certainty you’ll get a lift in morale and productivity.”

He said the EMR model was to come in and make significant improvements by increasing production, boosting reserves through drilling, technological improvements and cultural change. “People shouldn’t look at it (Kestrel) like it’s just going to stay as is and go an at five million tonnes (per year) forever,” Mr ­Hegarty said. “The same thing with Cerro Colorado.”

One difference between EMR and a listed mining company is that there is an exit plan for all of the assets that have been acquired.

“We’re a mining fund, we ultimately have to go, you’re not trying to grow Rio, or BHP, or the Ox,” Mr Hegarty said. “We look very closely at where and when the exits will be when we go in and we do our due diligence on who is going to be the next owner.”

While Kestrel, Cerro Colorado and Lubambe have years of work ahead of them to realise value, some assets, like Martabe, are “spinning like a top”, with interest being fielded from potential buyers. During the GFC, Oz’s value plunged after banks refused to rollover Oxiana’s $1bn debt and it was forced to cut a rescue deal with Minmetals. Shareholder class actions resulted, which Oz settled. Mr Hegarty said the company did not have a lot of debt compared to its equity, but the banks stopped talking.

“It was bad luck, bad timing,” he said, adding there was not much that he’d do differently.”

Mr Hegarty has no near term intention of slowing down.

“I’ve made the commitment to investors to work with them and the EMR team and we have so much to get on with, I’m happy to keep beating it out,” he said.

And he has not stepped back from the “stronger for longer” mantra that he promoted Oxiana with. “I think we are still on the way up in the longer-term super cycle,” Mr Hegarty said, adding the GFC and the post 2011 price slump were bumps along the way.