Johannesburg — THE prospect of growing riches in the mining sector was set to lure private equity predators, a PricewaterhouseCoopers (PwC) report said yesterday, and companies such as SA's largest JSE-listed company, Anglo American, are right in the firing line.

Although Anglo American chairman Mark Moody-Stuart said in recent days that, "I see us as an acquirer" rather than a target, an influx of private equity money into the mining sector could alter this view.

Until now, private equity firms such as Blackstone, Bain Capital and Kohlberg Kravis Roberts have shied away from the mining sector, where profit margins and asset values are subject to volatility due to swings in commodity prices.

But, according to PwC's annual review of the mining sector, this is about to change -- due partly to the outstanding profits made by miners in the past four years.

The annual survey shows that since 2002, the combined profits of the 40 largest mining companies climbed fifteenfold from $4,4bn to $67bn last year.

PwC director of mining Hein Boegman said profits could still grow as "we don't believe that 2006 was as good as it will get for the industry", especially as demand for commodities was set to grow. Boegman said debt levels of mining groups was low, which would make them obvious targets for private equity buyers.

Gearing -- which is the level of net debt expressed as a percentage of a company's equity -- averaged 15% for mining companies, which is considerably lower than many other sectors.

"The low debt levels, in particular, will be of interest to private equity (although) the volatility of commodity prices reduces the proportion of debt that can be raised, " the report said.

Private equity companies typically look for low levels of existing debt and strong cash flows in their target ed companies. They then take out loans to buy their targets, and load this debt onto the balance sheets of the companies they buy.

Last year, the top 40 mining companies saw a 40% jump in their operating cash flows to $76bn.

Despite Anglo American's restructuring in late 2005, the company still remains a favourite for a takeover, either by a private equity group or another miner.

Speculation has dotted the marketplace for months that Anglo was being lined up for a bid with two of the fastest-growing mining companies, Brazilian miner CVRD and Xstrata, seen as the frontrunners.

Mining veteran Brian Gilbertson, who engineered the merger of Australia's BHP and SA's Billiton in 2001, has also been tipped to be putting together a buyout plan for Anglo American.

Even the world's largest mining company, BHP Billiton, has been touted as a possible target for private equity. Last month, Merrill Lynch said a consortium of private equity groups could pay a 30% premium to BHP Billiton's market price, and still make returns of 34%, should they wish to do so.

PwC researchers say that with so much money washing around the marketplace for private equity deals, "few companies in the mining industry would be excluded if private equity turned its investment attention to this industry".

There is now more than $500bn being invested in private equity funds each year, and when this money is leveraged upwards, this means that there is close to $3-trillion available for deals.