CLYDE RUSSELL: BHP’s Anglo deal will be hard to effect to the satisfaction of both

Launceston, Australia — BHP’s proposed takeover of rival miner Anglo American is one of those rare instances where a mega-merger actually makes strong business sense, but it will be difficult to pull off to the satisfaction of all parties.

BHP, the world’s largest mining company, offered $39bn last week to buy Anglo, a move the London-listed miner that grew out of SA rejected as “significantly” undervalued.

The expectation now is that BHP may boost its offer, or other buyers for Anglo, or parts of its diversified portfolio, may emerge.

Much of the media attention has focused on Anglo’s copper assets as the lure for BHP, with a combined company becoming the world’s largest producer of the industrial metal with a share of around 10%.

In effect, BHP’s bid is largely seen as a huge vote of confidence in the future of copper, which is essential to the energy transition given its properties as a conductor and its resistance to corrosion.

The bid may also be a tacit admission on BHP’s part that buying copper assets is far easier than trying to find them and develop new mines.

Anglo has interests in three copper mines in Chile and its production in the 2023 financial year was 507,000 tonnes, which resulted in underlying earnings before interest, taxes, depreciation and amortisation (ebitda) of $1.452bn.

The London-listed miner also has a 60% share in the Quellaveco mine in Peru, which gave it production of 319,000 tonnes and ebitda of $1.781bn.

This gave Anglo total copper output of 826,000 tonnes and ebitda of $3.233bn, or 32% of the group’s total for 2023.

BHP’s copper business is more diversified, with operations in Chile, Peru, Australia and the US, and in the 2023 financial year production was 1.717-million tonnes for an underlying ebitda of $6.65bn.

For the sake of argument, assume Anglo’s copper earnings can be maintained and the copper price remains stable, it would take about six years for the earnings to pay off half of BHP’s current offer price for Anglo.

Of course, it’s likely that there would be some cost synergies, and it’s also probably the case that copper prices rally, especially if the energy transition starts to accelerate.

That would make Anglo’s copper assets more valuable to BHP as the return would be over a shorter time period.

Of course, this assumes that BHP’s view of Anglo’s assets is that copper is effectively half of the worth of the total company.

The question for investors looking at BHP’s proposed takeover of Anglo is how much are Anglo’s non-copper assets worth, can they be disposed of effectively, or integrated into the wider group.

Coal and iron ore

The asset that fits best with BHP’s existing portfolio is Anglo’s metallurgical coal mines in Australia's Queensland state.

BHP, through its alliance with Japan’s Mitsubishi, is the world’s largest exporter of the coal used primarily to make steel, while Anglo ranks third.

Combining their assets would create a dominant metallurgical coal player, so much so that the deal is likely to attract scrutiny from regulators, especially in countries like Japan, which source the vast bulk of their coal from Australia.

The current BHP proposal foresees Anglo’s SA iron ore assets, held through Kumba Iron Ore, and the platinum mines of Anglo American Platinum, being divested and distributed to shareholders.

This may present problems for the SA authorities, but it’s also a sad reflection of how international companies are no longer keen on assets in the country that was once renowned as a centre of mining excellence.

Iron ore is BHP’s biggest earner, and the high-grade material produced by Kumba would be useful in the portfolio, but SA’s political risk and crumbling infrastructure make it unattractive.

Anglo’s Brazilian iron ore operations also offer high-grade ore, which BHP could integrate or seek to sell off.

Platinum is a commodity that may struggle in the energy transition, given its use in catalytic converters for internal combustion engine vehicles.

Anglo’s other interests, such as diamonds through De Beers, and manganese through Samancor, could most probably be sold to existing partners: the Botswana government for De Beers and South 32 for the manganese.

Overall, the mechanics of the deal seem to make good sense for BHP.

They can be made to make sense for Anglo’s shareholders if the offer is raised high enough so that they can’t say no.

Winning over various regulators across several countries may be far more tricky, and compromises may be needed, and that could end up undermining the very logic of the deal in the first place.

Disclosure: At the time of publication Clyde Russell owned shares in BHP Group as an investor in a fund.

Reuters