Why do miners always try to buy each other?
Mining investment collapsed along with commodity prices almost a decade ago and has never really recovered, instead using free funds to fund share buybacks. Buybacks were a way to improve production per share without actually improving production.
The following charts from Jefferies are a bit old but show the trend:
The strategy has now been exhausted, but digging a new mine takes a long time, is very expensive and upsets a lot of people. If labor and material costs are rising, it makes little sense to bet for ten years that raw material prices will do the same. And when mining stocks trade below replacement cost, it’s much easier to buy than to build. The payout is immediate.
Mining stocks currently below replacement value?
Most of the time yes. It is mainly due to concerns about Chinese iron ore demand that copper specialists are doing well. But even though copper accounts for about 40 percent of Anglo’s profits this year, a profit warning in December reinforced the perception that the company has lost something strategically.
Why does BHP want to own Anglo American?
It doesn’t do that, it wants to own some from Anglo American, especially the parts that do not require repair. Anglo is an old-fashioned conglomerate full of holdings and poison pills, most of which come from South Africa. Jefferies has a structure table:
BHP wants to get rid of Anglo’s controlling stakes in two South African-listed mining companies, with its proposal contingent on Anglo breaking up Kumba Iron Ore and Anglo Platinum. In this case, Anglo would focus on Chilean and Peruvian copper with production of about 760,000 tons per year. The purchase would improve BHP’s copper exposure by about 40 percent.
There is also Australian coking coal and Brazilian iron ore, as well as a not-so-significant diamond subsidiary and a long-standing polyhalite project in the North York Moors National Park that defies rational explanation. Some of these assets are below world standards, such as Brazil’s nickel mines, but none are considered particularly risky, either politically or geologically. A formal separation would make South Africa’s wildcat strikes and blackouts someone else’s problem.
It is also important that Anglo, excluding South Africa, is roughly the same shape as BHP’s existing operations. Combining the companies would meaningfully expand BHP, but it would not really change the investment rationale or corporate structure. Charts from JPMorgan:
So BHP is the obvious bidder?
My goodness, no. BHP completed its purchase of copper and nickel miner Oz Minerals less than a year ago and its liabilities from the Samarco mine dam disaster are not yet known. It is also no friend of South Africa, having founded South32 in 2015 and spun it off to get rid of any risk.
Rio Tinto (which bought South Africa’s Richards Bay Minerals from BHP in 2012) is probably in a better position to consider large mergers and acquisitions at the moment. That’s probably not the case with Glencore, given everything else the company has going on, but that hasn’t always stopped it from increasing the volume of its trading business when an opportunity arises.
There is also the likelihood that parts of the conglomerate will be of interest to rivals such as Vale, which is already an Anglo partner in Brazil and whose base metals business is headed by former Anglo boss Mark Cutifani.
Did BHP offer a knockout price given the risk of intruders?
Again: no. Not close. The offer includes 0.7097 BHP shares and shares in Johannesburg-listed Kumba and Amplats. At the market open, Anglo was valued at £31.1bn, or £25.08 per share, but with BHP shares down 2.4 per cent at the time of the pixel, it is now slightly less.
Given Anglo’s conglomerate structure, finding a top price isn’t easy. There is general agreement that Anglo is trading below its overall value, but this has been true for at least 20 years and the discount only reflects the problems that a new owner would inherit. If there was a quick and easy solution, it would have happened long ago.
Jefferies analyst Christopher LaFemina, a veteran of mining mega-mergers, believes that “a price of at least £28/hour would be necessary for serious discussions to take place, and a takeover price well in excess of £30 per share would result . “if other bidders would take part”.
Here is his work:
While considerable care would be required to estimate the significant synergies of this combination, as a first base case we assume that the synergies would represent 5% of Anglo’s total operating costs (excluding Kumba and Amplats). This is not inconsistent with what we have seen in the past with major mining mergers. This implies an average annual EBITDA benefit of approximately $750 million, compared to our 2025 EBITDA estimate of $7.6 billion for Anglo (excluding Kumba and Amplats). This synergy estimate is probably conservative. If we include our estimate of synergies based on net present value after tax ($4.1 billion), we estimate Anglo’s fair value to be 2824 pence/hr, which equates to an equity value of $42.6 billion. That’s 28% more than Anglo’s last share price, and we believe it’s a reasonable starting point for assessing what price might be enough to get a deal over the finish line.
Will this get through the competition authorities?
According to the seller’s website, probably. Due to its national strategic importance, copper has some potential sticking points and individual approvals will take a while.
But the thing about mines is that they are often natural monopolies in the areas in which they operate and sell to a global market. The Anglo-owned Quellaveco and BHP-owned Antamina mines, for example, are important to Peru, but only account for a fraction of global copper production. Does bringing them under the same ownership pose a market concentration problem or a political problem? And if it is viewed as a policy issue, could the antitrust remedies be to sell off non-core assets while retaining copper?
Will it start in South Africa?
Maybe, not least because national elections are taking place on May 29th. But the proposal to split Anglo’s listed subsidiaries is not obviously hostile domestically, and it would not be a clean break for BHP as it would still have Anglo’s South African diamond subsidiaries and a controlling stake in Samancor’s chrome operations. (Ironically, the Samancor stake was previously owned by BHP and came to Anglo via the South32 spin-off. Mining M&A often resembles musical chairs.)
Remind me, what’s the point of all this?
Cost cutting. Berenberg analyst Richard Hatch isn’t convinced Anglo offers turnaround potential, but there are plenty of head office jobs that could be eliminated:
In terms of synergies, there are limited clear operational synergies for us, perhaps some synergies within the country in Chile, Peru, Australia and Brazil, but the biggest savings would come from the company’s general administrative and administrative costs.
And Anglo has a reputation for paying above the industry average, particularly for senior positions. The 2023 Annual Report includes a useful map showing where staff cuts may occur:
Back to Berenberg:
Overall, we see the merits of the deal for the copper assets, but BHP may be buying a group of assets that require some care and attention and which we believe offer limited upside at this point. Current valuation multiples would also mean a slightly dilutive deal for BHP. Additionally, the company would have to assume net debt of $10.6 billion, which we believe would increase upon completion of the transaction as both Kumba and Anglo Platinum, which are consolidated, have net cash. Overall, we expect Anglo to push for a higher premium.
What does this mean for North Yorkshire?
The crucial question, and it is likely to be a mixed message for Sneatonthorpe residents. Anglo rescued UK-listed Sirius Minerals in 2020 and took over Woodside, its hugely ambitious project to extract fertilizer from the Yorkshire Moors. BHP also has a fertilizer project, the Jansen Potash Mine in Saskatchewan, Canada.
The BHP project is much more advanced than the Yorkshire one Money Pit for which a final investment decision has not yet been made and is unlikely to progress quickly under Anglo ownership without external investment. Berenberg says BHP “can likely delay the Woodsmith project as it already grows significant amounts of potash through Jansen in Canada.”