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BHP has trained its pickaxe on the stock market to find the metal it wants: copper.
Anglo American, one of the few miners to build a copper mine in recent years, is offering growth for the red metal buried amid its South African iron ore and platinum deposits. BHP’s complex all-share approach, worth £25.08 per Anglo share, values Anglo’s equity at £31.1bn. This price is not enough to close a deal.
There are other obstacles to this connection. The deal requires approval not only from British shareholders, but also from the South African government. Competition law there contains a public interest clause that could slow or block approval of a deal.
Anglo American’s South African exposures, with about a fifth of its assets located there, explain much of the company’s ongoing valuation discount compared to peers. Its five times expected Ebitda prior to BHP’s approach was about 15 percent below BHP and Glencore and 40 percent below U.S.-listed Freeport-McMoRan.
BHP, which has always sought to avoid risks in emerging markets, will see this as an opportunity for South Africa. Anglo holds a significant stake in its Johannesburg-listed subsidiaries in the country: the dividends of these companies, Anglo American Platinum (Amplats) and Kumba Iron Ore, are largely invested outside the country.
BHP is proposing to hand over the miner’s shares in Amplats and Kumba to Anglo shareholders. Some of this cash flow could stay in South Africa, the argument goes, and create jobs there. This logic is controversial. Local shareholders continue to demand dividends. And English investors who want to get involved directly probably already have what they need.
The combination of Amplats and Kumba shares with a lot of BHP shares means a price that is about 32 percent higher than Anglo’s three-month average share price.
That doesn’t look like enough. Anglo shares have been slowly recovering after a production warning was issued late last year. At £25.08 per share, the deal is just 19 per cent above the price Anglo quoted earlier this week. The overall price and premium has already fallen slightly as shares of Amplats and Kumba fell on Thursday.
Cost savings could be another issue. Apart from BHP getting copper tonnage cheaply, it is not clear what benefits this would have for BHP. The two companies could potentially share infrastructure for their metallurgical coal mines in Queensland, Australia. Both have iron pellet businesses in Brazil. Cost savings from copper seem unlikely, except perhaps by marketing 40 percent more copper production.
The combined group would generate 46 percent of expected Ebitda from iron ore and 44 percent from copper, Jefferies points out. To increase the price, BHP would have to make some savings there. The miner will have to dig deeper to get this project over the finish line.