Why is BHP Bidding for Anglo American?

BHP has proposed a £31bn deal to buy Anglo American, one of its biggest rivals. This would be the biggest transformation of the mining sector since Glencore’s acquisition of Xstrata over a decade ago.

The big prize for BHP, the world’s largest mining group, is to take over its competitor’s valuable copper mines and strengthen its position in iron ore and metallurgical coal; two important ingredients for steel production.

But the complex deal would require a radical transformation of the 107-year-old Anglo. Under BHP’s proposal, the London-listed mining company would be broken up and its South Africa-based platinum metals and iron ore divisions would be spun off. All other entities, such as De Beers Diamonds, would be subject to a strategic review.

Why now?

The world’s largest mining companies have made no secret of their desire to grow in copper. It is predicted that there will be massive shortages of the highly conductive metal in the coming years as demand for renewable energy, power grids and electric cars increases. Still, prices are too low for miners to develop new mines. The industry’s top managers are all betting on price increases in the coming years.

BHP is trying to get ahead of this price boom. The deal would increase the company’s exposure to Anglo’s copper assets located in Chile and Peru, it said.

Meanwhile, the mining sector is flush with cash after making record profits from higher commodity prices in recent years. That has prepared industry leaders for mergers and acquisitions after a decade of discipline and after disastrous overspending on deals during the last price boom more than a decade ago.

The timing also makes sense as Anglo has enjoyed a rapid recovery under chief executive Duncan Wanblad, who took over in April 2022. The company’s shares suffered their worst one-day fall in 15 years in December due to drastic downgrades to its production forecasts. Anglo compares favorably with its peers.

Analysts say the value of its copper business is obscured by the rest of its sprawling business. In particular, De Beers and its platinum metals division have experienced undesirable developments, in part due to structural threats to demand from lab-grown diamonds and declining sales of internal combustion engine cars.

“The timing is not surprising given that Anglo is reviewing its business,” said a major shareholder in BHP and Anglo American. “Anglo must create a compelling alternative if they want to defend this.”

Will there be counter offers?

BHP’s biggest rivals, which include Rio Tinto, Glencore and Vale, are unlikely to be left out as copper growth is a strategic priority for them all.

Kaan Peker, an analyst at RBC, named Glencore and Vale as two potential suitors, saying cost savings could be achieved by combining the Swiss group’s copper mines with those of Anglo. Meanwhile, Anglo boss Mark Cutifani has joined a Saudi-backed arm of Vale as chairman.

Others say Chinese mining companies – eager to secure copper and better placed to navigate the difficult situation with the South African government – should not be excluded.

“The decision has been made for China to trump BHP’s offer with relatively little resistance from South African authorities,” said John Meyer, mining analyst at S&P Angel.

Anglo could also go on the offensive and propose a merger with the second group of mining groups such as Teck Resources, Freeport-McMoRan or South32 as it looks to sell other assets.

Wanblad has told the market there are “no sacred cows” in the portfolio as it undertakes a review of its mines, which include copper, metallurgical coal, platinum metals, diamonds and fertilizers.

“We find it difficult to believe this at first glance [Anglo] “I’m just not going to argue that there’s a lot more they can do themselves than just fold paper for BHP,” said Mark Kelly, managing director of MKP Advisors.

Where are the synergies between the two competitors?

BHP has signaled the deal could deliver “significant synergies” by sharing procurement and eliminating duplication of work at mine sites.

Mining mergers and acquisitions typically only result in large cost savings when the two companies’ operations are in close geographic proximity to one another.

Both BHP and Anglo have copper mines in Chile and Peru, metallurgical coal mines in Queensland and iron ore operations in Brazil where some savings could be sought.

Jefferies analyst Chris LaFemina estimates that on Anglo’s forecast 2025 profits of $7.6 billion, annual savings of $750 million could be achieved, excluding the two South African divisions that could be spun off .

However, Richard Hatch, analyst at Berenberg, expressed doubts about the extent to which this could be achieved.

“There are limited clear operational synergies for us,” he said. “But the biggest savings would come from general and administrative management.”

What are the hurdles to completing the deal?

Bankers say Anglo’s complex history and extensive portfolio make any deal difficult.

One of the biggest challenges will be the South African government’s response – often referred to as Anglo’s “poison pill” – to BHP’s proposal to spin off the two local divisions. The country’s Public Investment Corporation is Anglo’s largest shareholder.

Anglo is one of South Africa’s flagship companies and one of the country’s largest employers, making a separation a bitter blow for Pretoria in an election year.

South Africa’s Minister for Mineral Resources, Gwede Mantashe, has already spoken out against the deal, saying BHP has “never done much” for the country.

Another possible hurdle is antitrust control. The biggest resistance is likely to come from China, which consumes more than half of the world’s copper, to the creation of a behemoth that could soon produce nearly 15 percent of the world’s supply.

Iron ore and metallurgical coal are other areas that could face resistance from jurisdictions such as the EU and Japan.

Antitrust issues in the UK are likely to be less of a concern, although the Competition and Markets Authority will not comment on the deals until a formal announcement is made.

“This deal would create the world’s largest copper producer, and they are also major producers of iron ore and coal,” said Tom Smith, a former CMA director now at Geradin Partners. “Two companies of this size would normally trigger merger filings in a large number of countries and we can expect these regulatory processes to drag on for at least many months.”

What do we do now?

BHP has until May 22 to make a formal offer for Anglo.

Anglo could begin selling off assets, but some shareholders believe the company is unlikely to do so given chairman Stuart Chamber’s track record of selling British companies such as Pilkington and Arm.

But BHP’s next steps will also be in focus. Jefferies’ LaFemina said BHP would need to increase its offer to at least £28 a share to be taken seriously by Anglo’s management team, and to £30 if other bidders were involved, up from the Melbourne-based company’s opening offer of £25, £08 .

“None of this is easy,” he said. “Let the games begin.”

Additional reporting by Suzi Ring in London