BHP (BHP) wants to buy Anglo American (AAL). Well, sort of. Or at least, parts of Anglo. If some quite complex conditions are met. And at a price that Anglo’s board or shareholders were never likely to agree to.
Around a week into this thing, the picture ahead is about as clear as a tailings dam. As of 30 April, no one can really say if we’ve just watched the first episode in a four-series drama, or a pilot that’s already been cancelled. Perhaps, in a week’s time, with pulses lowered and a few concessions and assurances made, BHP will simply add £5 a share to get things over the line.
We can but speculate. And indeed speculation – or at least thinking through what might come next – is what Anglo investors must now do. BHP’s approach has upended the investment case, and new rules now apply. So while Anglo’s advice is for shareholders to do nothing, with events only partly in their control, there is no harm in sketching the decision tree now taking root.
Given the Bearbull Income Portfolio contains a chunky holding in Anglo, this is also more than a curio. So, in my own bid to get my thoughts into order, here are five takeaways from the move.
1. Mining M&A is inevitable
It’s not hard to see why even the most conservative and M&A-averse resource cycle might lead to consolidation. Sure, we might point to the personalities involved, a sectoral surfeit of testosterone, or the thirst for universe-mastery that follows a career spent blowing up mountainsides. But mining’s internal logic means that, eventually, big deals are inevitable.
Here, greater scale requires big moves. Heavy R&D spending, network effects or viral marketing don’t cut the mustard in (a more efficient version of) the same Palaeolithic input-output model. And while advanced technology and human capital matter, there is no killer app allowing any single player to out-compete or out-innovate their peers – just varying ore bodies, terrain, mining codes and capital. It is a game of assets.
For proof, just look at BHP’s stated rationale for the tie-up. The acquisition would land it Anglo’s “world class copper reserves”, “value-adding copper growth options” and “increased geographic diversification and operating footprint”. It would make big old BHP even bigger. The only areas where two plus two come close to equalling five are the companies’ Brazilian iron ore operations and Australian metallurgical coal assets (both of which are more complementary than synergistic), and corporate overheads (which amount to a rounding error).
All corporate activity is ‘strategic’. But when your product is a raw commodity, strategic thinking becomes very uncomplicated. We already know BHP likes copper (plus iron ore, nickel and potash). Buying Anglo gets it more of the above.
So, size rules. For years, the Big Australian has been the bigger fish. However, in 2023, the diverging fortunes of the two companies’ share prices stretched BHP’s market value to almost six times Anglo’s. As a multiple of enterprise value, the ratio was closer to four, but this was still a size premium rarely seen over the past two decades (see chart).
That gives you an idea of BHP’s sense of risk. Anglo might have issues, but from a certain valuation and size vantage point, they look much more digestible. BHP’s bet is that, seen from the other side, a stake in a wider BHP group also shrinks the shared risks. And with the deal priced in equity, another potential issue – a big debt burden – is skirted, even if the initial bid is expected to be earnings dilutive for BHP.
2. We may be here a while
BHP’s non-binding proposal, as it stands, is to hand Anglo investors 0.7097 BHP shares for each one they own, providing Anglo de-merges and then distributes to them its majority stakes in Anglo American Platinum (SA:AMS) and Kumba Iron Ore (SA:KIO).
In its rejection, Anglo said the offer “significantly undervalues” the business and that its structure is “highly unattractive” given its uncertainty, complexity and execution risks. BHP chief Mike Henry, who will have anticipated some pushback, is reportedly readying a second attempt.
Despite Anglo’s fiery tone, we aren’t at complete loggerheads. Judging by analyst commentary and the noises from large investors, the main beef appears to be with the price tag, rather than a convoluted structure. This is to be expected, given how much easier it is for everyone to opine on price and fair valuations than the chances of clearing the deal’s numerous potential hurdles.
Easier, then, to suggest that at £30 – 42 per cent above Anglo’s undisturbed price, and a fifth up on the initial bid – everyone can shake hands. And because this is nakedly about commodity exposure, BHP benefits from the market’s aggregate price assumptions. The strategies aren’t that different. The name on the annual report matters less than the cash flows.
But while BHP is unlikely to have made its proposal without confidence in its regulatory and legal position, setbacks could come. It’s unclear, for example, what spanners South African authorities might throw into the works, or how trade envoys from China to the US might view a single entity controlling 11 per cent of global copper production. Nor can we anticipate the openness of most investors to owning the de-merged Amplats and Kumba holdings.
Anglo's fragmented shareholder base, with the top 15 institutional owners comprising just 35 per cent of the equity, may be another speedbump. Already, the Johannesburg-based Coronation Asset Management has used the run-up in the shares above the bid price to take some money off the table this week. Should the talks drag on, others will be tempted to follow suit.
3. Anglo is over in its current form
Despite the challenge of outmuscling BHP, other suitors know that the window to buy Anglo may not open again. Cue lots of guesswork around rival bids, and ex-poste reasoning.
Glencore (GLEN) likes to get its hands dirty and is at heart a dealmaker. Rio Tinto (RIO), for all its capital discipline, might get FOMO. Former Anglo chief Mark Cutifani, now chair of Vale’s (US:VALE) base metals arm, knows the ropes. Then there is China, which SP Angel analyst John Meyer reckons could “come in and trump BHP’s offer with relatively little resistance from the South African authorities”. Apparently, a better offer from a Chinese entity is “likely”.
But whether BHP or anyone else gets its man, Anglo is on the chopping block. The board will be forced to justify anything not in BHP’s crosshairs, now that a leaner, shinier alternate vision of Anglo’s future is smiling from the sliding doors. Think the JSE listings, De Beers and manganese. Glencore – trader, operator and existing South Africa player – may spy gems in the scraps.
Moreover, the bid simply confirms what has been apparent ever since Duncan Wanblad said there were “no sacred cows” at last December’s capital markets day. BHP can hardly be described as opportunistic for taking the chief executive at his word, even if he didn’t have the whole company in mind. Anglo will need to make sustained efforts to realise the value now seen to be trapped beneath its legacy structure.
4. Copper bulls are vindicated
In any big corporate takeover, much is made of the acquirer’s predatory instincts, and the weaknesses of the target. In this case, the latter is understandable, given Anglo’s recent underperformance. But we shouldn’t overlook the weakness in BHP’s position, whose bid amounts to an admission of its struggles to grow organically.
Yes, the world needs a lot more copper for the energy transition to happen. But is it prepared to put in the hard yards of finding, licensing, and then spending tens of billions of dollars building a mine in a jurisdiction big investors can live with? Evidently, BHP has scanned the globe for tier one assets, watched Rio Tinto’s (RIO) struggles with Oyu Tolgoi, and decided that picking through the debris of Anglo’s sprawling portfolio is preferable, if it gives it a route to Quellaveco and Collahuasi.
For those seeking a bidding war (or a much higher offer), the hope is that BHP has shown its hand. Already, there is talk that the starting pistol on the great copper consolidation has now been fired. Ergo, BHP needs to get this done. If everything starts to quickly re-rate from here, Henry may soon struggle to explain the long-term strategy for his favoured ‘future-facing’ metal.
Whatever happens, Anglo investors – and by extension the Bearbull Income Portfolio – will remain long the red metal.
5. This feels like a win
Initially, I was hesitant to view the bid as another casualty of an overly cheap UK market. After all, the story of the world’s resource needs doesn’t have much to do with the primacy of any one capital markets venue. So while Anglo’s eventual exit might be bad news for London’s listings regime, the folks at Paternoster Square could at least comfort themselves with the line that this is about metals. Copper is copper; not ‘copper with a Brexit discount’.
Nevertheless, Anglo is a sign of something gone awry. Despite its long history and recent attempts at re-positioning, it could not tell a convincing story about its long-term value. Prior to the bid, its enterprise value stood at just 5.5 times forecast operating profit, around a third below ‘pure-play’ copper producers.
At least the market’s price discovery has arrived at the same conclusion Bearbull reached when I bought the shares in August 2020. After a rocky run, this suddenly feels like a decent trade. Not that I’m about to get sentimental. This is mining, after all.
