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BHP launches long-awaited M&A salvo with OZ offer

Australian miner OZ Minerals rejects 32 per cent premium cash offer
August 8, 2022
  • BHP offers $5.8bn for Australian miner 
  • Chief executive Mike Henry said offer came in the “face of a deteriorating external environment”

BHP (BHP) has fired the opening salvo of a multi-billion-dollar buyout of OZ Minerals (AU:OZL), an Australian copper miner with strong expansion prospects, including in key energy transition metal nickel. The offer came after a selloff in metals markets sent the smaller company’s share price down a third since April. 

In an offer published at the end of last week, the major miner said A$25 (£14.40) a share in cash was a “compelling value proposition” for OZ shareholders. This was a 32 per cent premium on OZ’s closing price the day before. The smaller company’s board quickly rebuffed the $5.8bn (£4.8bn) offer, and Australian market observers said OZ had likely been more than ready for the approach as a tie-up has been on the cards for some time. BHP has also taken a sub-5 per cent position in OZ through derivative instruments, the smaller company said. 

BHP chief executive Mike Henry said he was “disappointed” the board of OZ had rejected the offer and refused to open its data room. “Our proposal represents compelling value and certainty for OZ Minerals shareholders in the face of a deteriorating external environment and increased OZL operational and growth-related funding challenges,” Henry said. 

OZ chief executive Andrew Cole said the offer was just too low. 

“We are mining minerals that are in strong demand particularly for the global electrification and decarbonisation thematic and we have a long-life resource and reserve base,” he said. “We do not consider the proposal from BHP sufficiently recognises these attributes.” 

OZ did outline “operational synergies” between two of its operations and BHP's Olympic Dam mine in South Australia, however, showing openness to a deal at a higher price. Its share price hit A$25.60 on Monday after the offer, showing investor confidence in an agreement. 

The company holds a promising portfolio but also faces challenges in funding all of its projects. OZ will make a final investment decision on West Musgrave, a nickel prospect, in the coming months. 

In the last week of July, Cole said the company had net cash of A$82mn as of 30 June, and A$700mn in debt available. Guidance for growth spending this year was around A$175mn. It has also just signed a deal with a smaller company, Havilah Resources (AU:HAV), that could see it spend A$200mn on another copper project. 

The cyclical nature of the industry is on show with this approach: BHP even effectively handed the company one of its key expansion projects, West Musgrave (potentially familiar to readers after Anglo Pacific Group took on a royalty on the mine last month), in 2014, before the current craze for nickel. 

A sizeable buyout has been expected from BHP for over a year, given the bull market cash it has brought in. But while the Big Australian may not have the M&A trauma of Rio Tinto (RIO), which threw away billions upon billions in bad acquisitions in the last boom, it has been careful in the past few years despite the cash flows it has generated and a strategic shift. Shareholders have done well from this approach, receiving record dividends. 

The question now is one of timing: has BHP picked a dip where copper and nickel assets will be cheap compared to later in the decade, as forecast shortages in those markets start to bite? Or will earlier this year have been the high point, as the cycle shifts again and supply picks up to meet energy transition demand? That is the question for BHP and now the board of OZ. This looks like a solid approach, though, even if metals prices don’t quickly surge back to the rabid levels seen recently.