Ball in BHP’s court; Anglo says bid fails on value, structure | Hotter Commodities

Just under two weeks ago, the chair of BHP made a phone call to his counterpart at mining peer Anglo American and set in motion a flurry of activity designed to create the largest copper producer in the world

Except that, based on its valuation and structure, the proposal in its current form is never going to fly. 

BHP chair Ken MacKenzie revealed the company’s intention to make the proposal to Anglo American’s Stuart Chambers during a phone call on Tuesday April 16, and then sent him the details, people familiar with the situation told Fastmarkets. 

This triggered a series of regulatory-related activities to inform the relevant authorities as well as work by Anglo American and its board to fully understand the value of the proposal versus what the company could itself deliver. The work continued for over a week until Wednesday April 24, when the proposal was leaked – most likely by bankers eager to start a bidding war – and Anglo American was forced to notify the market. 

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The board met again on Thursday April 25 and formally announced the intent to reject the proposal on Friday April 26.

The proposal is not an assured bid; under UK takeover and merger rules, BHP has until 5pm London time on May 22 to say whether or not it plans to make a formal offer. A significant amount could change by then and, if Anglo American’s response to date is anything to go by, will need to if the proposal is going anywhere. 

BHP’s proposal, which valued UK-listed Anglo American around $39 billion, sent the latter’s shares flying and is now below the current valuation of almost $44 billion. The all-share proposal is going to need to come up in price and will require a cash sweetener to help handle the flowback of Australian stock, market participants say.  

South African metals and iron ore businesses

Value isn’t the only objection that Anglo American has toward the deal. The proposal included the contingency that Anglo American demerge its South African platinum group metals and iron ore businesses. 

The South African government, unions and local communities will have a hefty influence in how things progress. Anglo American is a huge taxpayer and longstanding private employer in the country, where it has operated for more than a century. 

While the love-hate relationship of the country’s African National Congress (ANC) ruling party with business typically precludes it from publicly lauding corporations, South African sources say there is a deep acknowledgement at the ANC senior level that business helps with its policy agenda. To that end, Anglo American plays a significant role in South Africa’s business community, a fact that does not escape the ANC or its electoral supporters. 

BHP has its own history in South Africa too, something that South African Mines Minister Gwede Mantashe referenced this week. Speaking on a personal level, he cited a negative experience with BHP during its merger with former national mining champion Billiton in 2001, saying that it did not live up to expectations for what the combined entity would do for South Africa’s mining sector. 

(Just prior to that deal being announced, Anglo American held a 7% stake in Billiton, and talk was rife it was planning to launch its own offer. It backed away, BHP Billiton was born and the rest is history.)

Mantashe’s view was likely not positively enhanced by BHP’s exit from South Africa in 2015, when the miner demerged what it deemed to be non-core assets in the country – an aluminium smelter, its manganese business and seven coal mines – to create South32.

By the end of 2018, BHP had dropped Billiton entirely from its name, returning to its Australian roots. BHP no longer has an office or operation in South Africa. If Mantashe has his walls up against BHP, the company’s history in the country perhaps points to why.

Even if the demergers proceeded, they would likely take 18-24 months to complete while the company wades through the regulatory approval process. During that time, Anglo shareholders would be locked up and exposed to BHP without having shares in their pocket, which seems unpalatable for shareholders to accept. 

BHP”s copper portfolio

Much is being made of BHP’s desire to add copper, the cyclical darling of the investor community whose attraction has been more permanently enhanced as the world has woken up to the red metal’s role in the electrification and infrastructure required for the energy transition. 

If BHP is looking to beef up its copper portfolio, there are easier ways to get there than to buy Anglo American. 

The possibilities for an alternative form of tie-up with a copper-focused company abound, with options including First Quantum Minerals, Teck Resources’ base metals business, Freeport-McMoRan, Ivanhoe Mines, Southern Copper, Antofagasta Minerals, Grupo Mexico, Lundin Group’s various units… the list goes on. 

A deal with Anglo American, which has copper production guidance of 730,000-790,000 tonnes for 2024, would almost certainly encounter anti-trust issues. BHP’s 2024 copper production guidance is 1.72 million-1.91 million tonnes, similar to that of US producer Freeport-McMoRan and exceeding Chile’s state-owned miner Codelco.

Of course, other participants could enter the fray, including Glencore, Saudia Arabia’s Public Investment Fund or other sovereign wealth funds. Activist investors have already started to join the party: Elliott Management’s UK arm has built a 2.5% stake in Anglo American but has not publicly stated its view of the BHP proposal. 

The ball is now in BHP’s court.

In Hotter Commodities, special correspondent Andrea Hotter covers some of the biggest stories impacting the natural resources sector. Sign up today to receive Andrea’s content as it is published.

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