WILL BHP take a second shot at Anglo American when the UK’s six-month “put up or shut up” takeover rule lapses? ‘Definitely, maybe’, to quote Oasis, the UK rock band that is reforming after a 20-year hiatus. Money, it seems, drives even the unlikeliest of reunions; which is to say, don’t be surprised if the spotlight falls on Anglo again — though perhaps not imminently.
“I think it’s likely that BHP revisits a bid for Anglo once it is a simpler business after the disposals and demergers are completed.” says Sanlam Private Wealth investment analyst Christiaan Bothma.
Anglo unveiled plans for a radical restructuring in May, shortly after BHP’s takeover proposal was made public. It argued at the time that a streamlined company represented better value than BHP’s offer. However, the restructuring involves the complex unbundling of its 80% stake in Anglo American Platinum, and the even more challenging sale of De Beers.
Asked by the FM in July why Anglo’s share price was well below BHP’s imputed offer, Anglo CEO Duncan Wanblad acknowledged that the market is waiting on results first. But those results could take about two years to materialise which, in commodity markets, is enough time for almost anything to happen.
For its part, BHP has plenty of alternatives, which means another bid for Anglo is not crucial to its plans to expand, says Bothma. “I’m not convinced that [BHP] wants Anglo that badly,” he says. Were that the case, BHP might have compromised on its initial takeover proposal for Anglo such as the group’s stake in Kumba Iron Ore, which the Australian firm wanted to unbundle, he says.
BHP CEO Mike Henry told analysts at the group’s full-year results presentation last month that merger & acquisition activity is not “plan A” as he seeks to diversify the group’s earnings from iron ore to metals with perhaps superior long-term prospects, such as copper. In terms of growing the production of the latter, BHP has an impressive array of options and the financial firepower to execute them.
It recently committed C$4.1bn for the Filo Corp greenfields copper project and adjoining resources on the Chile-Argentina border. This will contribute to its plans to grow annual copper production 70% from 1.9Mt in its 2024 financial year to 2050.
On a shorter time frame, 4% production growth is forecast for the current financial year with another pulse in production from 2027, largely from its Australian base (310,000t-340,000t a year to more than 500,000t a year) and the $5bn to $12bn recapitalisation of Chile’s Escondida, the world’s largest copper mine, in which BHP has a 57.5% stake.
Annual capital expenditure is forecast to exceed $11bn, an outlay that will come with a short-term cost for shareholders. Deutsche Bank analysts, led by Liam Fitzpatrick, have consequently cut BHP’s payout from 60% of earnings to 50%-55%. The bank has also cut its target price for BHP from £23.5 to £22.5 on its higher sustaining and replacement capex calculation.
BHP’s copper catch-up
In historical terms, BHP’s payout ratio is still impressive and far from the debt-laden crisis diversified mining groups, including BHP, found themselves in during the last commodity upcycle from 2000 to about 2011.
But it’s also worth acknowledging that BHP has the weakest copper growth potential of its peer group and has to do a bit of catch-up. There’s also the risk that the expected explosion in copper demand doesn’t quite pan out as expected. “It is very easy to sit now and talk about an elevated copper price, but future prices are future prices,” says South32 CEO Graham Kerr in an interview. Look no further than a recent downgrade of the 12-24-month copper price by Australian bank Macquarie. It cited “weaker China and ex-China demand and declining investor sentiment and positioning”.
Short-term price volatility? Certainly. But, as Kerr says, miners are betting on the future.
One company happy to stay on the sidelines is Rio Tinto. “A lot of deals were made between 2005 and 2012 and a lot of these turned out to be really bad,” Rio Tinto CEO Jakob Stausholm told the Financial Times. “Now it feels like things are opening up a little bit … but from the Rio Tinto perspective, that’s not that relevant: I have no ‘fomo’, or fear of missing out,” he added.
In addition to BHP’s tyre-kicking at Anglo, there is Glencore’s run at Canadian miner Teck Resources. The Swiss company eventually settled for Teck’s metallurgical coal mines, but Glencore spokesperson Charles Watenphul confirms that a two-year hold on renewing a bid for Teck would be released if other bids come in for the firm.
“The next cycle looks to me like a different type to the normal supercycle that lifts all commodities, with the energy transition favouring some commodities, notably copper and battery materials, and despising others, notably fossil fuels and PGMs [platinum group metals],” says Bothma. “We agree that copper experiences a strong cycle, especially on the basis that it is getting much harder to bring new supply to the market,” he adds, citing BHP’s capex plans to tackle grade declines at Escondida.
The next cycle looks to me like a different type to the normal supercycle that lifts all commodities, with the energy transition favouring some commodities, notably copper and battery materials, and despising others, notably fossil fuels and PGMs – Christiaan Bothma, Sanlam Private Wealth investment
Bank of America is bullish on BHP, factoring in a two-year copper price of $12,000/t (compared with the recent record copper price of $10,000/t). It also cites a higher-for-longer iron ore and metallurgical coal price.
There are worries, though, that with 65% of earnings before interest, tax, depreciation and amortisation in the 2024 financial year derived from iron ore, BHP is vulnerable in the short term — “with uncertainties surrounding the final Samarco dam failure liabilities, limited near-term growth and the shares trading at a premium to peers”, says Fitzpatrick.
In 2016, Brazilian authorities filed a $43bn civil suit against BHP and its partner Vale, after a tailings dam burst that killed 19 people and caused environmental damage two years earlier.
BHP recently submitted an improved settlement proposal of $25bn, which includes $6.6bn already paid in compensation. “Our understanding is that the Brazilian authorities could be seeking a shorter payment time frame and so the real value of the existing $6.5bn provision on BHP’s balance could still increase further,” says Deutsche Bank.
A version of this article first appeared the Financial Mail.
