Over the week a monumental bid has been put to the table from a mining giant for a fast-growing mining competitor, Anglo American. The offer given is a £31 billion takeover proposal.
BHP’s all-share proposal would have provided Anglo-American shareholders with 0.7097 BHP shares for each Anglo-American share, valuing each Anglo-American share at £25.08. This represented a 31% premium on the implied market value of Anglo American’s unlisted assets and a 78% premium to the 90-day volume-weighted average closing price of Anglo American’s shares.
However, Anglo-American’s board, including chairman Stuart Chambers, unanimously rejected the offer, deeming it highly unattractive. Critics, including major shareholders Legal & General Investment Management and Abrdn, labelled the offer as opportunistic.
The proposed acquisition would have increased BHP’s exposure to future-facing commodities through Anglo American’s copper assets, and complemented BHP’s iron ore and metallurgical coal portfolios. BHP also planned a strategic review of Anglo-American’s other operations, including its diamond business, post-completion.
The rejection of the offer comes amid the race for market dominance in copper, a commodity in high demand within the clean energy sector. Anglo-American’s largest shareholder, the South African state asset manager Public Investment Corporation, holds about 7% of the company’s shares, and a considerable number of mines are located in South Africa.
A foreign takeover could further damage London’s financial market and potentially accelerate the exodus of London-listed companies to other bourses. Under UK takeover rules, BHP must now make a firm offer for Anglo American by 22 May 2024 or abandon its plans.
The question is why this acquisition is a big deal for the mining industry and why is it on the radar of investors around the world. Before we answer that we should first delve deeper into the mining industry.
Mining Industry: An Overview
The mining industry has been a cornerstone of the global economy, in extracting valuable minerals, metals and other natural resources. Its significance lies in its role as a primary supplier of raw materials essential for numerous industries, which include construction, manufacturing, energy and tech. Such resources from the mining industry are a necessity to support these sectors for growth and development.
Despite its economic importance, the mining industry faces challenges and environmental concerns. Resource depletion, declining ore grades, and regulatory compliance are significant issues confronting mining operations. Moreover, mining activities can have adverse environmental impacts, including habitat destruction, water pollution, and greenhouse gas emissions. As a result, sustainable mining practices and environmental stewardship are increasingly emphasized to mitigate these impacts and ensure responsible resource management.
As an investor, the mining industry presents compelling opportunities for portfolio diversification and potential returns. The industry’s role as a primary supplier of essential raw materials for various sectors, including construction, manufacturing, and technology, underscores its fundamental importance to global economic growth. By investing in mining companies, one gains exposure to commodities such as coal, iron ore, copper, gold, and other metals, which serve as critical inputs for industrial production and infrastructure development.
One of the key attractions of investing in the mining sector is its cyclical nature, which offers the potential for significant returns during commodity upswings. Commodity prices are influenced by supply and demand dynamics, geopolitical factors, and macroeconomic trends, creating opportunities for investors to capitalize on market fluctuations. During periods of strong demand and limited supply, mining companies can generate robust profits and shareholder returns, making them attractive investment prospects.
Recent Years of the mining industry
In current years, the industry has been facing many challenges, with declining capital expenditure and a shift towards shareholder returns over growth investments. After the collapse of commodity prices nearly a decade ago, mining companies have been reluctant to commit to major projects, and currently instead focusing on cost-cutting and returning cash to shareholders through share buy-backs.
This strategy has led to a slowdown in new mine development, as high costs and long timelines associated with building new mines, this made companies find it risky to make large capital outlays. With labour and materials costs rising, there is less incentive for miners to take on the risk of long-term bets on commodity prices.
This has led to the result of many mining stocks currently trading below their market value. Therefore, why there have been many acquisitions currently (including the one that we discussing right now: BHP and Anglo-American)? This is because, with undervalued stock prices, acquisitions are more attractive as it is a more organic expansion for growth (leading to larger players in the industry seeking consolidation and gain scale).
However, the proposed BHP-Anglo American deal highlights some of the challenges facing the industry. Anglo-American’s conglomerate structure, with diverse assets across multiple jurisdictions, makes it difficult to arrive at a simple valuation and integration plan making it a more complicated large-scale M&A.
Who is BHP and why take over?
BHP, formally known as BHP Billiton, is one of the world’s largest diversified resources companies, operating in the mining, metals, and petroleum sectors. With a rich history dating back to the 19th century, BHP has grown into a global leader in the extraction and production of essential commodities.
Their global operation operates a vast portfolio of assets across the globe, with major operations in Australia, the Americas, and the Asia-Pacific region. The company’s diverse portfolio includes iron ore mines in Western Australia, copper mines in Chile and Peru, coal mines in Australia and Colombia, and petroleum assets in the Gulf of Mexico and offshore Australia. BHP’s extensive geographic footprint and diversified commodity exposure provide resilience and stability in volatile market conditions.
BHP is a leading producer of key commodities essential for industrial production and economic development. Its primary commodities include iron ore, copper, coal, petroleum, and nickel, which are used in various applications such as steelmaking, electricity generation, and transportation. BHP’s high-quality assets and efficient operations enable it to maintain a competitive edge in global markets, serving as a reliable supplier to customers worldwide.
Firstly to clarify, the M&A is not the whole firm of Anglo American, essentially a part of it, the ones that BHP thinks don’t need fixing. The goal of BHP is to be the majority stake (removing two South Africa-listed miners) in the copper market by having Anglo American demerging Kumba Iron Ore and Anglo Platinum. Such a situation will lead to an improvement in BHP’s copper exposure by about 40%.
Having separating South Africa from Anglo, would make Anglo approximately the shape of BHP’s existing operations, thus sticking the companies together will make BHP bigger.
Secondly, by combining certain assets and operations, BHP expects to achieve substantial cost savings, particularly in corporate overhead and administrative functions, as Anglo American’s conglomerate structure has made it challenging to extract maximum value. Thirdly, the acquisition would further diversify BHP’s portfolio across geographies and commodities, reducing the company’s reliance on any single asset or region.
Combined company 2024 pro-forma EBITDA:
Although BHP strives for the bid, it is not the best bidder at the table, well not the one analyst thinks is the best. Less than a year ago, BHP acquired Oz Minerals, and its liabilities are still being taken into consideration. Rio Tinto is a favour on the other hand, due to its M&A of Richard Bay Minerals in 2012, it can profit much more in the process of the acquisition.
So why reject?
Again the main problem in the mining industry is that it is extremely hard to find a knockout price. It is agreed that the valuation of the company is undervalued, but it has been so for the last 2 decades, bringing a new owner will not cause an easy fix.
Jefferies analyst Christopher LaFemina, a veteran in the field of mining megamergers, thinks a “price of at least £28/sh would be necessary for serious discussions to take place, and a takeout price of well above £30 per share would be the outcome if other bidders were to get involved”.
Another major problem that may arise is a political one. The mining industry is often a natural monopoly in the areas it operates, selling into the global market. Considering both Anglo and BHP-owned mines are important to Peru while being a fraction of global copper production. Having both under one roof will cause a market concentration that leads to a political problem. And if deepend could the antitrust remedies be sales of non-core assets while copper is retained?
Looking ahead
However attractive the offer is seen, the proposed takeover faces several hurdles. Anglo American’s board has unanimously rejected BHP’s initial offer, stating that it significantly undervalues the company and its prospects. Analysts suggest a price of at least £28 per share may be necessary for serious discussions. The deal will also require extensive regulatory review, particularly around the combined entity’s market share in strategic commodities like copper. Additionally, Anglo-American has significant operations in South Africa, which could raise concerns about foreign ownership of national assets. The complexity of integrating Anglo-American’s diverse assets across multiple jurisdictions presents another challenge for BHP.
Overall, BHP’s bid for Anglo American reflects the mining industry’s ongoing consolidation as companies seek to gain scale, diversify their portfolios, and capture synergies. However, the success of the deal will depend on BHP’s ability to address the various valuation, regulatory, and operational hurdles.
