Sameer Singh, Research Analyst at Private Clients by Old Mutual Wealth

 

 

 

“As widely reported, BHP Group (US$150bn market cap) has made an all share offer for peer, Anglo American (US$36bn market cap). Generally, when such mega-deals are announced, it is unlikely that everyone benefits. However, this time may be different.

 

 

We currently hold both BHP and Anglo American in our local portfolios and view this deal as a net positive. BHP shareholders would gain access to world class assets that offer meaningful growth and efficiency opportunities; while Anglo American shareholders would receive a fairer value far sooner than it would take for the market to replicate this.

 

 

For BHP, the rationale for the deal can be summed up in one statement: undervalued assets and copper scale.

 

 

Anglo offers a large, high margin and high growth potential copper asset base with close geographic proximity to BHP’s Chilean and Peruvian copper assets. The deal would see the combined entity being one of, if not the, largest copper producer in the world, with 2.6million metric tons of production a year, accounting for almost 10% of global production. As part of the deal specifics, Anglo would be acquired without Anglo American Platinum and Kumba Iron Ore. Each of these South African-based miners would be unbundled to shareholders, leaving the Anglo commodity portfolio with copper, steel-making coal, nickel, diamonds, marginal manganese, polyhalite (early-stage development crop nutrient) and the remaining iron ore assets in Minas Rio, Brazil.

 

 

We view the proposed deal as attractive for a few specific reasons. Firstly, Anglo American is currently undervalued. Some of their key commodities, namely platinum group metals, diamonds and nickel are facing challenging market conditions, which have undermined their respective valuations. If BHP were to acquire Anglo American at current price levels, BHP would be acquiring a meaningfully undervalued portfolio of assets.

 

 

Secondly, Anglo American has spent the greater part of the last decade right-sizing and optimising their asset base. As a result, their key commodity operations are globally competitive and are high margin. Therefore, the potential for big expenditure surprises and/or dealing with operationally challenged assets is reduced for BHP. Lastly, together with Anglo American’s already undervalued portfolio, this deal would de-risk this large acquisition by offering the potential for higher valued unbundlings and divestments down the road, which offers balance sheet resilience and flexibility for BHP.

 

 

Looking ahead, we are likely to see increasing interest in Anglo American from other potential suitors, potentially Rio Tinto or Glencore. The deal value, while offering a roughly 16% premium to the market price on 23 April 2024, remains around 36% off from our fair value for the company. This equates to an additional US$13bn to the current market value. While an oversimplification, to put this into perspective, BHP spend around US$10bn annually on capital expenditure. Buying Anglo American at a valuation of around US$50bn would equate to five years of capital expenditure. Relative to the commodity reserves and resources that Anglo American offer, recreating the same portfolio, taking into account costs for prospecting rights, exploration,  set up, and further capital expenditure to bring to market a new mine, and then the time cost as well, which can be between 7-10 years depending on the size and nature of the mine, Anglo American presents a bargain at these levels and still offers value at an even greater premium to the current value.

 

 

We are also mindful that the takeover process, if successful, will take time and will attract additional integration expenses over at least a 12-month period. Additionally, there are other considerations, particularly anti-trust for copper, and steel-making coal, and the likely separate listing or divestment of De Beers, the world’s largest diamond miner and marketer.  We will therefore be monitoring this deal and the associated dynamics closely as the developments unfold. As per UK takeover rules, BHP have to make a firm offer before 22 May 2024.”

 

 

ENDS