Sizing up the return of mining megadeals

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Dear reader,

It has been so long since we saw proper, big, unsolicited M&A in Europe that everyone is getting reacquainted with how it works. It is even longer since these deals troubled the mining sector, where the last blockbuster was struck in the aftermath of the supercycle’s bust with Glencore’s takeover of Xstrata in 2013. 

I was the FT’s mining correspondent at the time. The return of megadeals to the mining sector, with BHP’s £31bn all-stock approach to buy Anglo American, gives me serious flashbacks. This deal probably won’t happen in its current form but it has a long way to run. Some thoughts below — as well as links to the Lex column output on the deal.

First, this is a sector that still bears serious scars from the last cycle’s deals done in the wrong commodities, at the wrong time and at the wrong price. This time is different, of course: it always is. With BHP considering its next move — and the mining world set to gather in Miami for the Bank of America conference next week — chief executive Mike Henry will trumpet the miner’s disciplined approach on behalf of its shareholders. Just remember that Marius Kloppers did the same in 2008 when then-BHP Billiton’s year-long pursuit of Rio Tinto collapsed. It didn’t stop the company embarking on more ill-fated acquisitions, notably in US shale.

Second, whatever the price on offer, BHP will have to restructure its deal. You can read Lex’s original take on the BHP proposal here, arguing that it would need to pay more. But there is no real reason (beyond an absolutely unmissable price) that Anglo’s board should agree to a structure where it is asked to bear the risk and burden of spinning off its stakes in Johannesburg-listed Anglo American Platinum and Kumba Iron Ore. Miners know a thing or two about extracting crown jewels — in this case Anglo’s copper assets. You want it? You take the commodity and structuring risk. 

Third, Anglo is something of a poison pill in and of itself. Set aside its South Africa exposure, where BHP has already got itself in hot water by structuring its deal in a way that seemed designed to minimise its interaction with the country. No one out there really wants Anglo in its current form — quite possibly not even Anglo shareholders. Ultimately, this deal may boil down to a choice of which team investors would prefer to see dismember the miner, and how.

Anglo has been through multiple strategic reviews of its wide-ranging portfolio. One question is what defence plan the management and board will come up with to unlock value on their own terms (you can read some of Lex’s thoughts here). Some of that will doubtless be operational improvements, or alleviating infrastructure challenges in South Africa. But some should be structural, not least to free up capital to invest in what everyone actually wants — copper growth — or even what Anglo CEO Duncan Wanblad has hung his hat on, which is the Woodsmith polyhalite project in northern England.

BHP has a potential problem here too: the Australian group has embarked on a convoluted £31bn takeover essentially to get hold of Anglo’s three copper mines, which account for only about a third of the miner’s ebitda. Its shareholders may balk as the price rises. Sure, BHP would happily keep some of Anglo’s other assets. But I’m willing to bet that only a few meet the exacting standards of the miners from Melbourne. 

Fourth, think about white knights as well as rival bidders. Despite fevered speculation, the odds on a counterbid for the whole of Anglo seem pretty long to me. Every mining group would like Anglo’s copper mines. But BHP, with a market value of about $145bn, is one of the few that has the heft to absorb the costs and risks of prising them apart from the rest of its portfolio. 

As Barrick Gold’s Mark Bristow put it in an FT interview this week: “BHP is the ultimate 800-pound gorilla. It’s a complex transaction. It’s hard to imagine how we could be competitive in that process.”

Rio Tinto is big enough but probably doesn’t have the risk appetite for it. Glencore makes some sense in terms of Anglo’s assets (the two are partners in Collahuasi copper mine, say) and would be less troubled by South Africa exposure. But even for mining’s ultimate dealmaker this would be a complex mouthful, at a point where it is already dealing with the acquisition of Teck’s coal business. 

Everyone, however, will be looking for an angle — for how to use this situation to prise off a desirable morsel or get a stake in one of Anglo’s crown jewels as the miner looks for ways to demonstrate value and defend itself.

Fifth, as Bristow implied in his interview, this deal isn’t good for the planet. The world needs more copper and other metals that are crucial for the energy transition. Buying existing mines via the stock market doesn’t do much (caveat below) to make that happen. As Bristow said, “the industry needs investment in its future”. 

A legacy of the supercycle bust is aversion among investors to greenfield exploration and development, at a time when building big mines has become harder, more unpredictable and more expensive. Lex looked at the “build versus buy” copper maths that lies behind BHP’s proposal. Even with the copper price on the rise this year, it is still below levels needed to incentivise the building of new mines. 

The BHP logic is that, in a world where mine building is tougher and takes ever longer, only the biggest will have the heft and cost of capital to take on those projects. After all, even mining’s big gorilla is just a quarter the size of ExxonMobil. Mining’s “big four” combined don’t rival the biggest of Big Oil, and are worth less than half an Eli Lilly, let alone the US tech giants.

In taking on this mega-deal, BHP has signalled not only its determination to shift its portfolio decisively away from steel-making commodities such as iron ore — but also its belief that the era of the mining supermajor must begin.

In Lex this week

• European oil majors see money to be made by moving their listing to the US. TotalEnergies will report in September on a possible shift to New York. There have been mutterings of the same for Shell. The discount of European oil company valuations to their US counterparts owes something to an even wider strategic gap, argued Lex. Without a change in strategy, which the companies aren’t suggesting at the moment, a listing switch wouldn’t be an easy fix. Read more here.

• Cryptocurrency was supposed to democratise finance. Wall Street, though, always finds a way to win. Vulture funds that paid very little for secondary claims in the bankruptcy of cryptocurrency exchange FTX are set to get at least 118 cents on the dollar, thanks to events since the company’s collapse in 2022. In the chaotic weeks after the FTX bankruptcy filing, those claims were changing hands for well under 20 cents on the dollar. The task was to find, collect and sell every FTX asset under the sun for cash. And those assets were pulled in just as crypto prices were surging, along with the value of the company’s venture capital portfolio. Get the details here.

• Be it pandemics, storms, wars or pay disputes, airline managers are rarely without worry. In Europe, they have another to add to the list: lowly valuations. No chief executive thinks their share price is high enough. But Europe’s flag carriers look particularly under-appreciated — despite the fact that problems with aircraft deliveries and parts such as seats will constrain capacity in Europe this year, a market that has generally been oversupplied. Find out more.

Things I enjoyed this week

In my established tradition of recommending TV that everyone else watched years ago, I am enjoying Stanley Tucci’s Searching for Italy. 

How do you avoid flaming out as a child star, both in terms of lifestyle and career? How Daniel Radcliffe went from 11-year-old unknown, to Harry Potter and beyond. 

What did the “placenta chef accused of cannibalism” do next? Eat a lot of vegetables, it turns out. 

Have a good weekend,
Helen Thomas
Head of Lex