BHP has proposed a £31bn deal to buy Anglo American, one of its largest rivals, in a deal that would mark the mining sector’s biggest transformation since Glencore bought Xstrata over a decade ago.
The big prize for BHP, the world’s biggest mining group, is taking its rival’s prized copper mines, as well as bolstering its position in iron ore and metallurgical coal; two key steelmaking ingredients.
However, the complex deal would necessitate a radical reshaping of 107-year-old Anglo. Under BHP’s proposal, the London-listed miner would be broken up, spinning off its South African-based platinum metals and iron ore divisions. All other units, such as De Beers diamonds, would undergo a strategic review.
Why now?
The world’s largest miners have made it no secret that they want to grow in copper. The highly conductive metal is predicted to have massive shortages in the coming years as demand surges for renewables, power grids and electrical cars. Yet prices are too low for miners to develop new mines. The industry’s top executives are all betting on a price surge in the years ahead.
BHP seeks to get ahead of that price boom. It said that the deal would boost its exposure to Anglo’s copper assets, which are located in Chile and Peru.
Meanwhile, the mining sector is flush with cash after bumper profits from higher commodity prices in recent years. That has primed industry leaders for M&A after a decade of discipline, following disastrous overspending on deals during the last price boom over a decade ago.
The timing also makes sense as Anglo has been on a torrid run under chief executive Duncan Wanblad, who took over in April 2022. Its shares suffered their worst one-day fall in 15 years in December because of bumper downgrades to its production forecasts, making Anglo cheap relative to its rivals.
Analysts say the value of its copper business is masked by the rest of its sprawling business. In particular, De Beers and the platinum metals division have been misfiring, partly because of structural threats to demand from lab-grown diamonds and declining combustion engine car sales.
“The timing is not surprising considering Anglo is reviewing its business,” said one large shareholder in BHP and Anglo American. “Anglo will need to create a compelling alternative if they’re going to defend this.”
Will there be counterbids?
BHP’s largest rivals, which include Rio Tinto, Glencore and Vale, are unlikely to sit on the sidelines, since copper growth is a strategic priority for all of them.
Kaan Peker, analyst at RBC, singled out Glencore and Vale as two potential suitors because of the potential to cut costs by combining the Swiss group’s copper mines with Anglo’s. Meanwhile, Anglo’s former chief executive, Mark Cutifani, has joined a Saudi-backed arm of Vale as chair.
Others say that Chinese mining groups — hungry to secure copper and better positioned to handle the tricky situation with the South African government — should not be ruled out.
“The die is cast for China to come in and trump BHP’s offer with relatively little resistance from the South African authorities,” said John Meyer, a mining analyst at S&P Angel.
Anglo could also go on the offensive by proposing a merger with the second rung of mining groups such as Teck Resources, Freeport-McMoRan or South32, as it seeks to sell other assets.
Wanblad has told the market that there are “no sacred cows” in the portfolio as he undertakes a review of its mines that span copper, metallurgical coal, platinum metals, diamonds and fertiliser.
“We find it hard to believe at first glance that [Anglo] simply won’t argue that there is plenty more they can do themselves rather than simply folding for BHP paper,” said Mark Kelly, chief executive at MKP Advisors.
Where are the synergies between the two rivals?
BHP has signalled that the deal could deliver “meaningful synergies” by sharing procurement and eliminating duplication at mine sites.
Mining M&A only tends to generate large cost savings when the two companies’ operations are in close geographical proximity to one another.
Both BHP and Anglo have copper mines in Chile and Peru, metallurgical coal mines in Queensland and iron ore operations in Brazil, where some savings could be targeted.
Chris LaFemina, analyst at Jefferies, estimates that $750mn of annual savings could be made on Anglo’s $7.6bn forecast earnings for 2025 excluding the two South African divisions that could be demerged.
However, Richard Hatch, analyst at Berenberg, cast doubt on the extent to which they could be achieved.
“There are limited clear operational synergies to us,” he said. “But the main saving would be through corporate general and administrative”.
What are the hurdles to the deal’s completion?
Bankers say Anglo’s complex history and sprawling portfolio make any deal fraught.
One of the most challenging elements will be the response of the South African government — often described as Anglo’s “poison pill” — to BHP’s proposal to spin off the two local divisions. The country’s Public Investment Corporation is Anglo’s biggest shareholder.
Anglo is one of South Africa’s showcase global companies and is one of the country’s largest employers, which makes a break-up a bitter blow to Pretoria during an election year.
South Africa’s minerals resources minister Gwede Mantashe has voiced his opposition to the deal, saying that BHP “never did much” for the country.
Another possible hurdle is antitrust scrutiny. The biggest resistance is likely to come from China, consumer of more than half of the world’s copper, to the creation of a behemoth that could soon produce nearly 15 per cent of global supply.
Iron ore and metallurgical coal are other areas that could face opposition from jurisdictions including the EU and Japan.
The UK should be less of an issue although the Competition and Markets Authority does not comment on deals until there is a formal announcement.
“This deal would produce the world’s largest copper producer, and they are also significant producers of iron ore and coal,” said Tom Smith, a former CMA director now at Geradin Partners. “Two companies of this size would normally trigger merger filings in a large number of countries, and we should expect these regulatory processes to drag out for many months at least.”
Where do we go from here?
BHP has until May 22 to lodge a formal bid for Anglo.
Anglo could start to pursue asset disposals but some shareholders say the company is unlikely to pull up the draw bridge, given chair Stuart Chamber’s record of selling UK businesses such as Pilkington and Arm.
But LaFemina at Jefferies said that BHP was also going to have to raise its bid to at least £28 per share to be taken seriously by Anglo’s board and £30 if other bidders emerged, up from the Melbourne-based company’s opening shot of £25.08.
“None of this is simple,” he said. “Let the games begin.”
Additional reporting by Suzi Ring in London