Copper

Citi’s take on BHP’s failed Anglo American bid

Fri 31 May 24, 10:56am (AEST)
copper

Key Points

  • Disagreements over deal structure saw BHP abandon its final attempt to acquire Anglo American
  • The deal would have required Anglo to spin off stakes in two South African miners
  • BHP continues to explore lower-cost copper production and focus on iron ore and potash projects

BHP’s third and final bid (for now) to acquire Anglo American for $75 billion was abandoned earlier this week, as the two sides failed to agree on the deal’s complicated structure.

A core condition of the deal, as outlined in BHP’s initial approach in mid-April, required Anglo to spin off its majority stakes in two listed South African miners. BHP would then have proceeded with an all-share acquisition of the remainder of Anglo American.

The latest development means another offer from BHP is unlikely, especially as UK law prohibits BHP from making another bid for six months unless there is a rival offer, Anglo invites another approach offer, or there is another material change in circumstances.

In response, BHP management said:

“We remain of the view that there would be clear benefits to both South African communities and the South African government, and that there is a well-established pathway to progress the transaction in South Africa. We also had a clear plan to continue Anglo’s legacy of social investments and sustainable value creation in the region.”

“But unfortunately we weren’t able to reach an agreement with Anglo American on these points nor access key information that would have helped address the risks that they have said exist. Given this, we were not prepared to proceed further with a bid.”

Why Anglo American?

Copper was the main appeal of the acquisition for BHP, with its flat-lining copper production the group’s “Achilles heel” according to a Citi research note.

Anglo American has stakes in three of the world’s key copper mines including Chile’s Collahuasi and Los Bronces and Peru’s Quellaveco.

“An Anglo merger scenario would have lifted BHP’s attributable copper production in FY28 to over 2mt with attributable copper EBITDA over 40% of group EBITDA, making BHP clearly the most leveraged to copper of the diversified miners by a wide margin,” Citi analysts said.

BHP remains the Australian miner most leveraged to the red metal. But addressing declining output from its Escondida mine requires capex of up to US$30,000 a tonne, according to Citi research. This would need a copper price of US$6 a tonne – Citi’s long-term copper price is US$4.08 – to generate an acceptable internal rate of return.

“BHP has to contend with a drop off in Escondida headgrades in FY27 which won’t be offset until either a new and larger concentrator replaces the ageing Los Colorados concentrator and/or large-scale sulphide leaching can be employed,” Citi said.

How BHP stacks up

Weighed against other Australian miners, and assuming it successfully consolidates Escondida, Citi said: “In FY24 we estimate BHP is most leveraged to copper at ~22% of attributable EBITDA, followed by S32 at 19% and then RIO at 10%.”

“Looking forward to FY28, BHP would still be the most leveraged to copper at 34% of att. EBITDA, followed by RIO at 20% and then S32 at 14%.

BHP Group (ASX: BHP)

  • Rating: Retain BUY

  • Price target of $48.50

“BHP continues to simplify its core business and an exit from Petroleum should focus the company on existing large-scale assets in iron ore, copper and metallurgical coal with potash an emerging long-life, large-scale asset,” Citi said.

Screenshot 2024-05-31 at 10.24.28 AM
BHP's share price over 12 months (Source: Market Index)

Risks

“Operating risk in BHP is lower than for smaller metals and mining companies with fewer operations,” Citi said.

On the downside, risks include weaker-than-expected commodity prices, weaker economic growth and currency fluctuations. The same variables present upside risk if commodity prices or economic growth overshoot expectations.

Rio Tinto (ASX: RIO)

  • Rating: NEUTRAL (reduced from Buy on 20 May 2024)

  • Price target: $137

Screenshot 2024-05-31 at 10.29.23 AM
RIO's share price over 12 months (Source: Market Index)

South32 (ASX: S32)

  • Rating: NEUTRAL (reduced from Buy on 23 April 2024)

  • Price target: $3.80, up from $3.50

Screenshot 2024-05-31 at 10.29.39 AM
S32's share price over 12 months (Source: Market Index)

What now for BHP?

BHP will now push forward with internal growth options in its Chilean copper production, ongoing “de-bottlenecking” (improvement of processes and equipment to increase production) of its iron ore projects, and Jansen potash.

It is currently trialling other potentially lower capex techniques to produce copper concentrate, including bio-leaching (a process that extracts valuable metals from a low-grade ore with the help of microorganisms like bacteria) – though as Citi analysts note, “this is not new and presents its own challenges.”

Written By

Glenn Freeman

Content Editor

Glenn is a Content Editor at Livewire Markets and Market Index. Glenn has almost 20 years’ experience in financial services writing and editing. Glenn’s journalistic experience also spans energy and automotive, in both Australia and abroad – including the Middle East – where he edited an oil and gas publication in the United Arab Emirates.

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