At Escondida, the world’s largest copper mine, BHP has some problems: ore grades are declining, the rock is getting harder and a $5bn concentrator needs to be replaced. The company will also have to spend as much as $10bn to upgrade the facilities over the next seven years.
The challenges in Chile and a global race for a metal crucial for the energy transition have analysts questioning whether BHP will revive its bid for Anglo American, six months after its initial £39bn takeover attempt failed.
Mike Henry, chief executive of BHP, the world’s largest mining company, has so far been coy about future acquisitions, but is clear that the company wants more copper assets.
“The commodity is so attractive, that we would like to have more by way of future growth,” he told the Financial Times this month.
That hunger drove BHP to spend $2bn for a stake in a copper prospect in Argentina in the summer, raising eyebrows over the price and highlighting strong demand for the metal, which is used in utility grids, wiring and electric vehicles.
The ultimate question is whether BHP’s copper craving will lead to another move for Anglo. Such a deal would create a copper behemoth that controls a tenth of global production, and bolster the Australian company’s growth prospects in copper.
BHP is free to launch another attempt to acquire Anglo from today under London takeover rules that mandate a six-month standstill after withdrawal of the previous offer.
“An approach from BHP is very much still on the cards,” said Marina Calero, an analyst at RBC. “The initial approach was all about copper, and that’s still pretty much the case — Anglo American has a very attractive copper portfolio.”
London-listed Anglo fended off the initial bid and launched its own radical restructuring, which includes disposing of its coal, platinum and nickel assets, as well as the De Beers diamonds business. The plan is already showing signs of success, which could complicate a future bid by BHP.
Anglo, founded in South Africa in 1917, has raised $930mn by selling down its stake in Johannesburg-listed Anglo American Platinum, also known as Amplats, before a planned spinout next year. On Monday, it secured a $3.8bn deal for its remaining Australian coal mines.
The disposal of the coal mines, which happened despite a fire that threatened to derail the process, has strengthened faith in Anglo chief executive Duncan Wanblad and boosted the company’s shares.
Anglo’s share price has risen 18 per cent since early April, before BHP’s first offer, while that of the Australian-based BHP has fallen 11 per cent, making an all-share deal as originally proposed potentially more expensive.
Nevertheless, some analysts and bankers believe that demand for copper and the expense of building new mines mean BHP will probably make another bid.
“The reasons why they had to buy in April are still pretty much all there . . . If anything the case for copper demand has only gotten stronger,” said George Cheveley, a portfolio manager at investment manager Ninety One, who formerly worked at BHP. “They should still do it.”
BHP expects demand for the red metal to increase 70 per cent by 2050, compared to 2021, and for the price to reach $4.5 per pound, the level it uses in internal calculations to assess investment returns, from $4.1 per pound.
As the cost of maintaining production at Escondida and similar mines rises, analysts calculate it will often be more attractive for mining companies to invest capital in buying copper assets, rather than expanding existing ones.
“The capital intensity of the copper projects is going to be higher and higher,” said Chis LaFemina at Jefferies, one of the analysts who attended a recent tour of Escondida hosted by BHP. “I think ‘buy versus build’, still favours ‘buy’,” he added.
Some analysts believe BHP could make a move before Christmas, while others expect it may wait until next year, when Anglo’s restructuring process is further along.
An early move could lead to BHP having to absorb parts of Anglo’s business that it does not want, such as Amplats and the De Beers diamond business.
Preconditions of its first bid included requiring Anglo to sell South African assets such as Kumba Iron Ore. The complicated structure of the proposed transaction, which was vehemently opposed by Anglo’s leadership, ultimately doomed it to failure.
“There’s a very good chance they will just keep their powder dry until they see how Anglo executes [its disposal programme],” said Richard Hatch, mining analyst at Berenberg.
But waiting holds its own risks. BHP might have to contend with rivals who are attracted by Anglo’s streamlined business, or be forced to pay a higher premium as Anglo’s stock gets re-rated.
“Once [Anglo’s management] clean up, they will be an easy target,” said the chief executive of a major mining company.
Glencore, which is already a partner with Anglo in the Collahuasi copper mine in Chile, could be a logical bidder for Anglo, according to bankers.
A potential fall in BHP’s share price, which is closely linked to iron ore prices that are under pressure from the weak Chinese property market, would also make a takeover more expensive.
For Henry, the deal would secure his legacy by reorienting the company towards “future-facing” minerals such as copper and potash.
Since taking up the top role in January 2020, he has sold off the oil and gas business, and all of BHP’s thermal coal mines. In his second year on the job, he approved the $5.7bn development of Jansen potash mine in Canada, and announced that BHP would move its primary listing from London to Sydney.
BHP bought copper miner Oz Minerals for $6.4bn last year, and this year paid $2bn to acquire a 50 per cent stake in Argentine copper miner Filo.
Last month, Henry went to South Africa where he met government officials alongside chief development officer Catherine Raw, leading to renewed speculation that it was preparing a new bid for Anglo.
But BHP’s top executives have learned the hard way to avoid commenting on whether it will come back to bid for Anglo again.
Last month chair Ken MacKenzie said at the AGM that BHP had “moved on” from its Anglo bid. But the company was forced to issue a clarification to the London stock exchange that same day — making clear his remarks were not intended to rule out another bid.
That option remains on the table.
Additional reporting by Harry Dempsey
https://www.ft.com/content/5b44bf5f-c8c7-4e2c-8fbc-f727ea442e81
