By Nathaniel Taplin
Anglo American, one of the world's top miners of copper, diamonds and platinum, has spurned the advances of BHP, its larger peer from Down Under.
But that is unlikely to be the end of the story. Anglo's challenges aren't purely cyclical or operational: It faces real strategic problems that could continue to weigh on profitability. BHP may raise its bid, or other big miners could throw their hat into the ring. One way or another, some of Anglo's assets seem destined for new owners.
BHP, the world's largest listed miner, shocked the mining world this week with an unsolicited all-stock offer for Anglo that valued the firm at about $39 billion. Anglo shares closed up 16% at 25.60 British pounds on Thursday, above the implied offer price of GBP25.08, equivalent to $31.38. LGIM, one of Anglo's major shareholders, called the bid "highly opportunistic" and "unattractive." On Friday, Anglo formally rejected it.
Complexity was one problem with BHP's proposal. It would have required the company to spin off its platinum and iron-ore operations in southern Africa, embroiling both companies in local politics just ahead of a South African general election.
BHP plainly wants Anglo's copper -- one of the "future-facing commodities" at the heart of its growth strategy. Tackling climate change will require vast amounts of the metal for transmission lines, wind farms, electric vehicles and other uses. A merger of the two companies would create the world's top copper miner.
But lurking in the background are other important commodities: coking coal, diamonds, platinum and nickel. The deal would have put BHP in the top spot for metallurgical coal, used to make steel. Unlike the thermal coal used for power generation, the metallurgical kind still has no obvious replacements.
Diamonds and platinum, meanwhile, are at the root of Anglo's strategic problem. The firm, through its subsidiaries, is the top global producer of both. And both businesses are in trouble.
On the face of it, it is easy to see why some investors were unimpressed with BHP's bid: As recently as January 2023, Anglo's shares were trading at around GBP36, roughly 40% above where they sit now. But by other metrics, Anglo doesn't necessarily look that cheap: Its market value including debt now stands at about 8.6 times forward operating profit, according to FactSet. While any acquirer will have to pay a control premium, Anglo's multiple following the bid is the highest since 2016 and well above BHP and rival iron-ore producer Rio Tinto, which both clock in around seven times.
One reason Anglo's stock has been weak lately is the firm's struggling diamond, platinum and nickel businesses. Anglo wrote down its De Beers diamond and Brazilian nickel operations to the tune of $2.1 billion in February, helping push net debt to 43% of equity, according to FactSet -- also its highest since 2016. Chief Executive Duncan Wanblad announced a strategic asset review alongside the company's annual results, saying that "nothing is off the table."
And while diamond, platinum and nickel prices are suffering partly for cyclical reasons, there are structural concerns too. China's meltdown in real estate and consumer confidence and the increasing acceptance of synthetic diamonds -- more than a third of engagement rings in the U.S. had synthetic stones in 2022, according to one survey -- could weigh on diamond prices for years. No surprise then that Anglo is on the hunt for buyers for its controlling stake in De Beers diamonds, as The Wall Street Journal reported Thursday.
Nickel faces similar structural headwinds, despite being another of BHP's future-facing commodities: Massive Chinese investment in low-cost nickel mining and processing in Indonesia is swamping global markets. And platinum demand is underpinned by its use in catalytic converters, making the metal a loser in the shift to electric vehicles. Macquarie estimates that automotive platinum demand could peak as soon as 2025.
To be sure, not everyone sees dim prospects for diamonds and platinum. While acknowledging the headwind from synthetics, Wanblad noted in February that diamond demand tends to move with global growth, meaning it could eventually recover along with economies such as China's. The slowing transition to EVs and rising interest in hybrid vehicles could give automotive platinum demand a longer-than-expected tail.
And Anglo's core iron ore and copper businesses are still churning out cash, despite some operational problems recently. The company sharply lowered its production guidance in December, including for several key South American copper mines. The firm's total copper production was down about 14% sequentially in the first quarter of 2024, although still up 11% on the year. The bull case for Anglo is that copper prices will head much higher, these operational issues will prove transient, and it will get a good price for De Beers.
All of that may yet come to pass. Copper prices are on the rise, for now. But if operational issues persist, copper prices stumble or the company is forced to write down once-choice assets further, then the likes of LGIM might warm to takeover approaches. Whatever happens, this week's proposed megadeal will likely trigger some kind of reordering of the mining world.
Write to Nathaniel Taplin at nathaniel.taplin@wsj.com
(END) Dow Jones Newswires
April 26, 2024 07:04 ET (11:04 GMT)
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