By Christian Moess Laursen
The potential deal between BHP and its London-based mining rival Anglo American, which would be the largest takeover in the industry in years, is being hindered by headwinds roiling the sector in South Africa.
BHP is eyeing the diversified miner mostly for its copper assets, while it wants to avoid the South Africa-based ones, which have been hamstrung by tumbling commodity prices, persistently high costs and continued logistical strains over the past year.
On Friday Anglo American rejected a 31.1 billion pounds ($38.91 billion) takeover approach from its Australia-listed rival, citing too much uncertainty and complexity around the structure of the proposal, significant execution risks and a low valuation.
The proposed deal was contingent on Anglo American spinning off its two South African subsidiaries, Anglo American Platinum--or Amplats--and Kumba Iron Ore.
The exclusion of these assets highlights the risks around the South African operating environment, as well as a persisting negative sentiment around platinum group metals, JPMorgan said in a note.
Analysts at Swiss-based equity-research firm Baader Helvea saw the deal's structure as a way for BHP to distance itself from the troublesome assets while walking away with the attractive ones.
In December, Kumba Iron Ore cut its production forecast through to 2026 due to logistics issues at Transnet--South Africa's state-owned freight rail and port operator--which forced it to stockpile its mined iron ore.
"It will take time for conditions to improve and a longer-term solution to be implemented," Chief Executive Duncan Wanblad said in a presentation to investors when announcing the downgrade.
Kumba produced 35.77 million metric tons of iron ore and contributed $2.415 billion in underlying earnings to the group's $9.96 billion last year. Its shipping costs are more than double those of Rio Tinto and BHP, according to a note from SP Angel.
Meanwhile, Amplats--the world's largest platinum-metals producer--has seen its share value slump 41% over the past twelve months as the platinum group-metal--or PGM--sector suffered under tumbling prices and persistent inflationary cost pressures, especially in South Africa.
The business delivered $1.2 billion in underlying earnings last year compared with $4.42 billion in 2022.
In February, Amplats said it could cut around 3,700 jobs in a restructuring to address these challenges. Other industry peers have outlined similar measures, with Impala Platinum saying it will potentially shed around 3,900 workers and Sibanye-Stillwater setting out a restructuring plan that could affect more than 4,000 jobs.
BHP--the world's largest miner by market cap--isn't likely to accept a deal that includes those South African assets, should negotiations continue. "We cannot see BHP as logical owners of Anglo American Platinum or Kumba Iron Ore," Berenberg analysts wrote in a note.
The company has until May 22 to make a firm offer for Anglo American or walk away under U.K. Takeover Panel rules. But as the proposed deal stands now, it is more likely to fall through given Anglo American's criticism of the way it is structured, the German bank said.
In addition, the company's largest shareholder is South Africa's Public Investment Corporation, and its reaction to the idea of Anglo American disposing its stakes in Amplats and Kumba could be difficult to gauge, SP Angel said.
"While the PIC may see opportunity in allowing Amplats and Kumba to cast off from Anglo, they may also prefer to hold the group together," SP Angel said.
Still, if BHP does indeed chase the deal, its highly likely other bidders would emerge as Anglo American would be a compelling fit for most majors, Jefferies analysts wrote in a note. Rio Tinto, Glencore and Barrick Gold have been named as potential bidders in recent reports.
Finding a feasible solution for the South African assets will be crucial for anyone joining the race, according to Baader Helvea. "The odds are lower as anyone, like BHP, would be wary of the South African concerns and truth be told, there's no easy solution to this," Baader Helvea said.
Write to Christian Moess Laursen at christian.moess@wsj.com
(END) Dow Jones Newswires
April 30, 2024 08:58 ET (12:58 GMT)
Copyright (c) 2024 Dow Jones & Company, Inc.
Comments