BHP: Tremendous Value If They Get Anglo American At Current Offer Price

seekingalpha05-21

BHP announced its intent to acquire competitor Anglo American to create the world's #1 copper producer in an offer valuing the company's equity at £27/sh.Mainly eyeing the copper assets, BHP intends ...

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class=\"meta\">\n\n\n2024-05-21 02:52 GMT+8&nbsp;&nbsp;&nbsp;<a href=https://seekingalpha.com/article/4694597-bhp-tremendous-value-if-they-get-anglo-at-current-offer-price><strong>seekingalpha</strong></a>\n\n\n</h4>\n\n</header>\n<article>\n<div>\n<p>BHP announced its intent to acquire competitor Anglo American to create the world's #1 copper producer in an offer valuing the company's equity at £27/sh.Mainly eyeing the copper assets, BHP intends ...</p>\n\n<a href=\"https://seekingalpha.com/article/4694597-bhp-tremendous-value-if-they-get-anglo-at-current-offer-price\">Source Link</a>\n\n</div>\n\n\n</article>\n</div>\n</body>\n</html>\n","isBrief":false,"type":0,"news_type":1,"symbol":"BK4168","symbol_name":"多种金属与采矿","start_time":0,"source_url":"https://seekingalpha.com/article/4694597-bhp-tremendous-value-if-they-get-anglo-at-current-offer-price","article_id":"2437891854","we_media_id":null,"thumbnails":["https://static.seekingalpha.com/cdn/s3/uploads/getty_images/2125777801/image_2125777801.jpg"],"rights":null,"url":"https://stock-news.laohu8.com/highlight/detail?id=2437891854","pubTimestamp":1716231146,"sourceInfo":{"source_id":"seekingalpha","name":"Seeking Alpha"},"weMediaInfo":null,"summary":"BHP announced its intent to acquire competitor Anglo American to create the world's #1 copper producer in an offer valuing the company's equity at 27/sh.Mainly eyeing the copper assets, BHP intends 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Growth A Acc SGD-H"},"translate_title":"必和必拓：如果他们以目前的报价收购英美资源集团，将会有巨大的价值","themeId":null,"isJumpTheme":false,"ttsUrl":null,"symbols_score_info":{"KIROY":1,"VALE":1,"TECK":1,"SOUHY":1,"SCCO":1,"RIO":1,"AAUKF":1,"GLCNF":1,"FSUMF":1,"FQVLF":1,"FCX":1,"AFG":1,"ANGPY":1,"BHP":1,"QSD.SI":0.9},"content_text":"BHP announced its intent to acquire competitor Anglo American to create the world's #1 copper producer in an offer valuing the company's equity at £27/sh.Mainly eyeing the copper assets, BHP intends to divest Anglo's South African businesses Amplats and Kumba, potentially looking to exit diamonds and coal down the line.While the divestment plan has drawn political criticism in South Africa, I estimate BHP could unlock significant value and effectively acquire the remaining Anglo assets at just 4x EBITDA.I see Anglo's fair value at £31.4/sh based on a SOTP valuation (~14% above BHP's revised offer) with an upside scenario indicating potential for up to £41/sh (~50% above offer).I view the deal as highly favorable for BHP in both financial and strategic terms, significantly increasing its copper exposure as well as adding nickel and manganese, materials crucial for the energy transition.   JHVEPhoto/iStock Editorial via Getty Images On April 24, Australian mining giant BHP (NYSE:BHP) announced what would be the largest deal in the sector since 2013's acquisition of Xstrata by Glencore. At an initial offer valued ~$39B (paid for in 100% stock at ~£25/sh) the company sought to take over one of its prime competitors in London-headquartered Anglo American (OTCQX:AAUKF). While Anglo's production is highly diversified with significant contributions from copper, iron ore, coal and platinum, BHP's offer mainly reflects its push to increase exposure to copper, a material critical in enabling the energy transition. Acquiring Anglo's copper mines would make BHP the by far #1 global producer of the commodity at over 2,000kt/year and give it a significant edge over its competition in diversified miners and pure-play copper producers. Primarily eyeing the copper portfolio, BHP's offer implies significant divestments, starting with Anglo's South African platinum and iron ore assets and potentially extending to diamond business De Beers and its coal operations. Since the initial offer had been proposed in late April, Anglo had repeatedly stated its intent to remain independent, most recently rejecting an improved offer which valued the company at ~$43B or £27.4/sh. Initially trading at ~£21, shares have since rallied by more than 20% to now trade roughly at offer value, indicating markets pricing in a high likelihood of the deal coming through. Data by YCharts While there has been significant criticism of the deal from political actors, largely related to the implied South African divestments, I do not want to comment on that given my lack of expertise in the area. Instead, I will purely focus on the implied financial impacts to BHP should the deal go through. I find that despite having raised its offer, BHP can still realize significant value at current terms, with a Sum-of-the-parts (\"SOTP\") valuation indicating a fair value ~14% above the offer price. Largely depending on the valuation of Anglo's copper segment, I see up to 50% higher fair value per share should copper trade at above peer average multiples, which I argue it could very well do given its leading profitability and high diversification. Breaking up Anglo could unlock further value for BHP with full divestments of Amplats, Kumba, De Beers and the company's coal assets potentially bringing in up to $25B in proceeds, implying an effective takeover price of $18B for Anglo's remaining assets while increasing net copper exposure by ~5%. At ~$4.5B in 24E EBITDA for those assets, I therefore see an effective realized multiple of 4x, significantly below both current trading of 5.8x and the 5.9x implied by the offer, showcasing the deal structure's highly attractive financials for BHP. [Note: Diversified mining peers refer to Rio Tinto (RIO), Glencore (OTCPK:GLCNF), Anglo American and Teck Resources (TECK). Pure-play copper peers are Freeport-McMoRan (FCX), Antofagasta (OTC:ANFGF), First Quantum (OTCPK:FQVLF) and Southern Copper (SCCO). Additional peers include Vale (VALE), Fortescue (OTCQX:FSUMF) and South32 (OTCPK:SOUHY). All financials in US$ if not indicated otherwise.] Key Discussion Points Anglo acquisition would create the world's largest copper miner and increase BHP's leverage towards the energy transition. By acquiring Anglo American, BHP could boost its copper output to around 2,000kt, making it the largest global copper miner ahead of Chinese Codelco and American Freeport-McMoRan. Notably, this would also put BHP significantly ahead of its diversified miner peers Glencore and Rio Tinto, with both producing less than half of pro-forma output. With copper being a crucial material in enabling the energy transition and demand expected to double by 2035 as per S&P Commodity Insights, I view the acquisition as putting BHP in the leading position to profit off significant secular tailwinds. Largest Global Copper Miners (Bloomberg) While its copper assets are the primary driver behind BHP's push for Anglo, the company is highly diversified, with commodity exposure ranging from iron ore and coal to potash and platinum. Based on FY23 revenue, iron ore makes up the largest part at 25% of Anglo's portfolio, with copper and platinum group metals closely behind at 23% and 21%. Anglo's iron ore assets can be divided into two distinct segments, with the company's majority holding in South African Kumba Iron Ore (OTCPK:KIROY) accounting for the majority, while Brazil assets make up the rest. The platinum assets are similarly not directly controlled but consolidated via Anglo's controlling stake in South African Anglo American Platinum (OTCPK:ANGPY) or Amplats. BHP has expressed its interest to dispose both stakes as part of the deal terms, seeking to reduce exposure to South Africa. Anglo further has significant coal operations, both in met and thermal coal, at 13% of revenues, while a further 13% is contributed by legacy diamond business De Beers. With BHP having partially divested the majority of its own thermal coal assets and De Beers having recently clashed with the Botswana government, I estimate both of those assets to also come under watch for eventual divestments down the line. At roughly 6% of sales, the remainder of Anglo's portfolio consists of nickel and manganese as well as fertilizers with nickel and manganese also critical to the energy transition given their application in solid-state batteries. Assuming a consumation of the deal and proceeding divestments of both Amplats and Kumba, I estimate BHP could boost its net exposure to copper and nickel/manganese by ~1% while cutting down its iron ore exposure by 8%. Not assuming a De Beers or coal exit at that stage, diamonds would further emerge as a new 6% of pro-forma revenue, with coal remaining at 20%.   BHP and Anglo Exposure by Commodity (Company Filings) At current offer terms and depending largely on copper segment valuation, the deal seems highly attractive for BHP. In trying to assess the attractiveness of BHP's offer I use an SOTP approach, valuing Anglo's operations separately by commodity as well as using current market values of its stakes in Amplats and Kumba (79%/70%). To account for sensitivities, I also include a bull and a bear valuation next to my base case, where I use multiples at the top and low end of the peer groups. In the base case scenario, I value Anglo's operations at peer average multiples for copper (12.1x), iron ore (4.6x), coal (5.9x) and Nickel (7.3x) as well as multiples of 5.8x on corporate expenses and 5x on De Beers. Applying those multiples on consensus 24E EBITDA, fair value per share would exceed £31, ~14% above BHP's revised offer of ~£27.5 and implying favorable deal terms at the current offer price. In an upside case where I value each segment at the top end of peer multiples, I see potential for up to £41/sh, ~50% above the latest offer, while a downside case implies a fair value ~15% below current terms, creating what I believe it a highly attractive risk/reward profile.   Anglo American Peer Universe by Segment (WSR Estimates)  Anglo American SOTP Valuation (Bloomberg, WSR Estimates) I find that the most crucial lever in assessing the true value that BHP would add through acquiring Anglo is the company's copper segment, which, at current 24E EBITDA estimates, could be worth as much as 75% of the consolidated company. Anglo's Brazilian iron ore and global met coal operations constitute much of the rest, while De Beers and Nickel/Manganese likely don't exceed a combined value of ~$4B and its fertilizer assets remain a net negative effect. Plotting Anglo's copper division against both the respective copper operations of other diversified miners and pure-play copper producers, I find that it ranks among the best in profitability while also having a considerable level of output, highlighting the asset's attractiveness to BHP. At ~49% projected 24E EBITDA margins, significantly above the industry average of ~40% and only behind pure-play Antofagasta's ~52%, Anglo's copper assets would provide a significant boost to profitability for both BHP's copper segment (~45%) and the consolidated company.   24E EBITDA Margins for Selected Copper Miners (Bloomberg)  24E Production for Selected Copper Miners (Bloomberg) While there is no current market valuation available for the segment, I estimate that a standalone Anglo copper division could trade above the industry average multiple of ~12.1x and towards the higher end of peers in the mid double-digits. I view this as justified given the segment's combination of 1) significant scale, 2) leading profitability and 3) a diversified footprint with no single mine accounting for more than 40% of output.   Anglo Copper Output by Mine (Company Filings) Considering full divestments, I believe BHP can increase copper exposure by ~5% and realize a true acquisition multiple of 4x EBITDA. While BHP targets immediate divestments of both Amplats and Kumba by deal closing, it has also expressed to be considering further asset sales down the line to further streamline the acquired portfolio. I assume the two main candidates for such divestments are De Beers and Anglo's coal operations with the diamond market struggling and coal also including sizeable thermal coal exposure, a space BHP itself mostly withdrew from in the previous years. Assuming full divestments of De Beers and Anglo coal on top of the deal-implied exits from Amplats and Kumba, I estimate BHP's copper exposure to rise by up to 5% to 35% of pro-forma sales while iron ore and coal shares of revenue decline. Notably, the weighting of other commodities including nickel, manganese and potash would also rise by 3% to around 6%. With both nickel and manganese being used in EV batteries and copper being a crucial input to the wider energy transition in electrification and grid expansion, this would provide BHP with a highly attractive portfolio for the decades to come.   WSR Estimates I estimate cash proceeds from those further divestments to potentially reach ~$10B, with Anglo's coal assets at 5.9x and De Beers at 5.0x multiples on 24E EBITDA for respective asset values of $7.7B and $2B. Coupled with the Kumba and Amplats exits, which at current market values would yield $6.5B and $8.6B respectively, this implies total gross divestment proceeds of ~$25B. Assuming Anglo's current valuation of ~$43B as per BHP's revised offer, this would imply a net purchase price of ~$18B for the remaining copper, iron ore and other assets. WSR Estimates Plotting against 24E EBITDA for Anglo's remaining operations, which is currently expected at ~$4.5B (o/w copper ~$3.1B), I therefore see potential for BHP to effectively acquire those assets at a 4x EBITDA multiple. This is significantly below both Anglo's current trading at ~5.8x and the ~5.9x implied by the latest offer, showcasing the tremendous value currently hidden in Anglo's bloated structure. I further estimate this effective 4x multiple to be even more attractive given divestments of most of Anglo's \"lower value\" assets including De Beers and the South African businesses, leaving a higher net focus on copper at ~2/3 EBITDA contribution. Bottom Line I view the potential deal as highly attractive for BHP, both strategically and financially, with acquiring Anglo an effective way to increase its exposure to copper and nickel, two commodities critical in the energy transition. At the latest revised offer of ~£27.5 per Anglo share, I estimate BHP can create significant value with an SOTP on peer average multiples indicating ~14% upside and a fair value per share north of ~£31. Depending on the valuation of Anglo's copper segment, which I view as best-in-class in terms of margins and diversification and therefore would likely trade at a premium to peer average as a standalone entity, I see an up to 50% undervaluation and a fair value per share of ~£41. Should the deal proceed, it's likely that BHP will largely break up the company, immediately exiting equity stakes in South African businesses Amplats and Kumba as part of the offer terms and likely seeking to divest De Beers and Anglo's coal assets later down the line. Assuming full divestments, I estimate BHP could generate proceeds of up to $25B, implying an effective takeover price of ~$18B for the remainder of Anglo's assets (copper, iron ore, nickel/manganese and potash) and increase its net copper exposure by up to 5%. At ~$4.5B in 24E EBITDA for those assets, BHP would therefore pay an effective multiple of 4x EBITDA, significantly below Anglo's current trading at 5.8x and the offer implied 5.9x, highlighting the deal's highly attractive financials. There has been political backlash against the deal, given Anglo's deep entrenchment in the wider South African mining industry and BHP's plan to divest Amplats and Kumba. With Anglo's management also trying to evade the offer by forcing a breakup itself, which at current would include divestments of De Beers and other assets, it remains unclear if and how the deal might go through, however.  Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. 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