Lure of Anglo's copper mines could test BHP's spending resolve

A general view of Anglo American's Quellaveco copper mine in Peru. Source: Anglo American/Reuters

BHP wants Anglo's prized copper assets in Chile and Peru.

Its $49bn, or $39.38 a share, attempt failed in May, but BHP did not rule out a renewed offer.

Investors and banking sources say at least a 40% per share premium to its current value, including a cash component, is needed to make any offer compelling.

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Anglo has strengthened its balance sheet after receiving almost $6bn in cash from selling coal assets and shares in its South African platinum unit as part of a restructuring plan CEO Duncan Wanblad announced in May.

Its shares have rallied by just over a fifth during the last 12 months, LSEG data show, while BHP's stock has lost almost the same percentage over the same period.

Stiff competition

The market is anticipating any renewed offer from BHP could face competition, the sources said, as a restructured Anglo focused on copper could attract rival bids.

The sources, who requested anonymity because they were not authorised to speak publicly, said the need to come up with an offer that could succeed was a challenge given CEO Mike Henry's stated aim of maintaining spending discipline.

Investors also said it would be difficult.

"There probably is a window for a deal still, but I don't think there is much of one," Ian Woodley, a fund manager at Old Mutual, which holds shares in both Anglo and BHP, told Reuters.

"They (BHP) really have to come in with a strong bid and that's not what they want to do."

BHP has 'moved on'

BHP chairman Ken MacKenzie told the company's annual general meeting on 30 October, it had "moved on" from pursuing Anglo.

The company, however, immediately contradicted its top director.

It said the UK Takeover Panel had confirmed MacKenzie's comments "will not be treated as a statement of intention not to make an offer in respect of Anglo".

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BHP declined to comment for the purposes of this story. Instead it referred to comments Henry made at a conference in Paris on Tuesday.

"We did try the Anglo American acquisition. They had other ideas and they've kind of gone off on their own, but I step back and say plan A for BHP is always to make more of the resources we have both through productivity but also developments," he said.

Hefty offer?

Some Anglo investors said they expected BHP could renew its bid after the company completes the spin-off of Amplats in mid-2025.

An investment banker said Anglo investors could agree to a "hefty offer", but one that comes with a higher cash split. He cited the premium Rio Tinto offered to acquire Turquoise Hill Resources in 2022, as an example.

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BHP outlined plans to invest between $10bn and $14.7bn within 10 years to extract more copper from its giant Escondida mine, where output is forecast to decline, and from the smaller Spence operation. It also wants to restart the Cerro Colorado mine.

Anglo will keep drawing interest from rivals primarily because of its Collahuasi, Quellaveco and Los Bronces mines in Chile and Peru, with rich copper deposits making them longer life assets. It aims to raise output to about 1 million metric tons of copper by 2030 from about 790,000 tons now.

Wanblad's gambit

BHP investors have long warned the company against costly deals and could resist any attempt to pay up for Anglo assets.

"They (BHP) clearly like the assets, but the reality is you can't make the numbers work," Jack Gabb, an investment analyst at Pendal Group in Sydney, said.

Without a reversal in share price values of each miner, making an offer would be tough, investors said.

Investors in Anglo American, which was long undervalued relative to its mining peers, expect to capitalise on a higher premium as the company is re-rated closer to a pure-play copper producer.

A spokesperson for Anglo American said the rerating was expected to continue and the company had already increased from trading around 4.5 times forward EV/EBITDA in the middle of the year to between 5.5 and 6 times now.

The enterprise value (EV) to earnings before interest, taxes, depreciation, and amortisation (EBITDA) ratio is a valuation multiple that compares a company's value to its cash earnings.

"This would indicate that the market is starting to value us differently as we focus the portfolio around copper, premium iron ore and crop nutrients," the spokesperson said.

Not a pure play copper producer

Even after its restructuring, another investment banker said Anglo would not be a pure play copper producer given its Brazilian iron ore business, limiting the extent to which it could be re-rated.

Some Anglo investors also want to see the strategy fully implemented, Old Mutual's Woodley said.

"People might say, let's see Anglo get on with their restructuring and we can see what sort of a company we're left with at the end of that, rather than having someone come in and take it now," he said.