BHP’s clever plan for dealing with Anglo’s poison pills

Anglo American has been an increasingly vulnerable target for one of its larger rivals for the best part of two years, but the poison pills in its sprawling portfolio deterred predators. Now BHP has a plan for excising the most poisonous of those pills.

After Bloomberg flushed out BHP’s approach, Anglo American confirmed that the world’s largest mining company had presented it with an unsolicited all-share takeover proposal.

Anglo, which has a market capitalisation of around $52 billion, mines everything from copper to diamonds, iron ore to metallurgical coal. It even has a potash-like project in the UK.

For BHP chairman Ken MacKenzie, a successful takeover of Anglo would be a follow-up to the $9.6 billion acquisition of Oz Minerals.Credit: David Mariuz

Its share price has nearly halved over the past two years and is down more than 12 per cent over the past year after fissures opened up in its diamond, platinum and South African iron ore businesses. (It was down 30 per cent only a few weeks ago, suggesting a possible leak of BHP’s interest).

In confirming the BHP approach, Anglo said the offer would be preceded by separate demergers by Anglo of its entire shareholdings in Anglo American Platinum and Kumba Iron Ore to Anglo’s shareholders.

Amplats, as it is commonly known, is the world’s largest producer of platinum and related metals like palladium and rhodium, where prices have slumped as long-term prospects for metals used largely in catalytic converters for internal combustion engines are under a cloud.

South Africa’s iron ore business, like many South African businesses, has been savaged by the country’s failing transport and power networks.

The issues within those units, an unexpected and sizeable cut to Anglo’s South American copper production and a massive $US1.6 billion ($2.5 billion) writedown in the value of the De Beers diamond business, were responsible for the steep fall in Anglo’s earnings last year. Underlying earnings slumped 30 per cent to $US9.96 billion, and Anglo’s dividend was almost halved.

Demerging Amplats and Kumba would remove the worst of the cankers within the portfolio.

It’s interesting that De Beers – which has suffered from the incursions of lab-grown diamonds in the US, which are a long-term structural threat, and weak demand from China, perhaps a more cyclical development – wasn’t also included in BHP’s demerger proposal. BHP exited the diamond industry more than a decade ago.

While it does have those challenged businesses within its portfolio, Anglo also has some that would be very attractive to BHP, and other major industry players.

It has a big copper business in Peru and Chile, even after cutting its production target from a million tonnes a year to between 730,000 and 790,000 tonnes for the next two years.

It also has a 25 million tonnes-a-year iron ore mine in Brazil with significant expansion potential after Anglo struck a deal with Vale earlier this year that would bring a 4.3 billion tonne Vale resource into the Minas-Rio project in exchange for an initial 15 per cent equity interest.

It also has a potash-like, $US9 billion polyhalite project in north-east England which, given BHP’s enthusiasm for potash, it might find interesting, as well as a significant metallurgical coal presence in Australia.

Anglo American has a number of mines in Australia, including coal operations in Queensland.Credit: Bloomberg

Thus, stripped of the two most troublesome South African businesses, the remaining Anglo portfolio contains much that would fit neatly next to BHP’s existing copper, iron ore, met coal, and potash operations – particularly the copper assets at a time when everyone is looking to grow their copper exposures.

For Mike Henry and his chairman, Ken MacKenzie, a successful takeover of Anglo would follow up on the $9.6 billion acquisition of Oz Minerals and its South Australian copper resources completed last year, adding another big copper resource, whose scale would be difficult to develop organically.

Where the Oz Minerals bid was cash, the approach to Anglo is all scrip. While BHP’s share price is down about 10 per cent this year amid weaker commodity prices, particularly for iron ore, that is a way to reduce the risk of acquiring a company that has more than its fair share of problems while offering Anglo shareholders exposure to any upside that BHP’s highly respected management can create.

Anglo has been slashing its workforce and its contractors as part of a planned $US1 billion attack on its cost base under its relatively new chief executive, Duncan Wanblad.

Wanblad had the misfortune not only to succeed Mark Cutifani, the Australian who rescued Anglo from an earlier brush with disaster, but to take up the role just as the host of issues began to surface.

Earlier this year, amid speculation that an activist shareholder might target Anglo, he said he was better placed to remake Anglo’s complex portfolio than anyone else. That might be an easier argument to make against an opportunistic activist than against BHP’s highly credentialed management.

Anglo shareholders’ unpleasant experiences over Wanblad’s two years at the helm might help BHP convince them that a change of ownership and new management of Anglo’s core assets would be to their benefit.

The takeover approach might, of course, go nowhere. Anglo and/or its shareholders might decide that the terms, yet to be disclosed, aren’t sufficiently attractive, and BHP, which is highly disciplined when it comes to its capital allocations, might decide that the price of success is too high.

It’s also possible that it might flush out a competitor. It is almost inevitable that Glencore and Rio Tinto would have been keeping an eye on Anglo, a perennial target, as its share price tanked. Glencore, though, might find it has its hands full digesting its $US6.9 billion acquisition of Teck Resources’ met coal assets last year, and both would be wary of a confrontation with BHP.

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