Dividend bonanza looms in BHP takeover of Oz Minerals

OZ Minerals shareholders could get a $1.75 per share franked dividend ahead of the close of its $9.6bn takeover by BHP, which now rests on an independent expert’s report.

Oz Minerals’ copper mining project in Carrapateena, South Australia.

OZ Minerals shareholders could get a $1.75 per share franked dividend ahead of the close of its takeover by BHP, as the company looks to run through its franking credits before being swallowed up by the mining giant.

The two companies locked in the terms of BHP’s $9.6bn takeover offer on Thursday, with the deal’s go-ahead resting on the recommendation of an independent expert report prepared by accounting firm Grant Samuel.

The pair briefly extended the due diligence investigation period last week, but OZ Minerals’ Australian and Brazilian assets ultimately survived BHP’s deep dive into the company’s data room.

With no rival offer having emerged since BHP first pitched a merger deal in August, the deal now rests on the copper price and the outlook assumed by the independent expert.

OZ Minerals initially resisted BHP’s initial $25 a share offer, arguing the company was perfectly positioned to take advantage of an expected shortfall in copper production later this decade and the bid undervalued the company’s medium term value.

But BHP’s “best and final” rise to $28.25 was enough to win over the company’s board.

The copper price briefly surged back above $US8500 a tonne in mid-December, but has since settled back to levels around $US8400 amid ongoing uncertainty around China’s economic recovery.

Macquarie analysts noted this week that copper concentrate imports into China hit a record monthly high in November, with demand for refined copper up during the month, suggesting a price recovery is possible early in 2023.

BHP’s bid for OZ Minerals is still conditional on the independent expert report concluding the offer is in the best interests of OZ shareholders, along with regulatory approvals in Brazil and Vietnam. That suggests a surge in the copper price looks to be the only real risk to the deal. OZ Minerals shares traded as high as $29.75 in January 2022 when copper was traded at long-term peaks above $US10,000 a tonne.

Few analysts expect copper to trade above those levels for any length of time in the near term, however.

OZ Minerals chief executive Andrew Cole.

The two companies have agreed on a $95m break fee if either side walk away from the deal, with OZ Minerals shareholders to vote on the $9.6bn takeover deal in late March or early April.

The terms of the binding agreement between the two companies suggest BHP is in no hurry to progress OZ Minerals’ West Musgrave project in Western Australia, where OZ has been working through the early stages of finding partners and backers for the $1.3bn project.

While the scheme implementation agreement allows OZ Minerals to keep its data room for the project open to potential partners, and to continue to talk to contractors for the early stages of the project, the South Australian miner has agreed to not make any irrevocable decisions while the bid remains on foot.

“OZ Minerals must not enter into any binding agreements for a sale of an interest in the West Musgrave Project (or subsidiaries owning the assets relating to such project) or the sale, disposal, grant of a right, or other grant of an economic interest in the West Musgrave Project,” the agreement says.

The company has also agreed that it will not agree to binding offtake or royalty streaming deals, and that any contract it signs covering work at the project must include a clause allowing the company to cancel on 90 days’ notice.

The agreement lends weight to suggestions that BHP retains a keen interest in West Musgrave as an option to pad out production at its Nickel West operations in WA and reduce its reliance on the state’s mid-tier nickel miners for feed for its smelter and refiner, but wants to make its own decisions around the timing of any construction of the project.

OZ Minerals will also be free to pay a franked dividend of up to $1.75 a share ahead of the takeover being finalised, though the final price paid to shareholders will be reduced by any dividend paid.

The copper miner had about $290m in franking credits at the end of 2021, but has paid 26c a share in fully franked dividends through the year.

The agreement between the two companies prevents OZ Minerals from relaunching its dividend reinvestment plan ahead of the transaction’s close.

The formal bid agreement comes after BHP closed its due diligence investigations this week, and OZ updated its mineral reserve and resource estimates.

OZ added 23 per cent to the underground reserves at its Prominent Hill mine, taking the contained copper at the flagship operation to 590,000 tonnes, according to Macquarie analysts.

But the company again shaved its copper resources at its Carrapateena operations, Macquarie said, with the company reporting lower average grades than previous estimates.

“Since the 2020 update, reserves have declined by more than 10 per cent, driven by the depletion of mined ore and changes to both block model and mine designs. We note the average reserve copper grades have decreased by about 6 per cent,” analysts said.

OZ Minerals boss Andrew Cole said on Thursday the company’s board still believed the BHP offer was in the best interests of its shareholders. OZ shares closed up 2c to $27.80 on Thursday, with BHP down 8c to $46.25.