BHP’s mega deal comes down to a single question: who do you trust?

BHP may have the popular vote behind it, but Anglo American’s strategy is to run down the clock.

BHP and Anglo are now battling it out over trust.

The $64bn battle to control a slice of the world’s copper market comes down to a single question. Who do you trust?

That’s the choice facing Anglo American investors as they weigh up the choice between chief executive Duncan Wanblad and the BHP boss Mike Henry over bringing much sought-after copper to market.

Based on the reaction of Anglo’s share price so far, Henry has pulled ahead on the popular vote. However, it may be all too late.

The clock is quickly running down for BHP as Henry faces the hard reality of takeover rules in the UK.

BHP has until May 22 before it hits the “put up or shut up” deadline where it is required to either launch as formal bid for the smaller the rival, or disappear for six months.

Remember, BHP’s two approaches so far to Anglo have been informal, with an eye to opening a line of communication for the mega merger. Technically, once May 22 has passed, BHP can return to test the temperature for talks after three months, but Anglo is in no mood for turning.

It’s a board stalling for time, refusing to enter into talks with Henry’s BHP on the calculation that BHP will go away before launching a bid without the backing of Anglo’s board or, more importantly, access the books of the mining rival.

And Anglo’s instinct is on the money. Speaking at the Bank of America metals and mining conference in Miami this week, Henry issued a reminder about BHP’s “very, very hard won reputation for discipline” when it comes to spending shareholders’ money.

“And we do not take that lightly. We will remain disciplined,” he emphasised.

Henry stopped short of explicitly saying so, but the message was arrow sharp. BHP will only proceed by getting access to Anglo’s board and its books. Without that, there is no bid and Anglo shares could again fall away. So who’s going to blink first?

Big promise

This is where BHP is making an 11th-hour pitch to Anglo’s shareholders around trust.

Wanblad had been promising frustrated investors something big, and this is where he delivered.

On Tuesday night, Australian time, he vowed to blow up the company and base it around three core operating businesses.

Indeed, it could have been a slide from any BHP presentation of the past five years as Wanblad spoke about aligning the miner’s current disjointed portfolio to three global mega trends: decarbonisation, improving living standards and food security.

This would result in a new – but smaller – Anglo emerging with a miner built around copper, high-grade iron ore and the Woodsmith crop nutrients project currently under construction in Britain.

To get there would be a complex path to sell the Queensland metallurgical coal business. It would either shut down or sell the challenged nickel business, demerge the platinum metals business and spin off the De Beers diamonds operation. All this would substantially be achieved by the end of next year.

The radical restructure is set to happen at the same time that copper and Brazilian and South African iron ore are getting the right investment, while the spending on the capex-hungry Woodsmith potash and polyhalite mine will be pushed back again.

It’s one of the more radical restructuring plans pitched in response to a takeover approach, and by going down this path, Wanblad hopes to tackle long-running investor concerns about Anglo head on.

One of these is the persistent wild swings in Anglo’s financial performance. This was telling in the past year, when lower-returning commodities like diamonds and platinum dragged down broader earnings.

The new Anglo would have an earnings margin nearly 50 per cent higher, while the annualised cost base would be slashed by $US1.7bn ($2.6bn).

The second issue has been the complexity of Anglo, with its unrelated portfolio and crossholding of listed and unlisted assets all demanding capital from the miner’s relatively small balance sheet.

Credibility test

Wanblad has promised the new Anglo to emerge will have a clearly defined strategy built around high quality assets and a long-term business case.

Following the restructuring plan being released, Anglo’s shares didn’t make it past BHP’s revised all-share offer price equivalent of £27.53 ($52.23). Anglo’s shares opened in London on Wednesday at £26.36.

And this lukewarm response reflects the big challenge that Wanblad needs to overcome: Anglo’s credibility in being able to deliver on all these ambitious plans and quickly.

Much of Anglo’s financial pressures are from its own doing, and this includes the brutal downgrade in copper last December which could have been headed off with sustained capex investment.

At the same time, its Queensland coal mine was closed for two years following an accident that killed one miner and severely injured five others as a result of an underground explosion. Then there are questions around the Woodsmith project that has already been marred by cost blowouts and delays.

Anglo too has a long history of promising to clean up the portfolio and then not delivering on its sale. The more recent example of this was in coal.

BHP chief executive Mike Henry. Picture Aaron Francis

BHP was watching closely and in many ways had expected the nuclear option put forward by Wanblad.

The Australian miner anticipated its approach would force Anglo’s recognition it needed some “self help”. At the same time, the break up and demerger of the platinum metals business endorsed BHP’s own bid approach which called for the demerger of Anglo’s cornerstone holdings in Anglo Platinum and Kumba iron ore operations – both listed in South Africa.

Case for BHP

Henry has pointed to his company’s own record of “operational excellence” in running mines efficiently and project delivery. Likewise, BHP has discipline in funding expansions through its own cashflows.

He also points out the many overlapping synergies between Anglo’s top assets and BHP’s, and this will go straight to shareholders in both companies.

The two demergers aren’t as complicated as many like to make out, Henry told the Miami conference. BHP has undertaken more complex spin-outs, from the South32 base metals business to merging its global petroleum business with Woodside Energy.

Henry said that in this case, the path towards spinning the two businesses was relatively clear and “there’s a long track record” of being able to do it successfully.

Still, there are risks. It could leave some Anglo investors stuck with stakes in smaller listed companies they don’t want to be in. Some investors have mandates restricting their level of exposure to South Africa.

Still, this is all a moot point for BHP, which can’t afford to risk it all by launching a bid without really knowing what is inside Anglo. This includes the tax implications of writedowns that could really shift the dial on valuation.

In large miners, there are all kinds of unseen closure liabilities lurking in the corners and unexpected change-of-control provisions. Collectively, this could add up to many billions of dollars of exposure to BHP shareholders.

Anglo’s board has the ability to stop the May 22 clock by opening the door for talks. A six-month delay in a bid would give Anglo enough time to flush out a rival bidder, or at least a chance for a further recovery in copper price to support its shares.

Unless Anglo’s own investors put the heat on the board to extract some additional value from BHP through talks, all indications are the London-listed miner is determined to run down the clock.

And that removes the choice for Anglo’s investors around trust.

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Originally published as BHP’s mega deal comes down to a single question: who do you trust?