Diamonds for sale: Inside the plan to crash BHP’s $64 billion party

Anglo American has shown its hand in response to BHP’s $64 billion bid and the future it envisages looks very much like the one BHP is pursuing, albeit that it would retain its independence if it sees off its larger competitor.

On Tuesday evening, Anglo’s chief executive Duncan Wanblad outlined a break-up of the sprawling 107-year-old mining house that includes a swathe of assets sales and a demerger of its platinum metals group that broadly reflects the same endgame that BHP has proposed.

Anglo American chief executive Duncan Wanblad has outlined the company’s strategy as it tries to fight off BHP.Credit: Bloomberg

In a briefing about the outcomes of a strategic review that was brought forward by BHP’s bid and was held a day after the Anglo board had rejected a second, higher offer from its suitor, Wanblad depicted a smaller Anglo, shorn of its platinum metals, metallurgical coal, nickel and DeBeers diamond businesses and focused on its copper, iron ore and crop nutrients assets.

With the exception of its South African iron ore business (which BHP wants to demerge along with the Amplats platinum metals group), a query over the future of the capital-devouring Woodsmith polyhalite fertiliser project in the UK, and retention of the met coal mines in Queensland, that’s pretty much the vision that Mike Henry and his board have for the Anglo portfolio. They want Anglo’s copper and Brazilian iron ore.

Now that Wanblad has unveiled his response – “the most radical changes to Anglo American in decades” – Anglo shareholders will have to decide whether it is more attractive, on a risk-weighted basis, than what BHP might be prepared to offer if Anglo were prepared to negotiate with it and open its books to the due diligence program BHP is seeking.

That comes down to assessments of the credibility of the management teams, the premium BHP might offer and the execution risks of the competing proposals.

BHP would win on a comparison of the managements.

Where it has spent the past decade reducing its cost base, strengthening its balance sheet and radically reshaping its portfolio via the South32 and petroleum demergers, Anglo has had a spluttering financial performance, is overly leveraged and has only just discovered the potential for $US1.7 billion ($2.5 billion) of annual cost savings.

Unlike BHP, Anglo is also capital-constrained.

Wanblad waxed lyrical about the prospects of the Woodsmith project in the UK, which contains a vast deposit of a potash-like product for which there is currently no meaningful market, describing it as a “unicorn” and a “stonking” project that would produce billions of dollars of cash for decades.

Anglo had planned to spend about $US1 billion a year on the project between now and 2027, when Woodsmith was scheduled to bring its first product to market.

Now the capital expenditures on Woodsmith will be cut back to $US200 million next year and zero in 2026 – the project will effectively be mothballed with only feasibility work continuing. Beyond 2026, its future will depend on whether Anglo can find a partner to share the cost of what’s thought to be a $US9 billion project.

To release more cash and capital to fund its restructuring and deleverage its balance sheet, Anglo plans to sell its high-quality met coal business and says, while it hasn’t started a sales process, there’s been (as one would expect) significant interest in the business, which generated $US1.32 billion of earnings before interest, tax, depreciation and amortisation last year. BHP, with adjacent met coal mines in Queensland, wants to retain those assets.

The radical restructuring Anglo envisages will take cash and time to execute. Wanblad sees the process being completed by the end of 2025, which seems ambitious given the number and complexity of the assets to be sold and the concurrent demerger of Amplats.

Selling off its DeBeers diamond business is part of Anglo’s plan for the future. Credit: Bloomberg

The demerger is interesting because it is part of BHP’s playbook to demerge that business, along with Anglo’s South African iron ore business, a strong cash generator that Anglo plans to retain, probably because it needs those cash flows to sustain and develop its South American operations.

Anglo has criticised BHP’s proposed demergers as being too complex and risky yet is now planning one of its own, which to some degree validates BHP’s approach.

Wanblad argued that the complexity of a demerger and takeover combination, and the range of regulatory approvals required, makes BHP’s plans riskier, but the demerger would be effected ahead of the bid’s conclusion, with the shares in Amplats and Kuma distributed to Anglo shareholders at more or less the same time as they received their BHP shares. Buyers of the assets Anglo plans to divest would also require approvals in various jurisdictions.

BHP has, of course, executed larger and more challenging demergers of its own – South32 and BHP Petroleum were far larger, more complex and operated in vastly more jurisdictions than Anglo’s businesses – and Anglo itself has demerged a number of its own units, most notably Anglo Gold, previously. Both companies are quite familiar with the process and its complexities.

There’s no doubt any demerger of Amplats (and if BHP were to prevail, the also separately listed Kumba iron ore business) will have to obtain approval from the South African government and will involve significant costs, with the capital gains taxes alone amounting to billions of dollars.

Under Anglo’s plan, its shareholders would bear those costs and risks. Under BHP’s proposal, which at its current level would see Anglo shareholders emerge with 16.6 per cent of the enlarged group, BHP’s current shareholders would wear almost 84 per cent of the costs incurred. The same would apply to other asset sales, like DeBeers or the nickel assets.

That’s why, ultimately, the core of the choice Anglo’s institutional shareholders are confronted with is which management team and process they trust to deliver very similar end results more efficiently and then have the financial strength to maximise the latent growth opportunities in Anglo’s very attractive South American copper and iron ore assets.

BHP, of course, while it would absorb the vast majority of the costs and risks of restructuring Anglo, is also offering Anglo shareholders a premium that might well be enlarged if Anglo were prepared to engage with it.

The Anglo strategy is the right strategy for the company.Credit: Bloomberg

While the sharemarket response to Anglo’s presentation of its strategy wasn’t encouraging – the shares dropped more than 3 per cent to trade below BHP’s effective revised offer price – the Anglo strategy is the right strategy for the company.

It would result in a group focused on its best assets – its copper and South American iron ore assets – with a reduced exposure to returns-dilutive businesses and the dysfunctional South African economy.

It’s come years later than it should have, has been unveiled under the pressure of a takeover and at a time when Anglo’s finances are stretched and its execution won’t be straightforward, but it is a good plan.

The question for Anglo shareholders, however, remains whether Anglo’s current board and management or BHP’s should be the ones to execute it.

The answer might entail another sweetening of the offer – BHP wouldn’t have upped its initial offer without Anglo concessions if it hadn’t reserved something more to trade for Anglo’s co-operation – but that’s something that shareholders will only know if their directors are prepared to open a conversation with BHP to see what it might be prepared to offer in exchange for their support.

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