Anglo’s drastic plan to fend off BHP

Anglo American has unveiled the most radical plans to reshape the 107-year-old producer of copper, coal and diamonds in decades, as it fends off a £34bn deal from industry leader BHP.

Under its new vision, the FTSE 100 group would be rationalised to three divisions — copper, iron ore and fertiliser — shedding long-held mines producing platinum metals, metallurgical coal and nickel, as well as its trophy diamond brand De Beers, through sales and spin offs.

Anglo would also drastically slash spending on Woodsmith, its flagship $9bn project in England that will produce a yet-unproven fertiliser, to buy itself time to build a market for the product and save cash to implement the drastic overhaul.

Anglo’s break-up plans pits South African chief executive Duncan Wanblad against the world’s largest miner, BHP, with a market value of $148bn. Wanblad must demonstrate to shareholders that his management team is better positioned to execute a plan that would end up with much the same result in terms of assets remaining under the Anglo name.

“It’s what we’ve been waiting for. It’s a proper defence,” said one large shareholder in Anglo and BHP. “This puts the ball back in BHP’s court whether they want to pursue it.”

At the core of the mining industry drama is a scramble for copper. Demand for the conductive metal is set to boom because of its use in electric cars, electricity transmission and data centres. New mines have become prohibitively expensive to build at current prices — which are close to their all-time high — creating a perfect storm for shortages.

“Copper is the new oil,” said Jeff Currie, chief strategy officer of energy at Carlyle on Bloomberg TV. “It’s the highest conviction trade I’ve ever seen.”

Anglo hopes that its restructuring can lead to the type of higher valuation achieved by miners solely producing copper such as Freeport-McMoRan.

By hiving off operations and making copper more than half of group production by 2030, up from a third currently, Wanblad is arguing that it provides a quicker and less complex route to doing so than a takeover by BHP. Anglo could realise up to $25bn in asset value through sales and demergers, estimates Wood Mackenzie, a consultancy.

“Anglo for decades has been an interesting self-help break-up story,” said Liam Fitzpatrick, analyst at Deutsche Bank. “If you were to ask investors yesterday for a list of things you want Anglo to do, they have delivered it and then some. It is as radical as it can be without breaking up the whole group.”

BHP’s next move

BHP’s second proposal to buy Anglo at a price of £27.53 per share was rebuffed on Monday but the Australian miner still has until May 22 to make a formal bid, or walk away. It could lodge another improved offer before then.

Many analysts say that BHP’s bid would need to exceed £30 per share to bring Anglo to the table and it may need to drop demands that Anglo ditch its South African subsidiaries Amplats and Kumba Iron Ore as conditions to the takeover.

Anglo’s shares in London fell 3.2 per cent on Tuesday, which analysts said suggested that there is a lower likelihood that the deal will go ahead.

But the takeover battle comes as some shareholders grow increasingly concerned that the mining industry needs greater scale and to build “supermajors” like the oil industry did to stay relevant as equity markets become dominated by tech stocks.

“One of the challenges that I can foresee that the mining sector has is it starts to lose some relevance because of its size in the context of the S&P 500,” said another significant investor in both mining companies.

One big question facing BHP will be whether it is willing to go hostile or not, as well as whether it will add a cash component.

“If I was in BHP’s shoes, I’d wait for Anglo to implement their value unlocking [plan] and come back with an unequivocal takeover offer that offers a massive premium that could be justified on the basis of eliminating the head-office costs,” says Zwelakhe Mnguni, chief investment officer at Benguela Global Fund Managers, an investor in Anglo.

Anglo’s hurdles

Anglo plans to complete the overhaul by the end of 2025 but its ability to execute disposals by then is in question as it needs to find buyers for the businesses and navigate complex government relations and regulatory reviews.

“Anglo’s ability to execute on all of this is questionable,” said Chris LaFemina, analyst at Jefferies. “Simpler is better, but valuation at separation matters as well.”

Wanblad argues that the change of ownership under the BHP proposal would necessitate a “step change” in regulatory risks — particularly in South Africa, which reacted furiously to BHP’s plans to break up a national champion and do away with exposure to the country.

Gwede Mantashe, South Africa mining minister, has already come out in support of the Anglo break up plans over the BHP takeover proposal. “I am happy with the rejection of the BHP deal and I hope it will continue,” he said.

Others acknowledge there is not much between the two proposals, except the management team.

Mike Henry, BHP’s CEO, said at a conference in Miami on Tuesday that Anglo’s plan was a “variant” of BHP’s own vision for the miner. He said that shareholders should decide “how confident they are in the delivery of value from that plan, their timetable and the execution risks”.

Shareholders are clamouring for more details from BHP on synergies that can be achieved if their operations are put together, plus the costs involved in the break up for both sides, which could include an estimated $2bn capital gains tax charge on the Amplats spin off.

Another question is whether Anglo has the bottle to see through the divestitures. In 2016, Mark Cutifani, the previous CEO of Anglo, unveiled a sweeping restructuring plan for the business, which included exiting Amplats and Kumba Iron Ore. Those plans were later overturned after prices of those commodities rebounded.

Potential suitors for Anglo’s assets

Of the units that Anglo is shedding, analysts were most surprised by its coking coal mines in Queensland, Australia — a commodity with a bright future owing to growing demand for steel.

Those mines could fetch an estimated $3bn-5bn, according to Deutsche Bank, which will be used to reduce the company’s $10.6bn of net debt.

BHP itself could be among the potential interested buyers of the coal mines, although it recently sold some of its own Queensland operations. The new breed of coal producers such as Whitehaven, Peabody Energy and Metals Acquisition Ltd could also be interested, analysts said.

Glencore, which is close to sealing Teck’s coal business, could be another. Japanese and Indian steelmakers could also be keen to take a stake in any deal because of their concerns about an oligopoly in the supply of metallurgical coal.

De Beers is set to be sold or spun off in a possible IPO. Analysts say that possible buyers include Gulf sovereign wealth funds, luxury houses, wealthy individuals who want a trophy asset and Chinese private equity firms.

However, advisers warn that the growth of lab-grown diamonds has diminished the interest of several potential De Beers buyers including the Middle Eastern sovereign funds, which themselves want copper and other critical minerals.

Another hurdle for new ownership of De Beers is the government of Botswana, which owns the 15 per cent of De Beers that Anglo does not hold and has yet to finalise a 10-year sales deal extension with the group. The African nation’s partnership with De Beers goes back over half a century and helped turned Botswana into one of the continent’s richest economies, making changes to the relationship hugely sensitive.

Botswana mining minister Lefoko Moagi said that the government was awaiting more information from Anglo. “Be assured in no uncertain terms that Botswana will defend its stake in whatever way or form, as we believe in the diamond business,” Moagi added.

End of an era

Whatever happens, 107-year-old Anglo will not be the same again. Dawid Heyl of Ninety One, which holds 2.1 per cent of Anglo and wanted a higher offer from BHP, said that Anglo’s announcement opens a path for it to become a neater company within 18 months.

“It’ll be a smaller organisation, with a purer focus on future-facing commodities, centred around copper, which is an attractive prospect for investors,” he says.

Even if Anglo is successful in breaking itself up, some analysts warn that Anglo will be in a precarious position next to BHP and other predators such as Glencore and Rio Tinto.

Dominic O’Kane, an analyst at JPMorgan, said: “We believe the inevitable shrinkage of Anglo’s market cap will lead to an eventual outright break-up of the group.”

Additional reporting by Rob Rose in Johannesburg