BHP’s bold bid for Anglo American, minus its key South African assets Kumba and Anglo American Platinum (Amplats), is already being dubbed the biggest mining buyout offer in a decade.
Why BHP would want to amputate these profitable businesses from the Anglo American rump is not hard to imagine – they’re in the wrong country.
Load shedding and Transnet’s creaky rail network have hobbled production, especially for Kumba’s iron ore exports. Though that’s just part of it.
It’s also reported that London-headquartered De Beers, with operations in Botswana, Namibia, SA and Canada, is potentially up for sale.
Is SA even investible at this point from a mining standpoint?
“Unfortunately, SA has been uninvestible since 2004, when the Mineral and Petroleum Resources Development Act [MPRDA] came into being, and all the add-ons that followed,” says Peter Major, analyst with Modern Corporate Solutions.
Though not mentioned by either BHP or Anglo, it’s clear that SA is seen as a pariah in mining investment terms.
BHP has long distanced itself from SA, having unbundled its coal, aluminium and other assets to South32.
A stifling regulatory environment, onerous Black Economic Empowerment (BEE) requirements and the unpredictability of running large and complex operations in the midst of load shedding and declining rail capacity – notwithstanding recent improvements in both areas – have placed SA on a “no-go” list for most large mining groups.
It’s simply too difficult for mining houses to achieve a competitive rate of return on assets in SA, given the unpredictability of operating in a country where so many factors are beyond their control.
Kumba would perhaps be a decent fit for BHP, which has iron ore operations in Australia and Brazil, but that’s clearly off the table. It’s a great company, and well managed, but it’s located in SA.
Says James Lorimer, the DA’s shadow minister environmental affairs, forestry and fisheries: “Questions must be asked, if this is indeed the case that they are not interested in SA because these [excluded] assets are South African, then it is very concerning.”
Market analyst Syd Vianello posted on X: “I reckon AGL is over. Wouldn’t be surprised if Rio Tinto bids too. Both BHP and Rio have complementary assets to AGL.
“Rio has diamonds experience. No-one wants SA exposure. Both will close expensive London cost structures, move everything to Aussie,” he added.
Kumba, the world’s fifth largest producer of iron ore, was forced to cut production last year and start stockpiling because Transnet couldn’t ship enough volumes from the Northern Cape to Saldanha Bay.
Instead of planning for growth, executives plan for downsizing, which is what happened when Kumba announced around 500 job cuts in February.
Amplats is likewise a well-run, if volatile, business that strays far outside BHP’s bulk commodity focus. It has announced close to 4 000 job cuts, but the government urged it to hold off.
Miners elsewhere in the world are not used to operating this way. They need to be nimble and decisive when it comes to cost cutting.
The real prize for BHP is Anglo American’s copper assets, mainly in South America, its Minas Rio iron ore operation in Brazil, and the potentially interesting Woodsmith potash in the UK, which could be partnered with BHP’s Jansen potash mine in Canada.
Chinese investors have shown appetite for large transactions of the kind just launched by BHP and may be tempted to enter the fray, as may BHP competitors such as Rio Tinto.
China is the world’s largest buyer of copper and iron ore, and that alone might trigger interest from customers eager to secure control over the supply chain of crucial commodities produced by Anglo.
Prior to the proposed all-share bid by BHP, Anglo had been on the radar as a potential takeover target. Its share price had halved since peaking in April 2022, which was largely due to declining commodity prices, but in Anglo’s case, it was overdone considering the 12% drop in the MSCI World Metals and Mining index.
The relatively large exposure to Amplats, which accounted for 12% of Anglo’s cash profits in 2023, down from 30% the prior year, weighed mercilessly on its share price.
Automakers accumulated large inventories of platinum group metals (PGMs) following the Covid slowdown of the last few years, and it will take some time for that to unwind.
Anglo’s controlling share in Kumba meant iron ore was the largest source of profits last year, followed by copper – which has been trending back towards its May 2021 high. It could take a few interest rates cuts to ignite metals and commodities prices, though that is likely to be a delayed reaction, possibly later this year or into 2025.
Anglo has traded at sizeable discounts to net asset value in recent years, sometimes more than 40%. The BHP offer has largely eliminated that, indicating that BHP and any other potential bidders will have to improve their offers.
Exodus from London
Another aspect of the BHP bid that has London concerned is the potential for a corporate exodus from the city.
“The buyout offer from BHP, the world’s largest publicly listed miner, for Anglo American, won’t just shake up the mining industry, but will send a fresh chill through the City of London,” says Susannah Streeter, head of money and markets at Hargreaves Lansdown.
“There are concerns that if the deal goes through it could be the tip of the iceberg and more giants could leave the [London Stock] exchange.
“It comes hot on the heels of speculation that Shell might up sticks and leave for New York, rumours that Ocado may be considering leaving for the Big Apple, and follows the crushing disappointment of home-grown chip designer Arm choosing the Nasdaq over the FTSE 100,” adds Streeter.
Like the JSE, the London Stock Exchange is looking at a dwindling pool of shares, which means investors will have to look elsewhere for quality mining assets.
Anglo American moved its primary listing to London in 1998, marking the start of a migration away from SA. The rationale then was to position itself near the heartbeat of the world’s largest capital market. Barely six months ago, AngloGold Ashanti followed suit, moving its primary listing to New York.
BHP might have ignited a bidding war, but the possible disappearance of the once mighty Anglo American, which at its peak controlled a staggering 25% of South Africa’s GDP and an estimated 60% of the JSE, is yet more tangible proof of SA’s deepening atrophy.