Anglo American (AAL) Ordinary USD0.54945

After several rounds of discussions, Anglo American denied BHP’s request to grant another extension to the window it had to make a firm offer to buy the business.

The latest proposal implied a value of £31.11 per share, based on BHP's closing price on 22 May. However, it contained several complex requirements for Anglo to de-merge assets that ultimately proved the sticking point.

BHP has decided not to make a firm offer.

The shares were broadly flat on the day.

Our view

Anglo American has rejected a third proposal from BHP and shut the door on any firm offer coming its way. The increased implied price clearly didn’t prove enough to offset concerns around the complex deal structure.

This comes as Anglo is about to undertake a hefty portfolio reshuffle. Management is looking to create a more agile and streamlined business with a focus on copper, premium iron ore, and crop nutrients. But getting there will take some work.

Anglo will need to get rid of several assets: steelmaking coal, nickel, platinum, and diamonds. There’s a mixture of sales, de-mergers and other options on the table to ensure maximum shareholder value is achieved. But no matter how well-planned this process is, there’s a lot of risk.

Broadly speaking we are supportive of the move. Recent takeover talk has accelerated these plans, but for a while now it had looked like Anglo was struggling to unlock the full potential of its assets while housing them all under one roof.

Once complete Anglo’s current production will be close to an even split between copper and iron ore. These are two areas we’ve liked for some time. For copper, the Quellaveco mine in Peru finished its ramp-up over 2023, and in Chile, there are plans to increase production from Collahuasi – both are high-margin assets.

The iron ore portfolio is set to expand with the Vale deal adding a fresh resource base to the Minas-Rio mine. We like the deal, it gives access to higher-grade ore which is not only more attractive to buyers but should also lead to lower costs. But it’s a long way off, so not something likely to have an impact anytime soon.

Then there’s Woodsmith, an exciting crop nutrient asset currently in the early stages of development. The breaks have been put on, and investment is set to slow from previous plans. We think this is another good move, the best outcome is for Anglo to bring on a partner to share in the development costs, and the risks.

Sentiment around Anglo before all the offer talk came along was questionable, after production cuts and struggling performance from some of its assets. We think the new strategy has a good chance at unlocking value, and the proposition of a more streamlined Anglo focused on copper and iron ore is attractive.

But executing such a huge reshuffle brings a host of risks and is expected to take a couple of years to complete. The near term has become quite tricky to map and investors should prepare for volatility.

Environmental, social and governance (ESG) risk

Mining companies tend to come with relatively high ESG risk. Emissions, effluences and waste and community relations are key risk drivers in this sector. Carbon emissions, resource use, health and safety and bribery and corruption are also contributors to ESG risk.

According to Sustainalytics, Anglo American’s management of material ESG issues is strong.

Climate targets include carbon neutrality across operations by 2040. There are also targets for a 30% improvement in energy efficiency and a 50% reduction in freshwater withdrawal against 2016 levels in water scarce areas by 2030. There is a strong renewable energy programme, which is expected to fully meet energy needs in Chile, Brazil, Peru and South Africa.

ESG data sourced from Sustainalytics.

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