Glencore-Anglo American Tie-Up Makes More Sense Than BHP Offer, Analyst Says

Diversified miners Glencore GLNCY and Anglo American NGLOY offer a better match than that proposed in BHP Group‘s BHP offer for Anglo, RBC Capital Markets analyst Marina Calero said in a note to clients on Friday.

Last week, Australia-headquartered BHP said it had made a $39 billion offer for London-based Anglo, which swiftly rejected the proposal as too low. This week, Reuters reported that Glencore, which is based in Switzerland, is considering a bid for the UK miner.

"We see the potential for a GLEN/AAL combination to have higher synergies vs. BHP/AAL given the closer proximity of the assets and the potential synergies for GLEN’s marketing division," Calero said.

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Copper assets are at the heart of both companies' interest in Anglo as the red metal is a key component of electric vehicles and renewable energy installations, demand for which is accelerating as nations around the world transition away from fossil fuels. All three diversified miners are also involved in coal.

"Mining synergies would largely come from the South American copper division and the Australian coal assets," Calero said.

In Chile:

• Anglo and Glencore each hold a 44% stake in the Collahuasi mine, which has some of the largest copper reserves in the world. 
• Glencore owns the Lomas Bayas mine. 
• Anglo has a 50.1% stake in the Los Bronces mine and the same stake in the El Soldado mine.
• BHP owns 57.5% of Escondida, the world's biggest copper mine. It owns the Pampa Norte mine.

In Peru:

• Anglo owns 60% of the Quellaveco mine.
• Glencore owns the Antapaccay mine. 
• BHP owns 33.75% of the Antamina mine, with Glencore holding the same percentage.

In Australia, all three companies have coal assets in Queensland.

RBC estimates that a combined Glencore-Anglo American would get 28% of its earnings before interest, taxes, depreciation and amortization (EBITDA) from copper, 19% from coal for electricity generation and 9% from the kind of coal used in steelmaking.

A combined BHP-Anglo would get 41% of its EBITDA from copper and 9% from coal, according to RBC figures. 

Anglo has said the structure of the BHP offer is "highly unattractive."

It is contingent on the UK company spinning off its shareholdings in Anglo American Platinum Ltd. ANGPY and Kumba Iron Ore Ltd. KIROY, which are both listed in South Africa. 

In a merger with Glencore, the combined company might be able to keep the platinum and iron ore assets, Calero said. 

"We view a combination of AAL with GLEN as potentially easier since the miner already has some assets in South Africa—coal, chrome and vanadium—and could be open to take on Amplats and Kumba into its portfolio," Calero said.

Jefferies analysts said in a note that Amplats and Kumba divestitures make sense in a deal with BHP. The miner already exited South Africa by spinning off South32 SOUHY, which has manganese and aluminum holdings in the African nation, and selling its stake in mineral sands company Richards Bay Minerals.

BHP also does not want platinum-group metals mining, especially in South Africa with its headaches related to labor issues, geological challenges and power constraints, the Jefferies note said. Also, antitrust concerns would be an issue with Kumba in a BHP-Anglo deal, it said.

The Jefferies note also said copper antitrust concerns would likely be a problem in a BHP-Anglo tie up.

"It is not clear that the merged company would have non-core copper assets to divest as a proposed remedy," the Jefferies analysts wrote. "Los Bronces has operational upside, and BHP is clearly unlikely to sell its recently formed Copper South Australia business. Collahuasi, Quellaveco, Escondida, Pampa Norte, and Antamina would almost certainly be core as well.”

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