In response to no-moat BHP’s (ASX: BHP) overtures, no-moat Anglo American (LON: AAL) proposes restructuring to focus on its copper and iron ore operations while selling or spinning off its other businesses, including platinum group metals, De Beers, or diamonds, and metallurgical coal.

It would also keep the Woodsmith polyhalite project in the United Kingdom. Along with selling its coal business, another major difference to BHP’s proposal is that Anglo will retain its 69.7% stake in Kumba Iron Ore in South Africa. The restructure would essentially cut Anglo’s business in half, with copper and iron ore operations currently accounting for around half of our forecast earnings before interest, taxes, depreciation and amortisation (“EBITDA”) midcycle from 2028.

While the approach is a reasonable counter to BHP’s proposal, we still think there is roughly a 50% chance that BHP could again sweeten its offer before the May 22, 2024 deadline. Either that or walk away. As such, we don’t think Anglo shareholders will be persuaded just yet. Our respective fair value estimates for Anglo and BHP of GBX 2,250 and $40 are retained.

While we understand the desire to focus more on copper, given the optimism over the rising demand from decarbonization and electrification, we are less enamored with Anglo’s proposed sale of the metallurgical coal business.

Demand will likely remain persistent given that green steel technologies are unlikely to be economic at scale for decades. And while we’d prefer Anglo keep metallurgical coal, if it must be disposed of, then it would be better to spin it off to shareholders rather than sell, as a fair price is unlikely given environmental, social, and governance concerns.

Platinum group metals and diamonds currently account for around one-third of our forecast EBITDA midcycle in 2028. Both are currently in cyclical downturns, and we think De Beers would also be better spun off to shareholders, as per platinum group metals.

BHP shares have appreciated close to 6% since the original bid on April 26th. They are currently screening as overvalued based on fair value estimate of $40.

Our fair value estimate

We modestly lower our fair value estimate for BHP to $40 per share, down from $40.50, driven by its increased proposal to acquire Anglo American in an all-share transaction via a scheme of arrangement.

This assumes a 25% chance that BHP increases its proposal by another 5%, and a 25% chance BHP increases it by another 10%. However, if no transaction eventuates, then all things equal, we would likely return to our current stand-alone fair value estimate for BHP of $40.50.

We assume iron ore averages about USD 100 per metric ton from 2024 to 2026 based on the futures curve. Our assumed midcycle iron ore price is roughly USD 70 per metric ton from 2028, based on our estimate of the marginal cost of production. Strong demand from China, which accounts for around 70% of the seaborne iron ore trade, is supportive of near-term prices. However, longer-term we expect demand from China to moderate as steel production peaks and starts to decline as its economy moves away from one reliant on fixed-asset investment to a more consumption-based economy. China’s falling population along with rising scrap-based production also contribute to reduced demand for iron ore in our view. We also think additional supply is likely, led by Simandou and Vale. Hence we expect a long-term price substantially below the current spot around USD 120 per metric ton.

Based on the futures curve, our assumed average copper prices from 2024 to 2026 are around USD 4.10 per pound, reverting to our assumed midcycle copper price of roughly USD 3.65 per pound from 2028. This is also based on our estimate of the marginal cost of production.

Other key assumptions include that thermal coal averages around USD 135 per metric ton from 2024 to 2026 based on the futures curve. Our assumed midcycle thermal coal price is about USD 105 per metric ton from 2028, again based on our estimate of the marginal cost of production.

We also assume average 2024 to 2026 prices of about USD 255 per metric ton for metallurgical or coking coal based on the futures curve. Our assumed midcycle price is about USD 155 per metric ton from 2028, which is also based on our estimate of the marginal cost of production.

We also assume prices of about USD 8 per pound nickel, USD 0.95 per pound lead, and USD 1.15 per pound zinc from 2025 in line with spot.

We employ an 11% cost of equity, reflecting high cyclicality and operating leverage with moderate financial leverage. This drives an 8.9% weighted average cost of capital, assuming a long-run 30/70 debt/equity split, appropriate for a major mining company such as BHP. Our fair value estimate equates to an enterprise value/EBITDA exit multiple in 2026 of 7.5 times.

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