Should BHP keep bidding against itself?
In this week’s video insight, Sean Sequeira and I discuss the strategic decisions within the mining sector, highlighted by BHP’s latest bid for Anglo American. This move, part of a broader trend of significant acquisitions, could reshape the competitive landscape by boosting BHP’s (ASX:BHP) production in iron ore, copper, and metallurgical coal. We also explore how other industry giants like Rio Tinto (ASX:RIO) are positioning themselves amidst these shifts, focusing on internal growth and strategic asset management. Join us as we delve into these developments and their implications for the global mining industry.
Transcript:
David:
Hello. I’m David Buckland, and welcome to this week’s video insight. Today, I’m accompanied by Sean Sequeira, who heads up the Australian Eagle Asset Management team. I thought it might be very interesting to talk about BHP’s third bid for Anglo America.
What we’ve seen is a 24 per cent increase in total cost to about $74 billion since the first bid back in mid-April. The Anglo-American bid, if conditions prevail – which involves the sale of the Amplatz South African platinum business and the sale of the South African Kumba iron ore business – would in fact increase BHP’s iron ore production by about twenty per cent, increase BHP’s copper production by about 50 per cent, and increase BHP’s metallurgical coal division by about one hundred and thirty per cent, if the bid is successful.
Sean, what are your thoughts on this particular play, given that we’re now talking about such enormous numbers?
Sean:
Well, when you look at where BHP is trying to position themselves, they’ve said for a long period that they see strategic growth in certain metals. And it looks like they’re positioning themselves to take advantage of the growth in those certain metals. And that’s to do with the energy transition, of which, they will have a significant global share in particular metals. Talking about copper, they will be one of the largest copper producers in the world.
You talk about iron ore; they are already one of the largest, along with Rio Tinto and, possibly, Vale (NYSE:VALE), out of Brazil.
So, they see growth along with copper in iron ore to help with the energy transition, and you can see that in how they’re bidding for these assets.
David:
So what interests me is that they would be one of the biggest iron ore producers, one of the biggest copper producers, and one of the biggest metallurgical coal producers in the world. And what is pretty clear, is that they’re basically divesting or planning to divest some of these other commodities that they’re just not a global significant player in.
Sean:
And they’ve been doing that for many years. So, historically, we’ve seen the diversified miners, the big, diversified miners, that is Rio Tinto and BHP, shedding a number of assets that they believe were not core, and they didn’t really see strong growth in demand for. And you’ve seen both BHP and Rio Tinto really becoming a lot more focused upon assets that they believe they will have a competitive advantage in. And that looks like copper, iron ore, for BHP, they’ve got metallurgical coal and potentially potash.
And for Rio Tinto, they are mainly copper and iron ore. You know, that’s what produced most of their results, and they have a good position in aluminum.
David:
And where are you positioned at the moment with these two global gorillas, BHP and Rio Tinto?
Sean:
Well, in terms of how we view the environment, particularly the resources sector, we had a more positive view on Rio. Given that they’re growing their copper business internally, they’re building and developing a copper mine in Mongolia. That should drive an increase in Rio’s copper production by almost one hundred per cent, and that’s internally driven. It’s not bought.
So, we see some risk in BHP. Historically, it’s very difficult for big miners to gain a lot of benefit from big purchases. Yes. It produces a lot of risk. There’s not always a lot of synergy benefits from purchasing mines. They’re discrete assets. The only one that might have synergy benefits for BHP might be the coal assets in Queensland. It’s close to their other coal assets. So, mines themselves don’t get a lot of, you know, miners don’t get a lot of synergy benefits from buying other assets. They can potentially run them a lot better than other players. BHP is a good operator. But historically, big purchases have led to a period of, let’s call it, indigestion.
David:
So the impression I’m getting is you’re quite underweight BHP at present.
Sean:
Well, that is the case. For the Montgomery Fund, we are underweight BHP. We do like the real assets and the internal growth, and we have a much larger weight in Rio Tinto versus that of the market and a lower weight in BHP versus that of the market.
David:
I think it’s also important to point out that a lot of the Anglo copper assets are highly dependent on growth prospects out of Peru. And we know how some of these undeveloped country sovereign risks can actually play out. We saw it next door in places like Bolivia where the government just wants a far bigger take, and by definition, that often sees pressure on margins over time as governments do end up with a bit more of a take.
Sean:
Indeed, We did also see something similar in Chile, which is a very large mining jurisdiction where they changed certain tax requirements of miners to get a larger take. That’ll happen particularly as some of these strategic assets, strategic metals are in high demand, and they’re only mined in certain jurisdictions.
Those jurisdictions will say, well, look, what are we getting? So, there is a little bit more risk in some of these, they’re not always less developed, but some of these non-tier-one mining jurisdictions.
David:
Okay, ladies and gentlemen. That’s all we have time for this week. We at both the Montgomery Fund and the Australian Eagle Asset Management team are underweight BHP, but probably prefer Rio Tinto in the short to medium term. Thank you very much for your attention.
The Montogmery Fund and the Montgomery [Private] Fund owns shares in Rio Tinto. This article was prepared 23 May 2024 with the information we have today, and our view may change. It does not constitute formal advice or professional investment advice. If you wish to trade Rio Tinto, you should seek financial advice.
Chief Executive Officer of Montgomery Investment Management, David Buckland has over 30 years of industry experience. David is a deeply knowledgeable and highly experienced financial services executive. Prior to joining Montgomery in 2012, David was CEO and Executive Director of Hunter Hall for 11 years, as well as a Director at JP Morgan in Sydney and London for eight years.
This post was contributed by a representative of Montgomery Investment Management Pty Limited (AFSL No. 354564). The principal purpose of this post is to provide factual information and not provide financial product advice. Additionally, the information provided is not intended to provide any recommendation or opinion about any financial product. Any commentary and statements of opinion however may contain general advice only that is prepared without taking into account your personal objectives, financial circumstances or needs. Because of this, before acting on any of the information provided, you should always consider its appropriateness in light of your personal objectives, financial circumstances and needs and should consider seeking independent advice from a financial advisor if necessary before making any decisions. This post specifically excludes personal advice.
