The blockbuster mining mega-merger has descended into farce

Perhaps it’s because it has been so long since there was a proper M&A battle involving a doyen of the FTSE 100, but there’s a somewhat surreal aspect to the latest blockbuster.

It’s hard to say what’s odder: BHP’s strange bid for Anglo American or Anglo’s weird attempt to rebuff the Aussie miner’s approaches. 

BHP has effectively said Anglo is a sprawling mess and suggested it should be broken up for parts. Anglo has armed the barricades by coming up with its own plan to get rid of everything but its iron ore and copper assets. It’s a bit like trying to fend off the advances of a hungry cannibal by offering to carve.

Let’s recap. At the end of April the Aussie miner made an all-share £31bn offer to buy Anglo as long as the UK-listed miner, if it didn’t mind awfully, disposed of its platinum and iron ore assets in South Africa first. Anglo said it did mind: the price was too low and the deal too complicated.

BHP came back with an improved offer of £34bn, a pretty decent 30pc premium on where Anglo’s shares were trading before the takeover interest became public. In response, Anglo’s chief executive Duncan Wanblad announced a radical restructuring of the company that involves getting out of diamond, platinum, nickel and steel-making coal mining (albeit at a somewhat leisurely pace).

Wednesday is the deadline for BHP to make a binding bid for Anglo. The main questions now are whether the Aussie miner will sweeten its offer and/or other bidders are waiting in the wings. So far, so relatively straight-forward. But that glosses over some of the nuttiness on both sides.

BHP’s insistence that Anglo should divest it’s South African assets before any acquisition is strange for two reasons. First, investors don’t know how much they will fetch and therefore will struggle to assess whether they are getting a fair price for the rest of the business. Second, it looks like a giant two-fingered salute to South Africa.

This would be less of a problem if one of the biggest Anglo shareholders that BHP must persuade to sell up wasn’t, err, the South African government. BHP has since insisted its lack of love for Anglo American Platinum and Kumba Iron Ore was about which assets best fit in its portfolio rather than an aversion to South Africa.

But that rings somewhat hollow from a company which exited the country in 2015 by spinning out the mining company South32. And, in fairness, South Africa (which is at the sharp end of a tightly fought election campaign) is a tricky place to dig big holes thanks to constant labour disputes, regular electricity outages and dodgy infrastructure.

Either way, damage appears to have been done. Gwede Mantashe, the country’s mining minister, recently told the Financial Times that South Africa’s experience of dealing with BHP was “not positive” and he was opposed to the deal. The company, he added, “never did much for South Africa”. The shadow mining minister has made similar grumbles.

But, if anything, Anglo’s defence is even weirder. For starters investors are entitled to ask why it took BHP’s approach for Wanblad to finally come up with a plan. The South African is an Anglo lifer and has been in the top job for two years. He shouldn’t have needed this long to get his feet under the desk.

As recently as February he was giving mixed messages by promising a portfolio review in which there would be no “sacred cows” but claiming Anglo could not “shrink itself to greatness”. Now he’s saying that downsizing is just what the doctor ordered.

What’s more, Anglo’s plans are essentially the same as BHP’s. BHP wants to get rid of Anglo’s South African iron ore business and keep its Australian steel-making coal business. Anglo thinks the former should be retained and the latter spun-off.

But that’s the only real difference. Both companies think it would be a good idea to sell off (or spin off) Anglo’s trophy diamond brand DeBeers, separate the platinum business and mothball its fertiliser mine in Yorkshire.

As defence strategies go, it lacks a little something. Anglo has effectively conceded that BHP knows what it’s talking about. Even if BHP’s current bid fails, it (and other potential acquirers) need only wait until Anglo turns itself into a collection of bitesize and more digestible morsels.

Mark Cutifani, Wanblad’s predecessor, appeared to have left Anglo in pretty good shape with the miner’s share price at an all time high when he stood down. But cost cutting to pay down debt left issues below the surface. Wanblad has had to downgrade production guidance three times.

Anglo also has big exposures to platinum and diamonds. The prices of both have slumped in recent years. DeBeers’s sales of rough diamonds fell 23pc in the first quarter of the year as cheaper, lab-grown alternatives become increasingly popular.

Together with Russia’s Alrosa, it controls two-thirds of the world’s round diamond supply. The hope was that the romantic allure of natural stones would help fend off the challenge of chemically identical man-made sparklers. But amid a global slump in luxury spending that hope is looking increasingly forlorn.

Meanwhile, the price of copper recently rose above $10,000 per tonne for the first time in two years and is nearing record highs. The red metal is expected to play a crucial role in the energy transition.

Might Wanblad have mounted a better defence of Anglo’s corporate independence if he’d reversed his strategy and sold off the prized copper assets? Anglo trades at a discount to pure-play copper miners because of all its other businesses.

JP Morgan reckons Wanblad would have flushed out other buyers by putting the copper division up for sale and sparked a bidding war that would have netted at least £24bn. Then he could have said he was backing his management team to turn around the currently unloved assets – like the stash of potash under the North York Moors.

Because here’s a funny thing about commodity prices: they can go up as well as down. It’s probably too late to attempt this now but I’m sure I read somewhere that the best way to make money was to buy low and sell high. Why do mining companies so often insist on doing it the other way around?