Everyone is hunting for the elusive great white whale that will get taken out of the market, and Rio Tinto has laid down the gauntlet with Alcan. But I think the better target is Anglo.
Mining is about two things: market concentration, and market concentration. Anglo offers that in spades. It owns two businesses, platinum and diamonds, and it really owns them, with significant market control. It now has a nice market share in iron ore, but it has under-performed completely compared with its competitors. BHP now has 2x Anglo’s market cap. Xstrata has 2/3 of Anglo’s market cap, and CVRD a 1.25 multiple. This is crazy. Anglo was the grand old lady of the business. Much like an old deer, I do not give it long to live.
The parts are worth more than the whole in my mind. I figure the company has a break-up value in the $130-150 billion range, versus a current market cap of $95 billion. There is a lot of room for value here. (I do not own any Anglo, by the way.) For example Anglo has a significant stake in the platinum market, and I think that Anglo Platinum, with its market share of 2.8 million ounces of annual production, is just a jewel that would fit into BHP’s or CVRD’s crown so nicely.
There are two main issues. First, multiple traded subsidiaries make a takeover more complex. Kumba and the platinum business are both in traded subs, and this will affect the valuation, but BHP is used to dealing with minority interests in its mines so I do not see a huge problem here. Where they can de-list they will, but they will have time to sort this out.
Second is the black empowerment issue in South Africa, which will be a longer term issue. I also do not see this as a killer.
There are a few parts to the company and I expect one company to make a bid, with a sell-off to another company of some parts. For example, I could see BHP doing a deal with Xstrata, or CVRD doing a deal with BHP to take the company. I do not expect CVRD to do a deal with Xstrata, as the pieces that they need to get rid of they do not want to fall into Xstrata’s hands, but they would be happy to have them in BHP’s hands.
BHP is going to want Anglo for just about everything. They will need a backup bidder to buy the parts that they cannot take due to antitrust (competition) concerns, or due to cash issues. The following is a list of assets from BHP’s potential point of view (again, this is simply my opinion):
- Kumba and the other iron ore assets. BHP owns half of Samarco, which is a neighbor to MMX. They would definitely want to keep these assets, which would significantly increase BHP’s geographic spread of iron ore assets in South Africa and more in Brazil.
- Diamond assets, for example Snap lake. I expect to see the main part of deBeers to go back into the hands of the Oppenheimer family.
- Platinum is an amazing business for anyone, and BHP would keep it.
- Base metals might be sold or kept.
- Manganese ore (Samancor). BHP currently has a 60% JV stake with Anglo, and they would like to own 100%.
- Coal. BHP would want to keep this business.
- Gold would be sold off to the highest bidder (Goldcorp?).
- Other non-core assets (Paper….) would be sold off to the highest bidders or floated.
For CVRD, this would be a tougher fit, but I could see them wanting to have a go.
- Iron ore assets would be sold to BHP. I think they would get a significant price for this, as BHP needs Kumba desperately to shift their marketing position.
- Diamonds would probably be sold to BHP or the Oppenheimers.
- Platimum would be a keeper.
- Base metals would also be kept.
- Manganese would be a keeper.
- Coal would be kept or sold off.
- Gold would be sold to a third party.
- Other non-core assets would be sold.
Xstrata would view this as a company-making deal, but they would be tied down in what they could afford. They would want to keep as much as they could, but I would see them selling 2-3 major assets to make it work. I think they could get almost the full purchase price back by selling off diamonds, platinum, manganese, gold, and other non-core assets. They would be the most interesting bid as they would have to figure out which bits to fight for and which bits to sell.
Anglo is an old whale of a company with layers of blubber in management that can just be burned off. If you shut down the head offices, I am not sure anyone would notice at the mines. Either Anglo quickly turns itself into a new, hip, lean fighting machine, or it is going to be bought out, and I do not think that the market is going to give it the time to fight. While Rio Tinto is busy with Alcan is the time to make the bid, as it would mean one fewer bidder who would want to sit at the table.
In a bold prediction, I expect to see a bid by the end of the summer. The question now is who is going to be the first bidder (and which investment banks are going to get rich off of the fees).
