BHP can't shake its Anglo American obsession

It's almost time for a Netflix series about BHP's unrequited love for Anglo American which Barclays Bank believes could soon spark a fresh marriage proposal. ...

It's almost time for a Netflix series about BHP's unrequited love for Anglo American which Barclays Bank believes could soon spark a fresh marriage proposal. The chances of Anglo agreeing to a merger with a suitor who simply refuses to take no for an answer are not great but the regular surfacing of the rumour keeps mining analysts employed because it might, just might, happen. Barclays added its tuppence worth to the BHP/Anglo saga last week, following up earlier suggestions of a deal simmering, including in Richard Wachman's London to a Brick column two months ago .But rather than see a fresh bid as a positive for the Anglo share price Barclays spin on the story is as a negative for BHP and a factor in the bank warning about M&A risk which added to its view that Rio Tinto, Anglo, South32, and Glencore are currently better investments than BHP.Glencore is said to be the star of the heavyweight miners because it is a beneficiary of higher energy prices through its coal business and because it too could benefit from M&A activity if Rio Tinto returns for fresh talks.

A factor in Barclays caution about BHP is that it has the least attractive growth options of the big miners which are about to start the next cycle of operational and financial reports, led by Rio Tinto with the issue its half-year production report on Wednesday. Barclays overarching comment about the big miners in a report titled "Catalysts into reporting season" is that it remains positive about the mining sector as "macro uncertainty resolves favorably," an observation made shortly before Iran and the U.S. started a fresh exchange of fire and Iran said that the Strait of Hormuz is closed.

On Anglo, Barclays said there are three factors pointing to a share price re-rating (increase) over the next three-to-six months, topped by completion of its merger with Canada's Teck Resources, followed by the sale of its controlling stake in the De Beers diamond business, and completion of the sale of the Brazilian ferro-nickel business. The Anglo/Teck merger, when complete, is estimated by Barclays to crystallise significant synergies worth between $10-and-$15 billion. Those synergies, achieved with the creation of a new-look Anglo, will lead to a top tier miner with 75% of its asset base exposed to copper, a target too tempting for BHP to ignore.

The probability of a fresh BHP bid for Anglo is enhanced by the replacement on July 1 of Canadian born Mike Henry as BHP chief executive with South African born and educated Brandon Craig who is more likely to have a strong understanding of Anglo management thinking. But however friendly a future move by BHP on Anglo might appear the reality, according to Barclays, is that BHP needs the deal far more than Anglo. Over the next four years, according to the bank, BHP offers limited commodity volume growth."Our

group attributable copper production estimate for financial 2030 is below 2026 (1.32 million tonnes v 1.41m/t)," Barclays said. Rising capital investment costs are also a worry for BHP with the cost blow-out at the Jansen potash project in Canada an early warning. "BHP could also carry M&A risk," Barclays said.

"The recent strong (share-price) re-rating of BHP could see the company use its shares to re-approach Anglo. "BHP made a brief last ditch approach to the Anglo Board in November. This suggests that BHP's board sees its own copper growth pipeline as less compelling in terms of returns, risks, and timelines to delivery, compared to acquiring Anglo.

"Further clouding the outlook for BHP is the risk of attempting four major growth projects simultaneously, Jansen, Escondida, Vicuna and a new copper smelter in South Australia – "when it has been unable to manage the timeline and budget of one," Barclays said. The other big miner being watched closely as it streamlines its operations is Rio Tinto which was the subject last week of a UBS report which question whether it would be able to realise the promised $5 billion to $10 billion from asset sales. Moves to sell the Californian borates business are said to have attracted a number of inquiries while the South African titanium dioxide business might have been withdrawn from sale because of geopolitical tensions.

A freight joint venture with big oil trader and logistics specialist Vitol is said to be making progress and could deliver a major savings on iron ore haulage costs. Partial sale of the electricity system which services the company's Australian iron ore business is expected to be launched in the current quarter along with a metals streaming deal similar to that struck by BHP.If Rio Tinto can achieve is asset sales target most of the cash liberated is expected to be used to retire debt, UBS said.