BHP will be back with a bigger bid: Morningstar
The miner won't take no for an answer, they're likely to be back with even more cash says Morningstar.
Mentioned: BHP Group Ltd (BHP)
Morningstar equity analyst Jon Mills believes that BHP will raise its bid for Oz Minerals after the company rejected the billion-dollar takeover on Monday. This comes as the iron ore miner tries to increase their copper and nickel share amid a growing demand for energy transition and position themselves as an ESG-friendly miner.
Morningstar raised the fair value of Oz Minerals (ASX: OZL) to $25.00 on Wednesday with the belief that the benefits of owning Australian copper and nickel mines will lead BHP (ASX: BHP) to increase its bid for Oz Minerals.
“We think it is more likely that BHP raises its bid, as it did with Noront Resources in 2021,” says Mills.
By acquiring these mines, Mills believes BHP is looking to ride the profit waves created by increased demand for electric vehicles and renewables.
Owning domestic copper and nickel mines would remove the geopolitical risks that exist with overseas mines, as Australia is a relatively stable jurisdiction, says Mills.
He believes the bid was a BHP’s way of saying they are bullish on future-facing metals like copper and nickel.
“BHP's offer is a bet on copper and nickel, with a side bet on Australia's relatively stable geopolitics,” says Mills.
“Nowadays, new copper mines tend to be in third world or developing countries where it’s been less stable. So maybe one reason why [BHP] is attracted to Oz Minerals is because it's in Australia,” he added.
Oz Minerals’ share price spiked 38% on Monday’s open, while BHP’s shares dipped 0.3% following news of the rejected takeover bid.
The iron ore miner has been trying to reposition itself as ESG- friendly since 2020, says Mills. In May this year, BHP completed the sale of 80% of its interest in BMC (BHP Mitsui Coal) to Stanmore Resources Limited.
BHP’S President Minerals Australia Edgar Basto said the sale was consistent with the company’s strategy.
“As the world decarbonises, BHP is sharpening its focus on producing higher quality metallurgical coal sought after by global steelmakers to help increase efficiency and lower emissions,” he says.
The iron ore miner submitted the takeover proposal to the Oz Minerals board last Friday, asking to acquire the company for $25 per share. The deal offered the copper miner’s shareholders a 32% premium to Friday’s closing price and a 31.6% premium to Morningstar’s previous fair value for Oz Minerals.
The $8.3 billion bid was turned down by the copper miner after the Board decided the proposal significantly undervalued Oz Minerals and is not in the best interest of shareholders.
A drop in the bucket
Mills was surprised at the takeover bid for Oz Minerals given the relatively small production capacity of the miner and BHP’s preference for large, low-cost assets with long-lives. Oz Minerals produced approximately 124,000 tonnes of copper in fiscal 2022 which represents a fraction of the 1.15 million tonnes produced by BHP.
While there may be cost savings associated with adjacent mines there will still be little material impact to BHP’s overall portfolio given the incremental increase in production.
“[Oz Minerals copper production] would be nice to have but in the relative scheme of things for BHP it is pretty minor,” says Mills.
He believes the iron ore miner is looking to swallow Oz Minerals to enhance a portfolio relatively well positioned for the accelerating global energy transition. This would further increase the gap over rivals like Anglo American.
Prioritising an ESG friendly company as a takeover target comes as the miner’s planned exit from the thermal coal market hit a wall in June this year, after failing to find a buyer for the Mount Arthur mine.