Morningstar raised its fair value for copper miner Oz Minerals last Friday following BHP’s offer to acquire the whole business.

Morningstar equity analyst Jon Mills increased no-moat Oz Minerals’ (ASX:OZL) fair value from $25.00 to $28.25 - the equivalent of the BHP’s bid. He believes the deal is likely to be completed considering the higher revised offer.

“We think BHP’s higher offer and Oz Minerals granting BHP exclusive due diligence means a deal is now likely to occur and a competing offer is unlikely,” he says.

He believes the reason other miners who have bullish forecasts on copper prices will not make competing bids for Oz Minerals is due to price BHP (ASX:BHP) is willing to pay. However, the higher fair value assigned by Mills is contingent on shareholders following the Boards recommendation and voting in favour of the deal.

“There is a possibility no deal eventuates after BHP completes its due diligence in December. If so, all else equal, our fair value estimate of Oz Minerals would revert to our stand-alone valuation of $19 per share,” he added.

This is not the first time BHP has put in a bid for Oz Minerals in its entirety. The no-moat diversified miner made an offer of $25.00 per share in August this year. An offer that was subsequently rejected. The Board justified the rejection, claiming the offer did not adequately compensate shareholders for Oz Minerals unique, high-quality portfolio and projects, noting the company is the only primary copper company in the ASX100.

Following the rejection in August, Mills remained confident that BHP would raise its bid, the same way the company did in 2021 with emerging metals miner Noront Resources. He believes the original bid was made because BHP is looking to increase its exposure to metals such as copper and nickel, which are likely to benefit from increased demand for use in renewables and electric vehicles in the energy transition. Mills stands by his thesis claiming BHP has come back with a revised bid for the Australian based coper miner as they are bullish on future copper prices.

“BHP’s offer is a bet on copper and nickel, with a side bet on Australia’s relatively stable geopolitics,’ he says.

BHP is paying full price

Despite the relatively modest pipeline of growth opportunities and possible synergies the acquisition presents for BHP, Mills still believes the iron ore miner offer is generous.

“We also commend BHP for trying to take advantage of recent falls in copper and nickel prices […]. That said, we still think BHP is likely overpaying,” he said.

According to Mills, the deal implies a midcycle copper price of approximately USD $4.50 per pound. This is significantly higher than Morningstar’s assumed midcycle copper price of approximately USD $3.00.

He acknowledges the merit of the deal but notes the acquisition of Oz Minerals is not a typical BHP investment.

“The proposed acquisition appears at odds with BHP’s preference to own assets that are large, low cost, and have a long life,” says Mills.

“[Oz Minerals’] assets in Brazil are modest and scattered and don’t fit within BHP’s typical asset size or strategy,” he added.

Mills explained that BHP already owns some of the largest, highest-quality copper mines in the world. He pointed to the company’s 58% stake in the Escondida mine and its fully owned Pampa Norte mining operation in Chile which each produced 1,004 and 281 kilotonnes of copper respectively in fiscal 2022. In comparison to BHP’s existing mines, Mills sees Oz Minerals’ copper assets as lacklustre. He says that once Oz Minerals ramps up production in existing copper mines this decade, the 240,000 tonne output is only a drop in the bucket compared to the 1.6 million tonnes BHP is forecasting.

“Compared with [BHP’s existing copper mines], we think Oz Minerals’ existing copper mines generally lacking scale and size,” says Mills.