Rising demand for raw materials coupled with meagre new supply could spur a surge in mining takeover deals and acquisitions, analysts said today.
The potential mining takeover boom has emerged against a background of reluctance within the sector to drill and develop new projects, following a decade of limited capital expenditure as companies paid down debt accumulated in the late 2000s.
But with decarbonisation trends driving increased demand for raw materials to build electric cars, batteries and energy storage, Russ Mould, investment director at AJ Bell, says takeovers could present a tempting opportunity for growth.
“The CRB Commodities index, which tracks a basket of 19 raw materials, trades near 10-year highs for a reason,” he said.
“The modest capital expenditure budgets of the last decade mean there is little new supply coming onstream, but demand continues to grow at a time when trends such as decarbonisation potentially require substantial amounts of raw materials, be they for electric vehicles, improved grid infrastructure or batteries and energy storage – and that is before GDP growth naturally increases the need for commodities.
“As such, mergers and acquisitions are one quick way to boost scale and grow output, and if shareholders in the target are prepared to accept stock rather than cash then all the better, as this avoids the need to add fresh debt to a carefully repaired balance sheet.”
Is Rio Tinto mulling mining takeover mega deals?
This view was further confirmed as reports emerged today that FTSE 100 mining giant Rio Tinto was considering its biggest takeover swoop for years after the collapse of rival BHP’s £39bn (£24.7bn) bid for Anglo American.
Rio, which is listed in London and Sydney, is studying a refreshed list of potentially industry-reshaping takeover targets including Teck Resources, the Canadian group, according to Sky News.
City sources said Rio had drawn up detailed proposals for a potential bid for Teck which included approaching banks about financing a deal.
Teck Resources would be valued at well over $30bn (£23.2bn) in any credible approach, according to bankers.
Mould said this potential swoop was in line with recent trends, with some commodities, namely gold, already seeing a lot of takeover and acquisition activity.
“Barrick Gold swallowed up Randgold Resources and Newmont snapped up GoldCorp in 2019; Agnico-Eagle and Kirkland Lake Gold merged in 2021; and in 2023 Agnico-Eagle and Pan American Silver bought and split up Yamana Gold before Newmont pounced on Australia’s Newcrest. Even AIM-quoted tiddler Shanta Gold drew a bid on the London market.
“Copper was apparently the motivation for BHP’s lunge for Anglo American, as the Aussie giant planned to spin off or divest the FTSE 100 firm’s steelmaking coal, platinum, diamond and nickel operations.”
In May BHP abandoned its pursuit of Anglo American after the London-listed firm refused to offload its South African iron ore business.
Will someone swoop for Anglo American?
In May BHP abandoned its pursuit of Anglo American after the London-listed firm refused to offload its South African iron ore business prior to a deal and declined to extend takeover talks.
The news brought to a close a fractious bidding process in which BHP failed to budge on the original terms of its bid, which required Anglo to carve off its South Africa-based Kumba business.
Any deal would have marked the biggest mining merger in over a decade but the condition has proved a sticking point and irked Anglo’s biggest shareholder, the South African government.
Mould said whether someone else would swoop for the company – or any other opportunity -would depend on the price.
He said: “Whether a board is offering stock or cash, the price paid for the assets will be a key consideration – whether you are buying one share or all of them, the price, or valuation, paid to access a company’s profits, cash flow and assets is the ultimate arbiter of return on investment.
“When Anglo’s shares were down around £18 (and no higher than they were in 2005), that gave the company a stock market capitalisation of around $28bn, compared to tangible net assets on its balance sheet (excluding $1.5bn of intangibles) of $30bn. In other words, any investor buying then was doing so at less than book value.
“Granted the miner had just taken a $2.6bn asset write-down so nothing is set in stone, but that lowly valuation offered some downside protection to any would-be buyer and upside potential, if commodity prices took off or the company’s planned efficiency programmes brought the expected benefits.”
Nick Davis, senior partner at Memery Crystal, added: “I think we have been in a period of consolidation in the industry for quite a while before the attempted bid from BHP for Anglo.
“We have seen significant numbers of deals in the mid cap space and several in the large cap. I think it is highly likely that other suitors will be looking at the Anglo restructuring and weighing up a future approach.
“The global need for copper and other battery metals will continue to be the driving force behind M&A in the sector especially while the copper price continues to be so strong.”