Company Reports

Commodity prices generally fell in the September-ending quarter, except for gold. Concerns about weak China end-user steel demand affected iron ore and other steelmaking commodities, while base metals prices fell on worries over slower economic growth in China and elsewhere.

As China rebalances away from infrastructure and construction-led growth, Anglo American is likely better positioned than most diversified peers. The company has greater exposure to consumption-oriented commodities like platinum and diamonds, which should enjoy better demand growth than investment-oriented commodities like iron ore and copper that prospered most in the past decade.

Despite a fire at its underground Grosvenor mine in Queensland late in the first half of 2024, no-moat Anglo American will proceed with the proposed sale of its metallurgical coal business. This is part of its restructure to focus on copper, iron ore, and its nascent crop nutrients divisions while selling or spinning off its other businesses. Anglo lowered 2024 metallurgical coal production guidance while also guiding to higher unit cash costs, and we assume Grosvenor remains on care and maintenance for two years before restarting.

As China rebalances away from infrastructure and construction-led growth, Anglo American is likely better positioned than most diversified peers. The company has greater exposure to consumption-oriented commodities like platinum and diamonds, which should enjoy better demand growth than investment-oriented commodities like iron ore and copper that prospered most in the past decade.

Shares of most of our global mining coverage fell during the quarter, and the average price/fair value estimate has fallen modestly to 1.05 at July 8, 2024 from 1.07 last quarter. While our coverage is close to fairly valued on average, there is a wide dispersion, with no-moat mineral sands miner Iluka the cheapest, trading 30% below fair value at that date. Mineral sands prices are lower, on reduced demand from China’s property sector. Rising interest rates and slowing housing markets in the West are also a near-term headwind. However, longer-term, maturing mines and a lack of large, high-grade, undeveloped resources are likely to support mineral sands prices. Its proposed rare earths refinery in Eneabba is an option, on elevated rare earths prices and potential Western tariffs on Chinese production.

Base metals prices surged earlier in the June quarter of 2024 before partially reversing due to concerns over China’s economy. Iron ore prices are broadly stable despite China's struggling property market and weak infrastructure spending, leading to questions over China's steel demand. After updating our commodity price assumptions, no-moat Iluka is the cheapest miner we cover, trading 31% below its unchanged fair value estimate of AUD 9.50.

As China rebalances away from infrastructure and construction-led growth, Anglo American is likely better positioned than most diversified peers. The company has greater exposure to consumption-oriented commodities like platinum and diamonds, which should enjoy better demand growth than investment-oriented commodities like iron ore and copper that prospered most in the past decade.

As China rebalances away from infrastructure and construction-led growth, Anglo American is likely better positioned than most diversified peers. The company has greater exposure to consumption-oriented commodities like platinum and diamonds, which should enjoy better demand growth than investment-oriented commodities like iron ore and copper that prospered most in the past decade.

After five weeks of sparring, no-moat BHP has failed in its pursuit of no-moat Anglo American. BHP confirmed that it does not intend to make a firm offer for Anglo after the latter refused its request to again extend the “put up or shut up” deadline (requires a firm either to declare its intent to make an offer or withdraw for six months) under the UK's takeover and mergers code. This was driven by disagreement over the risks to Anglo shareholders of BHP’s condition under its proposal that Anglo demerge and distribute to shareholders its 78.6% interest in Anglo American Platinum and 69.7% interest in Kumba Iron Ore. As a result, we revert to our unchanged stand-alone fair value estimates of AUD 40.50 and GBX 2,080 per share for BHP and Anglo respectively, from our probability-weighted valuations of AUD 39.50 and GBX 2,300 per share.

No-moat Anglo has again rejected no-moat BHP’s overtures despite a sweetened all-share proposal via a scheme of arrangement. BHP’s latest proposal has Anglo shareholders receiving 0.8860 BHP shares for each Anglo share held, around 9% higher than the previous proposal and about 25% higher than the original proposal (see our note 'BHP Lobs All-Share Proposal for Anglo American; Shareholders Take No Action'). While again rejecting BHP, Anglo has successfully requested a one-week extension to the deadline under the United Kingdom's takeover and mergers code. BHP will have until May 29, 2024 to either announce a firm intention to make an offer or walk away. The suitor has maintained the other conditions of the proposal, including Anglo American first demerging and distributing its 78.6% shareholding in Anglo American Platinum, or Amplats, its platinum group metals business, and 69.7% shareholding in Kumba Iron Ore to its shareholders.

As China rebalances away from infrastructure and construction-led growth, Anglo American is likely better positioned than most diversified peers. The company has greater exposure to consumption-oriented commodities like platinum and diamonds, which should enjoy better demand growth than investment-oriented commodities like iron ore and copper that prospered most in the past decade.

In response to no-moat BHP’s overtures, no-moat Anglo American proposes restructuring to focus on its copper and iron ore operations while selling or spinning off its other businesses, including platinum group metals, De Beers, or diamonds, and metallurgical coal. It would also keep the Woodsmith polyhalite project in the United Kingdom. Along with selling its coal business, another major difference to BHP’s proposal is that Anglo will retain its 69.7% stake in Kumba Iron Ore in South Africa. The restructure would essentially cut Anglo’s business in half, with copper and iron ore operations currently accounting for around half of our forecast EBITDA midcycle from 2028.

No-moat BHP has lobbed an increased proposal to buy no-moat Anglo American in an all-share transaction via a scheme of arrangement. Under the updated proposal, Anglo American shareholders would receive 0.8132 BHP shares for each Anglo American share they hold, 15% higher than they would have received under the original proposal that Anglo rejected. (See our note 'BHP Lobs All-Share Proposal for Anglo American; Shareholders Take No Action.') However, Anglo also rejected BHP’s updated proposal. All other conditions of the proposal remain the same, including being conditional on Anglo American first demerging and distributing its 78.6% shareholding in Anglo American Platinum, its platinum group metals business, and 69.7% shareholding in Kumba Iron Ore to its shareholders.

As China rebalances away from infrastructure and construction-led growth, Anglo American is likely better positioned than most diversified peers. The company has greater exposure to consumption-oriented commodities like platinum and diamonds, which should enjoy better demand growth than investment-oriented commodities like iron ore and copper that prospered most in the past decade.

No-moat BHP proposes to buy no-moat Anglo American in an all-share transaction via a scheme of arrangement. Under the proposal, Anglo American shareholders would receive 0.7097 BHP shares for each Anglo American share they hold. The proposal is conditional on Anglo American first demerging and distributing its 78.6% shareholding in Anglo American Platinum, its platinum group metals, or PGMs, business, and 69.7% shareholding in Kumba Iron Ore to its shareholders. It is also subject to due diligence and other conditions. The proposal is roughly equal to our base-case fair value estimate for Anglo of GBX 2,080 per share and Anglo is reviewing the proposal.

Commodity prices diverged in the quarter. Despite solid China steel production, iron ore and metallurgical coal prices are down, while copper rose on supply issues and hopes of faster global growth. However, prices are elevated compared with history and cost-curve support.

Iron ore prices are lower on concerns over China steel demand due to its struggling property market and weak infrastructure spending. However, gold prices are up on optimism over peak interest rates, driving a 2% rise in our estimate for no-moat Newmont, to USD 51. It remains the cheapest miner we cover, trading 27% below fair value.

As China rebalances away from infrastructure and construction-led growth, Anglo American is likely better positioned than most diversified peers. The company has greater exposure to consumption-oriented commodities like platinum and diamonds, which should enjoy better demand growth than investment-oriented commodities like iron ore and copper that prospered most in the past decade.

Demand growth from China has been the main driver of rising commodity prices in the past two decades. More recently, though, most commodity prices have fallen from highs set with Russia’s invasion of Ukraine, the subsequent sanctions on Russia, and the rerouting of supply chains. Prices, nevertheless, are generally elevated versus the 20-year average, as well as relative to cost support.

As China rebalances away from infrastructure and construction-led growth, Anglo American is likely better positioned than most diversified peers. The company has greater exposure to consumption-oriented commodities like platinum and diamonds, which should enjoy better demand growth than investment-oriented commodities like iron ore and copper that prospered most in the past decade.