Our readers know that we were not positive about BHP’s latest M&A optionality (NYSE:BHP; OTCPK:BHPLF). In detail, based on an offer of A$25 per share, we previously estimated a net asset value calculation of more than 1.4x with just a positive contribution of 1.5% at the EBITDA group level. In our last paragraph, we said that the mining company could have supported a superior offer; however, we were not in favor.
BHP’s A$25 per share offer is already expensive on NPV calculation and the company is targeting a business that has always traded at a superior valuation (from a historical perspective, this was due to copper scarcity in the geographical area). As we already mentioned, BHP might feel some pressure to move on with M&A targets after having reduced its coal division and on the way to exiting its oil segment.
Source: Mare Evidence Lab’s previous publication
Unfortunately, this is what happened. After the August 2022 offer, BHP increased its cash offer to A$28.25 per share for a total value consideration of A$9.6 billion (from A$8.4 billion). On that day, this represented a 49.3% premium price to OZ Minerals’ closing price. The higher revised proposal has been unanimously endorsed by OZ Minerals’ board of directors and BHP is currently moving on with exclusive due diligence. Even if there are many regulatory requirements to meet, here at the Lab, we believe that BHP will quickly move on. Key to report is the fact that the revised offer will allow OZ Minerals to pay a franked dividend to its shareholders of up to A$1.75 per share (ahead of the closing deal). So, in our calculation, we are reducing the cash price component and we are also estimating the closing in Q2 2023.
Although some news was speculating on a new A$30 per share proposal, BHP clearly says that this is the best and final offer. Based on a A$28.25 per share acquisition, on a standalone basis, our NAV calculation increased from 1.4x to 1.5x, and even if there is a strategic rationale for the transaction, we believe that the underlying assumptions are very optimistic. For example, our copper price estimated is around $6.5k per ton forecast for Fiscal Years 2023 and 2024 versus the spot price of around $8k per ton.
Source: FRED global copper price
At this stage, synergies are hard to quantify; however, after having analyzed OZ Minerals, we are estimating the following:
- We are reducing the corporate overhead and including a few sharing infrastructure facilities. This is based on the fact that BHP’s copper is ubicated in the middle of OZ Minerals’ Prominent Hill mine. In detail, at the Olympic Dam mine, BHP could significantly reduce its underground mining costs towards the level of the OZ Prominent Hill facility which is 50% lower and generate an important upside. For instance, in the copper commodities, BHP’s Olympic Dam and OZL’s Prominent Hill mining costs are $60/t and $35/t respectively. Here at the Lab, we are not including hub cost rationalization;
- BHP could replace third-party feed for the Nickel West smelter with the one coming from OZ Minerals’ West Musgrave. Consequently, this will reduce BHP’s costs;
- BHP could lower the financing costs of the brownfield expansions of the OZ Minerals West Musgrave nickel project. At Carapateena mine, there are additional resources that are not priced in and could be processed through BHP’s smelter.
Last time, we indicated that BHP’s debt will increase by almost $10 billion, and looking at the company’s press release, we are pretty in line with our initial estimates. OZ transactions will be funded with cash reserve and a new loan facility. As a reminder, we are already including higher CAPEX requirements over the next two years estimated at another A$2.5 billion.
Conclusion and Valuation
Here at the lab, in our mining top pick, we continue to prefer Rio Tinto (RIO) and Glencore (OTCPK:GLCNF) (both buy rated). Following our M&A optionality update, the former recently acquired Turquoise Hill Resources and this will provide a positive commodity mix evolution toward copper production. Regarding BHP’s valuation, we continue to see a balanced risk profile and believe that the company is fairly valued. Potential M&A was a risk included in our section, and we estimated that BHP overpaid for OZ Minerals. For this reason, we reiterate our Neutral rating target at A$40 per share derived on the average between BHP 2023 EV/EBITDA of 4x and our NPV model (this is also in line with comps valuation).
Previous analysis:
- BHP Group: Q1 Production Report Analysis
- BHP Group: Q4 Production Report Analysis
Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.
Be the first to comment