BHP Picks the Worst Moment to Return to Mining Megadeals

(Bloomberg Opinion) -- Mining’s biggest dealmaker is getting out its checkbook again. It could scarcely have picked a worse time.

BHP Group has built up its takeovers team and is looking at a transformational deal, people familiar with the matter told Bloomberg News this week. Candidates could include copper miner Freeport-McMoRan Inc., Glencore Plc, or the base-metals business of Vale SA, the people said.

That shows all the timing of a crypto investor buying Bitcoin at $60,000. Freeport’s market capitalization is at a record, while Glencore shares are around their highest level in a decade. Less than two years ago, when fears of Covid-19 were rampant, you could have bought the equity in both companies together for $25 billion or so. Nowadays, they’d cost more than five times as much.

For all BHP’s reputation as an aggressive buyer of assets, it’s mostly been lucky or sensible enough to avoid destructive mergers and acquisitions. Since the 2001 takeover of South Africa’s Billiton Plc and the 2005 purchase of WMC Resources Ltd. created the core of the current company, it has been more notable for the bids that failed than those that succeeded. 

A 2008 tilt at Rio Tinto Group failed amid regulatory scrutiny and the gathering storm of the financial crisis. The valuation of that offer peaked at around $194 billion — more than Rio has ever been worth since — and while the all-share offer at least wouldn’t have loaded BHP with debt, its stock at the time was trading at the lower earnings multiple, making it an expensive acquisition currency.

Two years later, BHP offered $43 billion for Potash Corp. of Saskatchewan, another peak-of-the-market bid that was blocked by the Canadian government. Potash Corp. was worth just a third of that amount on the eve of a merger with Agrium Inc. six years later to create fertilizer giant Nutrien Ltd. The only multibillion dollar deals of that era to land were the Australian company’s acquisition of shale assets in the U.S. They don’t represent a good argument for revolutionary M&A, opening up a $20 billion hole of writedowns, losses and wasted capital spending that was only closed when the business was sold to BP Plc in 2018.

There’s a sound reason why mining companies tend to avoid mega-deals and stick to exploring and developing deposits from the ground up: They hate their prospects being at the mercy of the volatile prices of the commodities they sell. The equity valuation of a mining company is effectively a leveraged bet on the value of the underlying commodity. Buying Freeport when copper is hovering around $10,000 a metric ton is like remortgaging your house to buy Cisco Systems Inc. at the peak of the dotcom bubble. 

Even if it weren’t for the price risk, there’s reputation to consider. BHP has spent decades trying to burnish its credentials as a responsible miner after the notorious environmental disaster at Ok Tedi, a copper-gold mine in the mountains of the island of New Guinea, which deposited its waste rock and slurry directly into a river. Freeport’s prize asset is Grasberg, a copper-gold mine in the mountains of the island of New Guinea, which deposits its waste rock and slurry directly into a river. That echo is one of the main reasons why a long-mooted BHP-Freeport deal has never come to fruition.

Miners of BHP’s scale constantly leave money on the table by refusing to operate in “difficult” jurisdictions where corruption, weak governance and authoritarianism make it hard to keep your hands clean. By acquiring major assets in Indonesia (for Freeport) or the Democratic Republic of Congo and Kazakhstan (for Glencore), BHP would be buying straight back into those markets. With a Glencore acquisition, a company that’s been trying to trim fossil fuels from its portfolio would also end up buying one of the world’s biggest thermal coal businesses.

There was a great time to buy assets like these — and it was during the decade-long slump for industrial metals. Right now, BHP’s better approach would be to use its talents to grow production from the giant deposits still sitting on its books. The end of the last mining boom nearly  10 years ago didn’t just halt BHP’s M&A pipeline. It also meant major expansions to some of its existing pits, such as Australia’s Olympic Dam, Chile’s Pampa Escondida, and Peru’s Antamina, were put on the back burner. Resolution, a huge joint venture copper mine in Arizona with Rio Tinto, is stalled because of a failure to get the buy-in of Indigenous groups. Developing any of these would represent a better use of capital than a top-of-the-market purchase of a rival.

Putting down $70 billion-odd on a mega takeover is clearly the look of the season, with Microsoft Corp. offering $68.7 billion for gaming company Activision Blizzard Inc. and Unilever Plc bidding $68 billion for GlaxoSmithKline Plc’s consumer healthcare unit. BHP’s chief executive officer, Mike Henry, should note what shareholders thought of those offers, though, with Microsoft stock dropping 2.4% on the news and Unilever falling 7%. The moment to buy is when there’s blood on the streets. The mining sector has rarely looked healthier than it is right now.

More From Other Writers at Bloomberg Opinion:

• Microsoft’s Activision Deal Could Be a Big Blunder: Tae Kim
• Metal Bulls, It's Not a Super-Cycle Yet: Clara Ferreira Marques
• A BHP-Freeport Takeover Is Mining's Dog That Didn't Bark: Gadfly

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

David Fickling is a Bloomberg Opinion columnist covering commodities, as well as industrial and consumer companies. He has been a reporter for Bloomberg News, Dow Jones, the Wall Street Journal, the Financial Times and the Guardian.

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