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Fabian Erismann (FE), Portfolio Manager of the Earth Sustainable Resources Fund, discusses BHP’s April 2024 takeover offer for Anglo American in conversation with Udo Wedler (UW), Member of the Management Board of Greiff capital management AG.
UW: The price of copper has been rising sharply for weeks, followed by BHP’s takeover bid to Anglo American last week (25.04.2024). This is potentially one of the largest transactions in mining history. What is happening in the copper market right now, Mr. Erismann?
FE: BHP’s offer is part of a series of recent acquisitions in the copper sector. Oz Minerals was bought by BHP, Newcrest was taken over by Newmont, then Glencore’s bid for Teck. In addition, there were various individual transactions of major copper deposits. What we have been pointing out for some time is taking place: the supply side of copper is under enormous stress. The pipeline of new mines has thinned out. Implementing large-scale projects has become extremely complex and expensive. Today, it takes an average of 15 years from the first borehole to the first production of a copper mine. Acquisitions have recently offered themselves as an attractive alternative to organic growth.
UW: Are you surprised by the offer for Anglo Amerian?
FE: No, not at all. Anglo American is one of the largest holdings in the Earth Sustainable Resources Fund’s portfolio. And this is for two reasons: After the 2022 share price collapse, due to revised production forecasts for the new Quellaveco copper mine in Peru and Los Bronces in Chile, write-downs in the ailing diamond division of DeBeers, and the price collapse of platinum group metals, as well as a number of other factors, the company is still very cheaply valued. In addition, Anglo American has a sustainability strategy that is unparalleled in the mining industry. It was built up and expanded over the years under the leadership of Mark Cutifani. This is very good substance at a low price, which makes the company attractive in a growing raw material environment. The recent takeover bid was the logical consequence. It won’t be the only acquisition.
UW: Could rival bidders emerge?
FE: Yes, I think so – we will see some activity here. The offer has already been categorically rejected by Anglo’s board of directors as being too low. One of BHP’s conditions appears to be to spin off the platinum and iron ore business in South Africa and the diamond division. South Africa is currently in the midst of an election campaign. Politicians will also want to have an important say here. One of the largest shareholders is the South African pension fund. In general, South Africa does not favour BHP. There are historical reasons for this. Due to the merger of BHP and Billiton, many South African mines have fallen by the wayside and other interested parties could also come forward with better offers.
UW: You hinted at the looming deficit in the copper market. What are the main reasons for this at the moment?
FE: There are quite a few. A few weeks ago, we noted the smelting margins of the Chinese copper smelters falling sharply. This is an indication that the market for copper concentrates, the precursor to the copper metal, is very tight. This is certainly the main reason at the moment. With the government-enforced closure of First Quantum’s Cobre Panama mine in Panama, a major copper concentrate producer has ceased to exist. Freeport McMoRan is nearing completion of its own copper smelter in Indonesia. This concentrate will also be withdrawn from the Chinese market. In general, however, it can be said that there has simply been too little investment in new mining projects in the last 10 years. Most Western mining companies have now massively revised their production forecasts downwards. The most dramatic drop in production is at Chile’s Codelco, which is still the world’s largest copper producer.
UW: What’s going wrong?
FE: Copper production has fallen from just under 1.8 million tonnes of copper to below 1.4 million tonnes in the last 10 years. Due to new, large, highly complex projects, Codelco is now technically at its limit. The group is heavily indebted.
UW: What do you mean by that, technically at the limit. Can you elaborate on this a bit?
FE: By 2030, about 30% of global copper production is expected to come from technically highly sophisticated, large underground mines, so-called block caves. The decreasing copper content is responsible for this, it requires “economies of scale” that this form of mining offers. However, there are only a few companies that have mastered the technology to realize such projects. The only mine that has mastered this technique on this scale is the Freeport McMoRan Grasberg Mine in West Papua, Indonesia. Codelco has other such projects with El Teniente and Chuquicamata. But as I said, new technical boundaries are being explored here. Rio Tinto is in a similar situation with the Oyu Tolgoi mine in Mongolia. In my view, these projects pose the greatest risk in terms of supply in the medium term. At the same time, the hunger for copper is growing strongly, also supported by the energy transition and the expansion of AI and data centers.
UW: Are you referring to the increasing energy consumption?
FE: That’s right. The electrification and digitalization of society is extremely copper-intensive. In general, the energy transition is becoming more and more of a battle of materials. This has been apparent for some time, and now meets a limited supply. In addition, there are a large number of populous emerging economies with strong growth in gross domestic product, above all, India, but also Indonesia, the Philippines and several African countries, which are expanding their infrastructure at an accelerated pace. A country’s prosperity and gross domestic product are closely linked to energy and raw material consumption.
UW: There are probably good times ahead for mining stocks. How is the Earth Sustainable Resources Fund positioned?
FE: Anglo American’s position was a bit of an outlier for the Earth Sustainable Resources Fund in terms of size. We actually see the best substance in mid-sized producers that show good, organic growth with compelling ESG strategies. These producers will be interesting takeover candidates in the future. However, they must meet our high technical requirements in terms of ore mining, community involvement, environmental standards and operational efficiency in order to qualify for the fund. Not all of them do this. We focus on copper, silver and a range of other commodities that are important for the energy transition, as well as companies with good diversification in terms of metals produced and vertical integration across the value chain.
UW: Finally, a brief outlook. What’s in store for us?
FE: I think the signs are good for a rapid increase in the price of a wide range of raw materials that are essential for the energy transition and the world’s energy supply. Not only for industrial metals, but also precious metals and energy commodities – the lights have jumped to green. Prices have risen sharply, despite high interest rates and a strong US dollar. This is unusual. In addition, there is the aforementioned investment gap in many commodities over the last decade. Much will depend on how real interest rates develop in the coming months and years, but we believe that the bottlenecks we are currently seeing will worsen dramatically. This is a good basis for a new commodity boom in which we are only at the beginning. If inflation continues to worsen and real interest rates fall, this would be very interesting for commodities across the board. Commodity stocks are very cheaply valued and have great upside potential in such an environment.
Image credit: Anglo American, www.flickr.com/photos/angloamerican/
