UBS has thrown its weight behind the merger between Anglo American PLC (LSE:AAL) and Canada’s Teck Resources (TSX:TCK), describing the tie-up as strategically sound.
It values Anglo shares at 2,750p, about 10% above their current 2,490p. The bank keeps a 'buy' rating on the stock.
The attraction is straightforward: more copper. The combined group would derive more than 70% of its earnings before interest, tax, depreciation and amortisation from the red metal, which is central to electrification.
At present, Anglo and Teck trade on six to seven times earnings, while copper specialists such as Antofagasta and Freeport-McMoRan fetch eight to nine times. UBS reckons a re-rating is on the cards once the businesses are integrated.
On paper, the merger offers synergies of around $2.2 billion. These come partly from trimming overheads and procurement costs, but the bigger prize lies in linking Teck’s QB mine with Anglo’s stake in the Collahuasi operation in Chile.
By blending higher-grade ore across the two sites, UBS believes the companies could achieve more than they are currently promising.
Regulatory hurdles remain. Canada has tightened rules around critical minerals and will want firm commitments on investment and jobs, while China has, in the past, demanded concessions when copper deals cross its desk.
Teck shareholders must also give a two-thirds majority to approve the deal, a higher bar than the 50% needed from Anglo’s investors.
Even so, UBS thinks the transaction is defensible, not least because both groups have faced takeover interest in recent years. Anglo has been targeted by BHP and Teck by Glencore.
A combination of the two would make for a less vulnerable target and a stronger copper-focused business in the long run.
For Anglo investors, there is also the sweetener of a $4.5 billion dividend to be paid when the deal completes.
On UBS’s numbers, the combined group would trade on less than seven times expected 2027 earnings, cheaper than copper peers. If the plan holds, that gap should close.