After a long hiatus, are the days of the big mining deal back with us?
Chatter on that score suddenly burst across the airwaves after sources inside BHP Group PLC (LSE:BHP) apparently let it be known that the company was on the lookout for a big acquisition.
How far “people familiar with the matter” are to be relied upon is an open question.
But after a painful period of restructuring after the reckoning that followed the last mining boom, the big miners are throwing off a lot of cash.
BHP is reckoned to be running the rule over Glencore PLC (LSE:GLEN), VALE and Freeport McMoRan, among others.
But memories of the disastrous deals that were made at the height of the last mining boom have not altogether faded - among the deals that went wrong last time were BHP’s acquisition of the Jansen potash project in Canada, and Rio Tinto’s purchase of Alcan.
Paying cash in the name of avoiding dilution is all very well, but if your shares are on the cusp of collapsing anyway because Lehman Brothers is on the brink, then big ticket deals don’t in the end seem so appealing.
And, after all, how stable is the financial system currently?
Certainly, no sensible investor would be putting all his eggs in one basket, or asset class, right at the minute.
All the same, given that BHP is known to have expanded its dealmaking team in London and elsewhere, what sort of opportunities might be on the table, allowing that the biggest deals might still be a bit too hard for investors to swallow?
One answer is that having off-loaded a portfolio of coal assets recently, BHP might well continue that pivot away from the more polluting end of the mining business and move towards battery metals, and others that are central to a greener economy.
In that regard, it’s easy to see why initially Freeport McMoRan was mooted, since it has a huge amount of copper. VALE has a lot of nickel, so that too would make sense, although its primary business is iron ore, and BHP has plenty of that already.
Perhaps, instead, BHP will look to gobble up single asset companies like Horizonte Minerals, which now isn’t that far away from production at its Araguaia project in Brazil. Araguaia has long been supported by Teck Resources, so it may be that BHP will have a hard time muscling in there. And it may be, too, that it’s learned caution from its recent experiences of conflict on the share register of SolGold, which owns Cascabel, one of the few large-scale projects it’s bought into in recent years.
But then again, why not Teck itself, which, with a market capitalisation of just under US$19bn would be a somewhat easier bite than Glencore’s £54bn. True, there’s a bit too much coal in the Teck portfolio for the ESG brigade to feel easy with, but if those could be flipped on to a Middle Eastern or Chinese investor then all parties could be satisfied.
On the Aussie side, the locals can get a bit touchy about big companies gobbling up national champions, but do nickel companies Independence Group, Mincor, Panoramic or Western Areas really fall into that category? And would it matter, now that BHP has finally shaken off the old Billiton dust, and returned to its Aussie roots? A bid from BHP would certainly bring all those questions to the fore.
Meanwhile, opportunities in lithium also abound. Will BHP take a swing at SQM, the original global lithium champion? It might be that there are just too many South American national interests tied up in that one to make it viable.
Which in turn means that it could look further down the value chain.
Atlantic Lithium has a great-looking project in Ghana, but unless anyone intervenes to stop a process that’s already well underway, the future of Ewoyaa is likely to be decided by Piedmont, the major funding partner.
Might BHP instead bid for Piedmont? Given the vagueness, mischievous and anonymous nature of BHP’s briefing to market, who can rule anything out?
Other assets that could come up for grabs could be European Metals’ Cinovec project, but there too, existing investment partners look to be in control.
The lithium assets of Bacanora are shortly to come under Chinese control, but could it be that Western companies might at last start buying assets off the Chinese, instead of the other way round? Don’t bet on it, not quite yet.
So something more out of left field then?
How about a mineral sands asset, like the huge one Sovereign Metals is developing in Malawi?
Or perhaps something more early stage, with real growth potential.
Watch this space for Bradda Head, shares of which have risen by over 60% over the past few months, and which may have several separate lithium development projects ready to market by the end of the year. And not just of one kind, either. This is a company with lithium in clay, lithium in hard rock and lithium in brines, all in the USA, close to potential customers.
Maybe it’s too small now, but comparable companies with assets in the South Western USA have seen valuations soar.
If BHP still has one eye looking backwards at the value destruction caused by buying at the top of the last mining boom, maybe it would prefer to get in on the ground floor by buying into a new district just as it’s taking off.
Bradda Head would fit that bill nicely, although, it hasn’t as yet been mentioned by “people familiar with the matter.”