- Teck is the second cheapest of the major copper mining companies, on a book value basis
- This gives Anglo American downside protection and upside potential if Anglo Teck delivers on its financial and operational targets
- Anglo American still has much work to do as it reshapes its own portfolio in wake of the failed BHP bid
“All of the headlines will be written about the strategic implications of Anglo American’s $20 billion, all-stock combination with Canadian miner Teck Resources, and the financial goals laid down by the management teams, but it is the price paid for the assets that will go a long way to determining whether the deal proves to be a good one or a bad one for shareholders,” says AJ Bell investment director Russ Mould.
“The good news is that Teck Resources’ shares were trading below net tangible asset, or book, value before Anglo American’s approach, so that gives management and investors some downside protection should anything go wrong and upside potential if the newly created entity unlocks the cost and revenue synergies it is seeking.
Source: Company accounts, Marketscreener, consensus analysts’ forecasts, LSEG Refinitiv data. Teck Resources share price as of the close on Monday 8 September.
“Only South32 was trading more cheaply on a book value basis before Anglo American’s move on Teck Resources, and it is a much more diversified resources play, with exposure to thermal and metallurgical coal, as well as aluminium, manganese, lead and zinc, as well as copper. Those coal assets will be perceived as risky, and potentially short-lived, by investors and thus weigh on the valuation.
Source: Company accounts. *Sumitomo Metal Mining does not disclose annual production and the 300,000 tonnes per year is a medium-term goal
“By contrast, Teck is a leading copper and zinc producer, albeit one with a relatively high cash cost of production compared to its global peers, and that may help to explain the lower valuation relative to net assets.
“Valuation, besides the strategic value of the target’s copper assets in Chile and Peru, was a key driver behind BHP’s bid for Anglo American and one reason for the approach’s failure, as shareholders felt the cash-and-stock offer was not high enough, even after several increases relative to the initial offer.
“Anglo American and Teck are targeting production increases, cost benefits and a substantial uplift in profits from the deal, especially from the two companies’ adjacent Collahuasi and Quebrada Blanca copper miners in northern Chile.
“However, transformational acquisitions do have the bad habit of transforming the buyer’s fortunes in unexpected, and not always positive, ways, so management will have work to do, if, as and when Anglo Teck starts to operate as planned in twelve to eighteen months’ time.
“BHP ultimately undid a lot of its 2001 Billiton merger by spinning off South32 in 2015 and miner’s share prices responded favourably to the austerity, cost reductions, capex cuts and asset sales of the 2010s, after the merger-and-acquisition and spending frenzy of the early 2000s, which also saw Rio Tinto’s poorly timed and ultimately overpriced bid for Alcan back in 2007.
“Moreover, Anglo American’s chief executive, Duncan Wanblad, is yet to complete the proposed overhaul of the company, with work to sell its stake in diamond miner De Beers, its Brazilian nickel operations and its Australian coking coal assets still ongoing. The company is also yet to convince everyone of the merits of 2020’s swoop for Sirius Minerals at a cost of £400 million.
“That helps to explain why Anglo American also looks cheap on a book value basis relative to its copper mining peers.
“It now remains to be seen whether it can complete the restructuring of its own business and then whether Anglo Teck delivers on its operational and financial targets, but at least the lowly valuation means there could be upside in the newly-formed company’s share price if it does so, all other things being equal and providing commodity prices do not nose dive in the meantime.”
