BHP Chief Executive Mike Henry’s reinvention of mining continues in $8.3 billion bid for OZ Minerals

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The dust on the massive Woodside deal only died down 74 days ago, but Henry has already steered BHP to another M&A maelstrom via an $8.3 billion bid for copper, gold and nickel producer OZ Minerals.

The offer was strenuously rejected this week by an OZ board that believed the $25 per share offer seriously undervalued the long-term opportunity that could arise from combining the copper mines. of the two companies in South Australia and the nickel assets in Western Australia.

But few people think that the case ended with this rejection.

“There are no sureties here, but you would think that [$25 bid] was the opening salvo for BHP if they were seriously considering OZ Minerals, which they obviously are,” said Marcus Bogdan, Chief Investment Officer of Blackmore Capital.

Blackmore’s mixed Australian equity fund holds both BHP and OZ shares.

Bogdan said he was happy to see BHP acting opportunistically amid falling copper prices and copper producer stock prices.

But he would be happy if BHP spent more on a higher bid for OZ.

“I’m not sure he needs a three in it [an offer priced above $30 per share] but it must certainly be materially above what it is today,” he said.

“We don’t have a definitive price on it, but it’s definitely higher than the $25.”

“Precise focus” on critical areas

Power is fleeting at the best of times and that was reinforced for Henry when he took on the role of Managing Director on January 1, 2020 and immediately saw his first year on the job hijacked by the pandemic.

Word leaked out of BHP through 2020 was that Henry was frustrated with the situation; Melbourne’s strict lockdowns served as an apt metaphor for how its plan to reinvent BHP had been put on hold by the immediate priority of managing a global workforce during a health crisis.

A disciple of a thorough, data-driven process, Henry would give in to the suggestion that an earthly emotion like frustration could influence the strategy of a huge multinational like BHP.

But in February, Henry said the pandemic had left him “focused on the critical few things and doing them very quickly”.

“As a large organization, we have too often tried to do a lot of things in parallel over a longer period of time,” he said then.

“I strongly believe that you should do fewer things, but do them faster, and then move on to the next things.”

An extraordinary boom in iron ore and coking coal prices over the past three years has left BHP’s balance sheet in poor shape, meaning Henry can act as quickly as he wishes on deals.

The unified corporate structure also means that BHP will find it easier to offer certificates upon acquisition.

Two and a half years later, the Henry era is clearly about decarbonizing BHP’s portfolio and gaining more exposure to commodities that will thrive in a future driven by electrification and environmental sustainability.

Simplistically, the OZ offer is in line with the strategy as it would provide BHP with more copper and nickel; two metals that are expected to enjoy strong demand as the world urbanizes, buys more home appliances and attempts to decarbonize through electric vehicles, batteries and other means.

On closer inspection, it is also a question of solving two problems; BHP does not dig enough nickel ore to operate its Kalgoorlie nickel smelter at full capacity and the purchase of OZ would give it additional volumes through the West Musgrave nickel, copper and cobalt project, which is ready to be transformed into a mine costing more than $1 billion.

Besides volume, West Musgrave ore contains the right balance of magnesium and iron that the Kalgoorlie smelter needs to run well; a chemical conundrum that has increasingly occupied BHP’s nickel division in recent years as its ore profile has gradually changed through depletion.

Another effort to make the Olympic Dam work

The other conundrum BHP could solve by acquiring OZ – and the biggest motivation behind the deal – lies at South Australia’s Olympic dam.

There are many reasons why Olympic Dam has been a tough mine for BHP and has delivered near-zero return on capital employed (ROCE) since being acquired through the Western Mining Corporation acquisition 17 years ago.

High uranium levels are the first challenge; state, federal and international governments have strict rules regarding the transport of radioactive materials such as uranium.

An aerial view of one of the Olympic Dam mines. PA

Olympic Dam’s high uranium content requires BHP to fully process the ore through the energy-intensive process that produces sheets of red metal approximately one square meter in size.

Most other copper miners, including OZ, have less uranium in their geology and therefore can transport and export their copper as a gray concentrate that looks like soil.

OZ concentrate is an intermediate product and therefore requires much less processing; the Adelaide company’s customers smelt the concentrate to turn it into pure metal.

Uranium is not the only challenge; the Olympic Dam orebody is huge but very deep underground and the copper is inconsistent, which is the opposite of what mining companies prefer.

Bringing in the high-grade concentrate from the two nearby OZ mines and mixing it with what BHP digs up at Olympic Dam would allow BHP to deliver a more consistent and predictable product through its smelter and refinery.

The mixed product would also likely contain more copper than BHP sometimes puts into the system; the same volumes of a higher grade feedstock would draw more copper from the rear end of the Olympic Dam.

“A lot of times when people think of growth, it’s all about production growth. Now, production growth is a big lever, but we really should think of growth as value growth,” Henry said in February, speaking of his attitude toward Mr.&A.

“One-time failures”

Other challenges at Olympic Dam are man-made; Western Mining has built an infrastructure worthy of a mid-level miner.

BHP would have done it very differently had it built the mine.

The design of the mine, where mine capacity is roughly the same as refinery and smelter capacity, means that if one part of the system fails or underperforms, the whole system under -perform.

In this sense, Olympic Dam operates more like an integrated steelworks than a mine; unless there is “just in time” delivery from one party to the other, this is debating.

Insiders call this the Olympic Dam series of “point failures”.

If BHP had access to additional volumes of copper concentrate from OZ, the Olympic Dam smelter and refinery would be the bottleneck in the system; a much better scenario than mine being the bottleneck.

BHP could solve Olympic Dam’s “point failure” problem by building new mine shafts, concentrators, smelters and refineries, but that would be expensive; we can reasonably infer that spending $8.3 billion to buy OZ is the cheapest option.

There could also be productivity benefits at the two OZ mines – Prominent Hill and Carrapateena – if they were combined with the Olympic Dam smelter and refinery.

OZ must mine selectively to avoid ore parcels that contain high levels of uranium because its regulators and customers will not tolerate transporting a concentrate with high levels of uranium.

There have been numerous occasions over the past decade where a batch of Prominent Hill ore has been processed at Olympic Dam because it contained higher than normal levels of uranium.

Many believe that uranium will become a bigger problem for OZ as its mines age, the easier elements of the resource have already been selected.

A full combination with BHP would reduce the need to selectively mine Prominent Hill and Carrapateena to avoid uranium, which would likely bring productivity gains and extend mine life.

OZ and BHP have discussed on numerous occasions over the years the possibility of establishing a regular off-take agreement for OZ concentrate to be processed at Olympic Dam.

OZ has traditionally been reluctant to become too dependent on its larger neighbor, and transactions have been sporadic.

If a merger cannot be completed, a deal for BHP to buy more concentrate from OZ could be a consolation prize.

“I think this makes strategic sense for BHP as it deweights its iron ore exposure and brings in a commodity that will become a bigger part of the portfolio,” Bogdan says.

“You want to be exposed to these metals that are going to benefit from decarbonization and copper and nickel are a key part of that.

“I think this transition that we’re seeing is probably one of the most significant themes of the next decade.”


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