Why we will vote against the BHP offer for Oz Minerals
Back in August 2022, when resources were out of favour and fear ruled the markets, BHP proposed a $25 per share offer for Oz Minerals (ASX: OZL) – a 32% premium to its share price of $18.92. OZL Directors took little time to tell BHP to come back with a better deal or get lost. Although the copper price was languishing (US$3.55lb) at the time, its long-term outlook was robust. OZL had a high-quality portfolio of copper assets in Australia and there were significant synergy benefits from integrating its operations with BHP. In December, BHP (ASX: BHP) came back with a $28.25 offer, OZ Minerals Directors liked what they saw and committed to support the offer subject to no superior proposal being received, an Independent Experts report supporting the transaction and Oz Minerals shareholders voting in favour.
The lawyers then began pulling the documents together for the Scheme of Arrangement with the proposed shareholders meeting scheduled for late March / early April 2023 (a Scheme of Arrangement requires 50% of shareholders to vote and 75% of voting shareholders, excluding the bidder, to vote in favour).
While a Scheme of Arrangement has many advantages, the one big disadvantage is that they can take a long time to execute, and markets can change a lot during that time. And that is exactly what has happened.
Since 5 August 2022, when BHP first announced its intentions, the copper price has risen from US$3.55lb to US$4.27lb, a gain of 20%. This has fuelled a rise in global copper stocks:
The major ASX-listed copper producers Sandfire Resources (ASX: SFR) and 29 Metals (ASX: 29M) are up 44% and 34% respectively. Global majors Freeport-McMoRan (NYSE: FCX), First Quantum (TSE: FM) and Ivanhoe (TSE:IV) are up just over 50%, 38% and 54% respectively. In the same period, BHP’s share price also increased by 28%.
So, the reality of the situation is that the BHP offer now looks a little anaemic. The $28.25 revised offer price is an increase of 49.3% from the price on 5 August 2022. The performance of its copper sector peers suggests that Oz Minerals would be trading somewhere close to $28 today even without the takeover offer from BHP.
Oz Minerals offers unique copper sector exposure:
- The vast majority of its operations are based in Australia. This is a huge advantage given that much of global copper production comes from countries suffering from social tensions or subject to geopolitical risks such as Chile, Peru, Russia, the Democratic Republic of Congo, and China;
- The primary assets of Carrapateena and Prominent Hill offer long-life, low-cost copper production;
- Oz Minerals boasts an enviable development pipeline including the West Musgrave copper-nickel project; and
- Oz Minerals has arguably the best management team in the Australian resource market.
The Oz Minerals portfolio also fits well with BHP - the copper assets offer synergy benefits with Olympic Dam and the nickel production from West Musgrave could be an important feed into BHP’s Western Australian nickel ambitions.
Further, the long-term outlook for copper is very attractive. Energy transition will require increased quantities of copper to meet the demand from expanding renewable energy generation and the escalating market share of electric vehicles. Supply will be constrained due to a lack of new discoveries, falling grades from existing projects and the potential for supply chain disruptions.
We view Oz Minerals as one of the best exposures to the global copper market and see no reason to sell out cheaply to BHP.
The information in this article contains general financial product advice only and does not consider the readers’s personal circumstances. Readers should obtain their own advice before making any investment decision.
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David is the fund manager for the Argonaut Natural Resources Fund - a high conviction investor in the Australian resources sector. He has over 25 year’s financial markets experience across stockbroking and funds management and has also held senior...
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