Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 579

Avoiding destructive M&A and hype cycles in mining

This article is an edited transcript of Justin Halliwell’s segment in Schroders’ recent broadcast “What happens when concentration cracks?”


We talk a lot about the asymmetric risk associated with M&A [mergers and acquisitions] with all companies. We have seen a lot of value destruction from M&A over time and miners have been very much at the forefront of that issue. BHP’s failed bid for Anglo American feels like they escaped, like they were saved from themselves.

The miners have extremely privileged assets. They generate amazing cash flow and really their key job is to allocate that efficiently. We really felt with the Anglo bid that was not the case, and I can put a few numbers around that.

It was a complicated transaction with Anglo owning a lot of assets which everyone will have slightly differing views on regarding value, but really all BHP wanted was the copper. And our numbers showed they were paying about $30 billion for the copper assets, which is about $50,000 a ton of copper production.

That's around triple the typical greenfield cost of late. And in fact, one of Anglo’s copper assets they would have been acquiring was a greenfield just completed. So for a brand-new asset, they were going to pay triple what was paid for the building of that asset.

The important part there is that, I mean, that's probably a good asset. It's probably going to generate 15%, 20% returns on that recent capital investment. For BHP to make that kind of return, which is what they're looking for on the acquisition, we're looking for implicit returns north of 50% on that asset. That's just not feasible.

Even if the asset is good enough and copper prices are high enough, we'd expect governments to want to take more and more of that profitability. So, we just think it's a one-way risk in terms of that transaction. Now, like I said, they were saved from themselves. They've gone into a smaller asset in copper with less scope to destroy value.

On the flip side, they're also selling assets. So, they've been getting rid of what they consider poorer-quality assets, such as in the coal space where there are less buyers. And you can see the Whitehaven transaction, you kind of feel like Whitehaven has done well out of that one. So, BHP should just stick to their knitting, generate cashflow and allocate it more efficiently.

Future facing metals still small fry in Australia

Copper is important for electrification and decarbonisation, and lithium obviously gets a big play in that as well. BHP are very bullish on copper, there's no question, and that was a big driver behind the Anglo transaction. But the numbers are small still - even within copper, which is obviously a far more developed commodity than something like lithium.

If you look at Australia specifically, the numbers in 2023 in terms of export value were something like $90 billion of iron ore, $60 billion of coal and $5 billion of copper. And lithium, with an incredibly strong price, was about $10 billion.

So $15 billion for the future facing materials, which is what the companies like to call them, versus $150 billion for the dull and boring iron ore and coal. So, we're a long way from those green and future facing commodities, certainly in Australia, from overtaking the more mature commodities.

Now it's probably worth reflecting on something like lithium, and it really comes to how we look at commodities and how volatile commodities have become. There's a lot of money washing around the system, trying to find a home in commodities. What we're trying to do, like with lithium, is avoid the storytelling that comes with some of these commodities.

So, this is a chart from UBS. It's not to pick on them. But what we can see here is the bars on the chart are the forecast of the market surplus or deficit.


Editor’s note: the forecast from 18 months previous is shown in the dark bars and predicts a significant deficit. The lighter bars show the surplus that is now being forecast by the same broker for the same periods in the future.

It's been a huge turnaround. The lithium price has gone from a peak of $8,000 a ton 18 months ago to now sitting at $700 a ton. I mean it's a huge, huge fall. Like nothing that we've ever seen in commodity land. And as that's happened, the market and the consultants have started to change their forecast dramatically.

It's also a commodity acting like all commodities do when there's high prices. Guess what?  Supply comes in that no one dreamt of. 18 months ago, it was a race for forecasting electric vehicle penetrations. As the prices of those vehicles have risen, in part due to the commodity inflation, consumers have become more focused on the price of those cars, demand started to fall a bit and at the same time, supplies come in.

What we're trying to do is we're trying to look through those cycles. We try not to get caught up in the hubris when things are very bullish, but also, we're not trying to get too bearish at the bottom.  The flip of that would be something like alumina, where 12 or 18 months ago, everyone was super bearish and the price was maybe $300 a ton. Few people were making money and guess what? Supply starts to get shut down, demand stays robust and the price flips around.

So, that's what we're trying to do. We're trying to look through cycles, trying to not get too caught up in the ups and downs and try and keep a steadier view.

 

Justin Halliwell is Head of Research for Australian Equities at Schroders, a sponsor of Firstlinks. This extract was taken from a recent Schroders webinar titled “What Happens When Concentration Cracks?”. You can view the full webinar and selected highlights from it here.

For more articles and papers from Schroders, click here.

 

RELATED ARTICLES

Australia’s bounty: is it just diversified luck?

Why ASX miners will handily beat banks in the long-term

Banks, BHP, RIO, CSL and the tyranny of size

banner

Most viewed in recent weeks

Australian house prices close in on world record

Sydney is set to become the world’s most expensive city for housing over the next 12 months, a new report shows. Our other major cities aren’t far behind unless there are major changes to improve housing affordability.

The case for the $3 million super tax

The Government's proposed tax has copped a lot of flack though I think it's a reasonable approach to improve the long-term sustainability of superannuation and the retirement income system. Here’s why.

7 examples of how the new super tax will be calculated

You've no doubt heard about Division 296. These case studies show what people at various levels above the $3 million threshold might need to pay the ATO, with examples ranging from under $500 to more than $35,000.

The revolt against Baby Boomer wealth

The $3m super tax could be put down to the Government needing money and the wealthy being easy targets. It’s deeper than that though and this looks at the factors behind the policy and why more taxes on the wealthy are coming.

Meg on SMSFs: Withdrawing assets ahead of the $3m super tax

The super tax has caused an almighty scuffle, but for SMSFs impacted by the proposed tax, a big question remains: what should they do now? Here are ideas for those wanting to withdraw money from their SMSF.

The super tax and the defined benefits scandal

Australia's superannuation inequities date back to poor decisions made by Parliament two decades ago. If super for the wealthy needs resetting, so too does the defined benefits schemes for our public servants.

Latest Updates

Planning

Will young Australians be better off than their parents?

For much of Australia’s history, each new generation has been better off than the last: better jobs and incomes as well as improved living standards. A new report assesses whether this time may be different.

Superannuation

The rubbery numbers behind super tax concessions

In selling the super tax, Labor has repeated Treasury claims of there being $50 billion in super tax concessions annually, mostly flowing to high-income earners. This figure is vastly overstated.

Investment strategies

A steady road to getting rich

The latest lists of Australia’s wealthiest individuals show that while overall wealth has continued to rise, gains by individuals haven't been uniform. Many might have been better off adopting a simpler investment strategy.

Economy

Would a corporate tax cut boost productivity in Australia?

As inflation eases, the Albanese government is switching its focus to lifting Australia’s sluggish productivity. Can corporate tax cuts reboot growth - or are we chasing a theory that doesn’t quite work here?

Are V-shaped market recoveries becoming more frequent?

April’s sharp rebound may feel familiar, but are V-shaped recoveries really more common in the post-COVID world? A look at market history suggests otherwise and hints that a common bias might be skewing perceptions.

Investment strategies

Asset allocation in a world of riskier developed markets

Old distinctions between developed and emerging market bonds no longer hold true. At a time where true diversification matters more than ever, this has big ramifications for the way that portfolios should be constructed.

Investment strategies

Top 5 investment reads

As the July school holiday break nears, here are some investment classics to put onto your reading list. The books offer lessons in investment strategy, financial disasters, and mergers and acquisitions.

Sponsors

Alliances

© 2025 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. To the extent any content is general advice, it has been prepared for clients of Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), without reference to your financial objectives, situation or needs. For more information refer to our Financial Services Guide. You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.