BHP

So the big news in equity markets is the BHP move on Anglo American, a move that is a play on copper, iron ore, and coal.

Now BHP only just finished divesting some coal assets (Blackwater and Daunia) to Whitehaven, so it’s unclear long run if they’d necessarily want to hold those, but met coal remains quite profitable at current pricing.

Same with diamonds; we are quite sure BHP is not interested in lithium or uranium, it’s just copper and, to a lesser extent given their own assets, iron ore.

And even as we type that, it’s hard not to think a) BHP might view their own shares as overvalued, hence a good funding source to move on Anglo b) that iron ore weakness in the future (you’ll recall that big negative RBA thought piece on China/iron ore) supports increasing copper c) BHP’s dreadful track record of M&A does suggest “top of the cycle”, all else equal.

Anglo has been a weaker performer, even as commodity prices have been stronger, and so BHP making a move is attractive, in that sense.

So, what to make of it.

BHP’s a big index position, and would grow larger, and thus active weights stretched to very large levels, large enough that being “in or out” determines whether you made alpha or not.

That you might be buying something where mgmt view it as overvalued, and, almost implicitly, given iron ore is such a large part of the business, so does the RBA.

That today’s market reaction, and any subsequent sell down (which could arise if BHP is forced to up the offer into something more meaningful, and thus more equity issued and thus more downwards pressure on the share price) could represent a “fair” opportunity to narrow the underweight.

All reasonable thoughts.

Below is Anglo’s cost structures. Those copper assets are quite good.

And BHP would become enormous within copper (even more so).

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