Ground Breakers: 'Giddy up' say analysts as copper investors go buckwild on BHP's $8.4bn bid for OZ Minerals

Copper stocks go haywire as BHP’s bid to take out OZ Minerals lights up the local market
29Metals, Copper Mountain, Sandfire among the movers on no news of their own
Analysts divided on whether BHP bid is as “compelling” as the Big Australian says

Investors in ASX copper miners have gone absolutely mental this morning, after BHP’s (ASX:BHP) $8.4 billion bid for OZ Minerals (ASX:OZL) lit a fire under the market.

OZ shares are unsurprisingly on a tear this morning, storming more than a third past the $25 a share price lobbed by BHP, with the Prominent Hill and Carrapateena miner’s board’s rejection of the offer suggesting a higher price will be needed to secure the company.

Low cost, moneymaking copper assets like OZ’s Prominent Hill and Carrapateena are hard to come by and BHP has zeroed in on the metal as a key cog in the ‘future facing commodities’ strategy it has prioritised since selling its oil and gas assets to Woodside in a multi-billion merger this year.

But could this mean other miners are in play? Anyone holding copper seems to think so.

29Metals (ASX:29M), owner of the polymetallic Golden Grove mine which was once part of the OZ portfolio, is up over 16% this morning.

Sandfire Resources (ASX:SFR) shares lifted almost 7%.

Dual listed Canadian company Copper Mountain (ASX:C6C), reportedly looking for a buyer for its Eva copper project in Queensland, is up over 30% on no news.

There were also gains for Havilah Resources (ASX:HAV), which is planning to sell its Kalkaroo project in South Australia to OZ via an option deal, Aeris Resources (ASX:AIS) and nickel stocks like Mincor (ASX:MCR), IGO (ASX:IGO) and Panoramic (ASX:PAN).

Base metals stocks share prices today:

Nickel angle

There is of course a nickel angle to the deal as well. While Prominent Hill and Carrapateena would bolster BHP’s Gawler Craton copper portfolio, sidling up nicely to its Olympic Dam and Oak Dam assets, the $1.1 billion West Musgrave nickel-copper project could add critical nickel tonnes for its reinvigorated Nickel West division, which has cut supply arrangements with EV makers Tesla, Toyota and Ford.

BHP shifted West Musgrave to junior Cassini Resources (acquired by OZ in 2020), for just $250,000 and some milestone payments in 2014.

That came at a time BHP was unsuccessfully looking for a buyer for its whole nickel business and it has completely altered its outlook for the commodity since then.

The metal’s role in lithium ion batteries prompted BHP to return the unloved division to its previous status as a core asset.

BHP Nickel West boss Jessica Farrell last week said BHP expects 90% of all vehicle sales to be EVs by 2040 and nickel demand to increase 300% over the next 30 years.

LME nickel prices were unchanged Friday at US$22,216/t, while copper was up 1.9% to US$7871/t as Chinese copper inventories fell and physical premia rose.

BHP offer ‘is compelling’: RBC

OZ’s board has rejected the BHP proposal, which is lobbed at a more than 40% premium to its 30 day VWAP, but a 14.4% discount to the miner’s peak share price of $29.21 in January.

Since then copper prices have fallen substantially and the market place for labour and supplies has gotten significantly costlier, placing an opportunistic air on the bid from the cashed-up major.

Despite OZ’s insistence the $25 per share price doesn’t offer full value for money, RBC analyst Kaan Peker agrees with BHP CEO Mike Henry that it is “compelling”.

He says the deal implies an EV/EBITDA multiple of 7.5x, over OZ’s long run average of 6.5-7x and well above the investment bank’s $18/sh price target.

“We think the offer is compelling, and aligns with BHP’s strategy of increasing exposure toward future facing commodities,” Peker said.

“The assets are complementary with 1) Carrapateena and Prominent Hill in close proximity to Olympic Dam and Oak Dam, and with 2) Nickel West being able to utilise West Musgrave concentrate.”

BHP’s heft could give it the strength to develop West Musgrave, which OZ has admitted could be delayed on account of WA’s inflated mining construction market and labour shortages.

“We also note that BHP has the balance sheet capacity to be able to develop all OZL’s growth projects (given the recent copper price weakness, and large capex burden, there were concerns around whether OZL would be able to self-fund the West Musgrave development without putting undue pressure on the balance-sheet),” Peker said.

“The key risk for OZL shareholders is whether BHP remains disciplined, as we somewhat saw with the Noront transaction.”

If successful, OZ would mark BHP’s first major M&A buy since its ill-fated US$15.1 billion takeover of US shale producer Petrohawk Energy in 2011.

‘Giddy up’

Shaw and Partners senior analyst Peter O’Connor has taken a different tact, ramping up OZ’s target price to a heady $30 and telling investors to “giddy up” for the corporate rumblings.

He says BHP will have to offer terms closer to “typical industry takeover premiums” of NPV x 1.25-1.3.

“The OZL valuation gap (Share price vs NPV) was always going to close as the world navigated past peak inflation/peak Fed and recessionary headwinds – the later now well priced into commodities and equities,” he said.

“BHP’s opportunistic tilt at OZL has just focused attention and will also likely garner other ‘interloper’ interest.”

O’Connor views OZ as better operators of its assets than BHP’s efforts at Olympic Dam since the WMC takeover in 2005, with the mid-tier having traded at just ~$3 a share when copper was in the doghouse in 2016.

“Ironically, if BHP could generate more return from its adjacent Olympic Dam operation (US$6bn asset base with completely uninspiring returns) it would be more sensible and more accretive,” he wrote in a note to clients.

“After 17 years of ODO stewardship clearly BHP is still struggling. Hence, the tilt at OZL to pick up some of the DNA and mojo that has delivered 10-bagger returns for OZL shareholders.

“This M&A foray is far from over and as the note title suggests BHP will need to offer terms that reflect the valuation of OZL not an opportunistic snap at a global sector/commodity cyclical low.”