The $6.7bn (A$9.6bn) BHP-Oz Minerals merger that is on course to be completed this spring has the potential to trigger a further wave of mergers and acquisitions (M&As) in the Australian mining sector. The merger, as laid out in the 22 December 2022 scheme implementation deed, finally brought to an end months of negotiations, and gave an insight into the future of Australian mining.

On completion, the merged entity will have an expanded copper and nickel mining portfolio enabling it to attain one of the most dominant positions in Australian mining. Both of these metals are necessary for the transition to clean energy and are expected to increase in value accordingly. BHP CEO Mike Henry said, “the combination of BHP and Oz assets, skills and technical expertise provides a unique opportunity not available under separate ownership.”

Yet BHP’s focus though is on “unlocking more copper units, quicker and faster” and not on M&As for their own sake, raising the potential of other similarly massive moves in the future. As Henry explained during a year-end Q&A session, “BHP’s strategy is not dependent on mergers and acquisitions. We’ve got this very clear focus on growth in copper, but there are a number of levers that we are pulling to unlock that growth, starting with getting more out of the big resources that we have.

“Any M&A that we would pursue would only be pursued if it’s strategically a good fit for us and if there’s value to be captured for BHP shareholders.”

As a result, one of the world’s biggest miners is retaining its ambition, and desire to expand and invest in minerals whose value is constantly changing. With ever-growing concerns as to the environmental and social footprints of mining, a commitment to game-changing deals and investments could set a new precedent for mergers in the sector.

Inside the BHP-Oz merger

BHP’s first offer of $5.8bn (A$8.4bn), at $17.3 (A$25) per share, was made last August, and was rejected. This led to then improved offer that was ultimately accepted by the board of Oz, and represents a 49.3% premium to the Oz Minerals share price of $1.3 (A$18.9) per share, prior to BHP’s initial offer. The cash to fund the merger will be sourced from a combination of BHP’s existing cash reserves and cash equivalents as well as the proceeds of a new loan facility.

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While the offer ultimately fell short of the $20.8 (A$30) share price that some in the industry were calling for, it remains a huge deal for one of the most attractive investments in Australian mining. According to Oz Minerals’ annual mineral resource and ore reserve summary, released on 21 December 2022, there was a 23% increase to 59 million tonnes in its Prominent Hill underground ore reserve over June 2021. The mine life was also extended to 2038.

The company also announced a 7% increase in the quantity of its West Musgrave ore to 270 million tonnes of copper and nickel with the mine life extended out to 2049. The Carrapateena ore reserve grade was reported as remaining stable at 190 million tonnes.

The merger still remains subject to ratification by the Oz Minerals shareholders. Information about the merger, including the unanimous recommendations by the Oz Minerals directors and the independent experts report, will be sent to Oz Minerals shareholders between late February and early March. It could then be approved by the shareholders at a scheme meeting that is expected to be held between late March and early April.

At least 75% of the votes cast by Oz Mineral shareholders present and a simple majority of all Oz shareholders that are voting in person or by proxy at the meeting are required for approval, which figures within the company expect to be granted. Speaking in support of the merger Oz Minerals Director CEO Andrew Cole said: “It provides Oz Mineral shareholders with an opportunity to realise certain value for their shares at a compelling premium.”

An aggressive industry

BHP is not alone in its pursuit of such resources, nor is it alone in acquiring assets through M&As. An S&P Global Market Intelligence report shows that Australia-based mining companies have been making “big swings” to acquire smaller outfits in stark contrast to more conservative M&A activity elsewhere. Between 1 January 2021 and 2 September 2022, Australian companies spent an aggregate of US$15.9bn (A$22.9bn) in making 92 corporate deals.

Oz Minerals' Carrapateena Copper Mine
Oz Minerals’ Carrapateena Copper Mine, which will soon merge into business with BHP. Photo by: Oz Minerals.

“Many Australian miners chose to buy their way into the most promising growth opportunities”, noted S&P in its analysis. Mike Harrowell of Harwind Partners, a mining corporate advisory serving Australia and North America elaborated, saying “the dynamics of the Australian market just suit M&As at the moment. A lot of smaller companies have done a good job of packaging up assets because they’ve been spun out of other companies.”

Last December, the Anglo-Australian miner Rio Tinto completed its acquisition of Canada’s Turquoise Hill Resources for approximately $3.1bn (A$4.5bn), based on a value of $32.3 (C$43) per share. This simplifies its ownership of the world-class Oyu Tolgoi mine in Mongolia and significantly strengthens Rio Tinto’s copper portfolio. As a result of the acquisition, Rio Tinto now holds a 66% direct interest in the Oyu Tolgoi project with the remaining 34% owned by the Government of Mongolia.

Rio Tinto Copper chief executive Bold Baatar said: “This acquisition further strengthens our copper portfolio […] we now have a simpler and more efficient ownership and governance structure, with our partner the Government of Mongolia, as we proceed together towards sustainable production from the underground mine.”

“Committed to growing the lithium business”

Similar deals have been made across the sector, most notably IGO’s $1.4bn (A$2bn) deal with Tianqi Lithium (TLC) for a 49% share in the Greenbushes mine in Western Australia. The move created a new joint venture, named Tianqi Lithium Energy Australia (TLEA), which has since began the process of acquiring 100% of Essential Metals (ESS), a lithium exploration company.

In an Australian Stock Exchange release IGO’s acting CEO, Matt Dusci, commented, “Both IGO and TLC are committed to progressing and growing our lithium joint venture business. The ESS transaction provides an opportunity to accelerate lithium exploration to bring new resources to production.

“It also complements the significant growth opportunities within the TLEA business which include the continued expansion of the Greenbushes operation, the successful ramp up train one of the lithium hydroxide facility at Kwinana and progressing towards the financial investment decision for train two.”

As Australia’s metals and mining sector ponders opportunities for consolidation and growth, M&A deals in this space should stay strong in 2023. GlobalData ranked Australia second, after Canada, last year in total metals and mining industry M&A deals with 48 deals in the third quarter of 2022. This compares with Canada’s 103 deals and the US with 27 deals.

As PricewaterhouseCoopers Australia partner Marc Upcroft commented: “We’re at a phase now where we’re expecting more growth projects, so I think capex is going to increase […] and that’s going to be a huge challenge for mining companies [on their own] to navigate.”