Long-suffering Anglo American (LSE: AAL) shareholders received a massive boost yesterday (9 September) when it announced a merger with Teck Resources, propelling the share prices of both companies.
Mega-merger
The bringing together of two mining giants is being promoted as a “merger of equals”. The newly formed company, to be named Anglo Teck, will see Anglo American shareholders owning 62.4% of the outstanding shares.
The miner will issue 1.3301 shares to existing Teck shareholders in exchange for each Teck share. It also intends to declare a special dividend of $4.5 billion (approximately $4.19 per ordinary share), ahead of completion.
The company will continue to have its primary listing on the London Stock Exchange. Secondary listings will be in New York, Toronto and Johannesburg.
One key commodity links both mining giants: copper. The merger will bring together six huge copper assets, with a combined annual production of 1.2m tonnes (mt). This is expected to increase to 1.35mt by 2027.
Copper demand
I have long viewed copper as the new gold. In the developed world, there is 230 kg of copper installed per person, but at a global level there is just 65 kg. To bridge this gap, the global installed resource base needs to increase fourfold in the coming decades, to 2,000mt. But even that estimate could be conservative.
Demand for copper is coming from multiple sources. These include renewable power generation (wind and solar), EVs, electricity grid infrastructure modernisation, and data centre expansion to power the AI revolution.
Copper deficit
I continue to believe that the world is sleepwalking into a copper deficit in the coming decade. For starters, ore grades are in long-term decline. The low-hanging fruit has long been mined.
But at a more fundamental level, governments and society do not view the industry in a favourable way. It is viewed as a polluter through its insatiable energy demands. In addition, many mines are located in areas where water supply is scarce.
The upshot of this hostility is that the timeline for expanding the world’s resource base is ever increasing. On average, it takes 15 years to obtain all relevant environmental planning permits from exploration, mine development and subsequent production.
Merger risks
The merger is expected to deliver annual pre-tax savings of approximately $800m, four years after completion. Economies of scale, operational efficiencies, and commercial and functional consolidation, will be the main drivers.
However, with a merger of this size, there is no guarantee that such savings will ever be realised. At the moment such numbers are estimates and the risk is they may not be realised. Plus a one-off cash cost of $700m will be incurred in the first three years following completion.
Bottom line
Following the completion, Anglo Teck will become a top-five copper producer. Indeed, copper production is expected to contribute 72% of total underlying earnings before income tax, depreciation and amortisiation (EBITDA).
Both miners have been undergoing significant portfolio rationalisation recently. For example, Teck sold its coal resource to Glencore and Anglo has divested itself of platinum group metals. So in that sense the merger could be a long-term win for shareholders.
Personally, I remain convinced of a copper deficit, which is why I own the stock. But its volatile nature means it will not be a fit for every investor’s portfolio.
