BHP’s Anglo American aspirations reveal full extent of its copper conviction

BHP’s $60 billion takeover tilt at the venerable out-of-Africa and London-listed Anglo American (LN:AAL) is not a takeover proposal at all.

It is a break-up proposal, one that has copper at its heart, or more specifically AAL’s copper unit which is good for as much as 790,000 annual tonnes of the red metal at a respectable unit cost of $US1.57/lb.

That copper is at the heart of the BHP tilt was confirmed in what detail AAL provided on the approach from BHP boss Mike Henry – AAL’s interests in South African platinum and iron ore would be split off before any BHP takeover bid for the rest.

BHP would then likely rid itself of AAL’s nickel, diamonds (De Beers), a fledgling fertiliser operation in opposition to its own potash ambitions, the manganese operations, and possibly the Australian met coal interests, the latter on possible anti-trust issues.

The whole thing then – should it actually proceed – is a merchant banker’s dream.

But the point is made that copper is at the very heart of the tilt. It goes to Henry’s ambition to build a copper unit big enough to hold sway in group earnings when the current earnings mainstay of iron ore falls away, as it will in response to peak steel, green steel and the Chinese-led expansion of African production.

Henry’s copper ambition became clear last year with BHP’s $9.6 billion takeover of OZ Minerals. While it has important integration benefits with BHP’s regionally close Olympic Dam copper-uranium mine, the OZ acquisition was small beer in comparison to his AAL copper play.

BHP is already one the world’s biggest copper producers (1.72Mt to 1.91Mt guided for FY2024 on a 100% basis and a unit cost at the biggest operation, the 57.5% owned Escondida, of $US1.40/lb to $US1.70/lb).

Nabbing AAL’s copper mines in Chile and Peru would deliver another 730,000-790,000 annual tonnes of copper at a unit cost of $US1.57/lb, based on guidance from AAL in its March quarterly earlier this week.

The strategy for BHP to reduce its earnings dependency on iron ore is well understood. And when it comes to copper, it has been an open book on why it is a commodity it so keen on.

It was certainly very open about its belief that copper was set for a golden period when it made its takeover bid for OZ. In February it fine-tuned its copper expectations, saying it had brought forward its earlier forecast that a supply deficit would emerge in the final third of the 2020s.

It said the supply deficit could well come earlier, and could well be pronounced. It is a recipe for sharply higher copper prices, something that is already playing out with copper prices up 15% to $US4.43/lb from an average of $US3.85/lb in CY2023.

Copper juniors:

We’ll know soon enough if BHP’s copper-focussed break-up plans for AAL is a happening thing thanks to the UK’s 28-day “put up or shut’’ takeover provisions.

In the meantime, BHP’s double M & A dip into copper (OZ and potentially AAL), along with the advance in the copper price to two-year highs of $US4.43/lb, should have a rub-off effect on the junior copper explorers where the upside leverage to “pronounced” copper deficits and tear-away copper prices is most pronounced.

There is a subset of the junior copper explorers that like the major miners, are focussed on porphyry copper systems (60% of global production), the large low-grade deposits which because of economies of scale, can deliver multi-decade production of serious amounts of the metal in the bottom of half of the cost curve.

They require big upfront exploration and development capital which precludes a junior from going solo.

But there is nothing stopping a junior from partnering up to make it all happen with a strategic corporate, or by accessing export credit agency support, equipment vendor support, or a streaming deal when and if a project gets to the development stage as the pie by that stage would be valued in the multi billions of dollars.

There a half a dozen or so ASX-listed juniors in the porphyry space. The most advanced of them is Caravel (ASX:CVV) which is advancing its namesake 3.03Mt copper project in WA’s wheatbelt as a likely 65,000/t a year producer over a mine life of more than 25 years.

A feasibility study is due for completion in the fourth quarter this year on the project with a view to getting into production in 2026/27 when the company, in line with BHP, reckons the copper deficit will begin to bite.

Best to wait for the FS. But it is notable that earlier work suggests that despite a grade of 0.24%, the project would sing at copper prices north of $US4/lb. It’s notable too that former Rio Tinto man Greg Lilleyman has become a strategic adviser to the company.

Caravel last traded at 22.5c, up from 15c in February, for a market cap of $118 million.

Alma Metals (ASX:ALM), sister company to Caravel from the Mitchell River Group partnership, is another to focus on the big time potential of the porphyry world.

It is trading at 0.95c for a market cap of about $14 million which gives it lots of leverage to the unfolding story at the Briggs copper deposit in central Queensland, inland from the infrastructure-friendly Gladstone.

Alma is earning up to a 70% interest in the project from Canterbury (ASX:CBY). It comes with an inferred resource of 415Mt at 0.25% copper, and a compliant exploration target for 480-880Mt at 0.2-0.3% copper.

A drilling program starts next month to chase higher-grade mineralisation identified on the margin of the Central porphyry deposit which would lend itself to a starter-pit scenario, and to increase the confidence levels to the indicated level in support of the start to a scoping study in the third quarter.

Lots of similarities there to Caravel but obviously not as advanced.

And finally, a word on Canterbury, which last traded at 2.8c for a market cap of less than $5m. That’s not a lot for its carried interest in Briggs, and a 20% carried interest in a joint venture with Rio Tinto exploring for big copper deposits in PNG. A drilling program there managed by Canterbury stats next month.

So apart from anything else, the $5m junior is going to be newsflow rich for the rest of the year, at a time when $US4lb-plus copper – and BHP’s latest copper tilt – has investors switched on to the copper thematic in a major way.

Chalice:

It could be thought that an 18% increase in the global resource at Chalice’s Gonneville deposit to 660Mt containing 17 million ounces of 3E metals (palladium, platinum and gold), 960,000t of nickel, 540,000t of copper, and 96,000t of cobalt would be a cause for celebration.

Not for Chalice. Its shares took a 10% hit in Wednesday’s market, falling 13c to $1.15.

The market has soured on Gonneville ever since it became clear its development as a large-scale, bulk tonnage operation would require currently heroic palladium price assumptions to be met.

Those assumptions might well be met in time given the queries over long-term supplies from the world’s biggest suppliers, Russia and South Africa.

But it was best for Chalice to go off and rework development plans, most notably start planning a selective open pit/underground mining operation based on higher grade portions of the orebody.

The smaller starter operation could, given the right commodity prices, be followed by a future bulk mining opportunity. So there is a sensible progression strategy now being pursued, with Wednesday’s update also including a revised higher grade resource of 59Mt containing 3.8M oz of 3E metals, 120,000t of nickel,120,000t of copper and 11,000t of cobalt.

Even in that reduced but higher grade form, Gonneville still represents one of the biggest undeveloped metals projects in Australia, or any other top notch mining destination for that matter.

Maybe that should have been a cause for celebration in Chalice’s update.

Argonaut’s head of research Hayden Bairstow seems to think that should have been the case. He has got a $2.40 price target on the stock.

“Our price target is derived from a 50/50 blend of NPV using Argonaut’s commodity price outlook and at current spot prices. Progressing the scoping study on the smaller scale project presents a key near-term catalyst for Chalice,” Bairstow said.

“The pre-feasibility study on the larger scale project is also progressing. The regional exploration potential within the Julimar State Forest remains strong and ongoing drilling could present positive catalysts through discovery.”