To the extent they have made their position known, South African fund managers have said they would prefer BHP to make a bid for Anglo American in its entirety without the precursor of unbundling Amplats and Kumba. They want an “all in” bid.

Why? And how would doing so change the bid, if at all? And would BHP even consider it?

Whatever the answers to these questions, the challenge put to BHP by the SA fund managers does illustrate some crucial imponderables.

The why is kinda simple: risk aversion. The problem and great advantage with Anglo’s structure (oddly enough very similar to BHP’s structure), is that the current consensus on how resource companies should operate is that they should be 1) big and 2) mine several different minerals. Being chunky means being able to raise capital at respectable rates, which is always important for miners whose assets depreciate since the ore body is finite. It also means that tracker funds are necessarily investors and at the upper end of stock markets, the support of tracker funds is very, very useful. Anglo’s raison d’etre for listing in London was partly because being on the FTSE100 meant a huge body of investors would be shareholders by default.

The mining of an assortment of minerals is at least partly a defence against mineral price movements; when iron ore is down, copper might be up and so on. But the price you pay for mining a whole range of minerals is similar to that for industrial holding companies – you tend to trade at a net asset value deficit. To make matters worse, shareholders tend to look at the best-performing minerals and ask themselves why they are not more invested in that mineral. And that in itself is one of the reasons for BHP’s bid. Bloomberg has calculated that the stand-alone value of Anglo’s copper assets is probably worth as much as the total bid! On a sum-of-the-parts valuation, Anglo should be trading at around twice where it is.

The problem for BHP, which Rhodes economics professor Gavin Keeton pointed out to me, is that when you look at the Anglo shareholder profile, the risks involved in unbundling Kumba and Amplats are very high. One question is whether tracker funds currently holding Anglo shares will want to hold shares in single-resource mining companies. The answer to that I think would generally be “no”. And would they want to hold shares that are exclusively listed in SA? The answer to that is also probably “no”. And would they want to hold shares in companies that don’t form part of the FTSE100? Er … “no”. And would they want to hold platinum shares in a declining market that has a question mark over its future? Again “no”. Obvs.

This is all very worrying, of course. So why does this bother South African fund managers, as opposed to UK fund managers, for one? Partly because fund managers are very aware of the shareholder register and SA fund managers are worried that if UK shareholders are going to dump their shares, they might be left carrying the can. In addition, they also face some of the same issues faced by the UK fund managers.

There is a currency aspect to this too. How many British shareholders hold Anglo shares in SA? It seems odd that they would, but it does happen because sometimes Anglo’s shares are cheaper in SA depending on the currency movements. It’s probably not a huge issue, but currency risk is a factor in the bid because it’s an all-share bid, so the relative Aussie dollar, pound, and rand levels will affect the value of the bid. I calculate the bid has already lost about 5% of its value in US dollars over the past two weeks.

As things stand at the moment, apart from the currency issue, share price movements favour the BHP bid’s proposal to unbundle Kumba and Amplats. Both Kumba and Amplats declined after the bid was made, reflecting I suspect the risks mentioned above, but both are trading marginally higher than the pre-bid price in dollars. This might be because there is a possibility that they too could become takeover targets after the dust settles and that is certainly true of Kumba.

So will BHP make an offer for the whole shebang? Who knows, but my guess is they will try very hard to avoid having to make an “all-in” bid. For a start, if they do, then the SA competition authorities will have a say and that is always a risk for foreign buyers and sellers because the commission likes to force concessions out of bidders. The way the bid is currently structured it seems unlikely they will require local competition authority permission and even if they do, there are no pure competition issues involved in the unbundling aspects of the deal.

With the share prices moving in favour of the bid, it seems unlikely that BHP will change the offer in respect of unbundling Amplats and Kumba. They are certainly under little pressure to do so, although they face a bit of price pressure since the bid is now about 10% below Anglo’s implicit dollar value. Hence, BHP will need to up the bid or there are going to be lots of disappointed shareholders.

But it does seem to me that on the whole, the market is underestimating the risks involved in the unbundling process. Anglo’s British shareholders are unlikely to be too upset to hold shares in a big Australian mining company; the growth profiles of both companies are very similar. But the essential question is whether British shareholders will want to hold shares in two smaller, single-mineral, South African mining companies.

And I think the answer to that generally speaking would be “no”.

Good investing,

Tim Cohen