BHP’s [ASX:BHP] pursuit of Anglo American [LON:AAL] is likely to enter a second phase as the Australian miner may not have many alternative targets to fulfil its bet on copper, according to industry sources.

BHP on 29 May confirmed it would not be making a firm offer for Anglo American after Anglo declined to extend talks to allow BHP to resolve concerns Anglo had around its final revised proposal. Under British takeover law, BHP has to wait six months before it can reengage with Anglo.

A source familiar with the matter said BHP has moved on from Anglo but still sees value in a transaction for the assets it prizes. Any new potential approach by BHP, however, will be beholden to the six month rule and will depend on markets and how Anglo progresses its demerger strategy, said the source. BHP has no need to pursue M&A for growth and has plenty of alternative growth opportunities, the source added.

The simple and obvious fact is that BHP has chosen copper as the next growth area, which motivated its move on Anglo in the first place, the industry sources noted.

“We have only seen the first phase of the deal. There will be a second phase,” said a mining investor, adding BHP will surely make another run for Anglo at some point.

A sector banker and a second mining investor agreed that for the time being BHP will sit back and see how things pan out with Anglo’s restructuring strategy. Anglo on 14 May announced a string of strategies to unlock value including a demerger of its stake in Anglo Platinum (Amplats) [JSE:AMS], a divestment or demerger of diamond operation De Beers, and a sale of its coking coal operation.

“If the restructuring doesn’t go well, they (BHP) can come back to say: ‘you kind of tried, [now] you have to deal with us’,” the sector banker said. If the restructuring goes well, Anglo will actually become more attractive for BHP as it is selling off the assets BHP has no interest in, the banker added.

However, before BHP takes another gander at Anglo, it will have to contend with an overhanging South African issue, the second mining investor pointed out, referring to BHP’s previous proposal involving the demerger of Anglo’s South African assets including its 69.7% stake in Kumba Iron Ore [JSE:KIO].

That said, BHP is not in a rush to reengage with Anglo, and the idea of BHP coming back in “six months plus one day” with an offer is crazy, the sector banker quipped.

Rarest red

Shortly before the Anglo deal collapsed, BHP CEO Mike Henry in May told the Bank of America 2024 Global Metals, Mining and Steel conference in Miami that over the past four years, BHP sanctioned the first two stages of the Jansen potash project, will see it become a major potash player by the end of the decade. It consolidated the largest copper resource in Australia when it bought OZ Minerals, Henry said at the time, adding that by merging its petroleum business with Woodside, spinning out its share of the business, BHP simplified its metallurgical coal portfolio to focus on higher-quality coals, thus increasing its greenfield exploration efforts and securing a toe-hold in potentially significant new resources.

On copper growth, Henry emphasized that BHP is in a “…much better placed today than we were just a few years ago.” BHP, which he asserts has the world’s largest copper ‘endowment,’ has “a strong pipeline of organic opportunities.” These include options at Copper South Australia and Escondida.

Aside from Anglo, does BHP have other copper targets in mind? There might be very few available, according to both the sector banker and the first mining investor.

The reality is that people are not generally selling copper assets if the assets [they have] are great, the banker said.

The investor, whose firm has conducted a full review of copper assets, said that it is going to be a very competitive environment for acquiring copper assets with very few assets available, while all the big producers have strong balance sheets for acquisitions.

“It is cheaper to buy than to build copper projects, so our view is that this is the start of a new chapter of mining M&A, particularly in copper,” the investor said.

The second mining investor said he would find it hard to believe BHP would not have formulated an alternative copper strategy apart from getting Anglo. “Anglo may be their preferred target, but BHP is absolutely looking at other things as well,” he said.

First Quantum Minerals [TSE: FM] would be an obvious asset for BHP to look at, but the location of the company’s mining assets – in Zambia – might be an issue, the second mining investor said. Another one is Ivanhoe Mines [TSE:IVN], which has the Kamoa-Kakula copper project in the Democratic Republic of the Congo, he noted.

The big problem BHP faces in terms of copper is that many independent copper miners are Africa-based, and BHP is typically anxious about associated risks.

Meanwhile, all four copper mines owned by Anglo are found in top copper-producing countries Chile and Peru.

Critical of minerals

A second sector banker noted that it is hard for BHP to move the needle just via M&A. Instead, BHP should spend more on exploration and maybe buy more earlier stage explorers or reduce their ’tier 1’ quality screening and/or move into new commodities, such as alumina/aluminium, rare earth elements, lithium, etc., he said.

While BHP has made its copper ambition crystal clear, the mining giant has shown no appetite for other critical minerals like lithium or graphite. The AUD 217bn-market cap company may deem those below-ground paydays not big enough or meaningful enough to bother with, the two mining investors said.

Copper is just much bigger, and BHP is focused on big things, the first sector banker said. “They don’t want lots of small things, they really want to have a few huge things,” he said, adding that he personally does not agree with BHP on the assessment of lithium.

Lithium would make sense “if you get into the conversion”, but BHP probably sees that as more chemical processing, the second investor said. “I don’t think they are the type of organizations that would go downstream and try control the mid-stream,” the first investor noted.

BHP does have an existing exposure to nickel, which is also used in batteries, but the nickel industry, particularly in Australia, is facing structural challenges in the face of surging supply of low-cost nickel from Indonesia. In February, BHP announced a non-cash impairment of around USD 2.5bn (post-tax) for its Western Australia Nickel business and said it is assessing options to mitigate the impact of low realized prices by potentially entering a period of care and maintenance at Nickel West.

BHP did not reply to this news service’s request for comments.