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Anglo American Platinum (OTCPK:ANGPY) (Amplats) is not wanted by BHP (BHP) in its bid for Anglo American (OTCQX:NGLOY). If the deal went through, that would decide the fate of Amplats as a separate entity. In reality, the company already had plans to spin off Amplats on their own time, with the BHP offer simply shortening timelines as Anglo American looks to simplify its structure in the interest of markets and potential suitors. The issue is that spinning off Amplats could do some damage to shareholders of Anglo American today. For those who hold Amplats only, the damage would be even more severe, as the market appraisal of Amplats won’t be good on the closure of a deal, especially as forced selling kicks in. On the flip side, there is still the hydrogen optionality, which we covered in our last article, and the fact that the EV push is not going that well. On balance, we’d still stay away.
Anglo American Deal
BHP wants Anglo American, and while it was raising its price in its subsequent offers, an unchanging point in the deal was that Amplats stays behind. BHP doesn’t want it, and markets took that signal to heart with a sell-off of Amplats’ stock. Anglo American is rejecting the deal on the basis that it’s unprecedented and irresponsible to try to do several demergers, of Amplats and Kumba, simultaneously with a merger between BHP and the residual Anglo American.
There are a couple of issues. Amplats trades independently, although consolidated and controlled by Anglo American. This process would be disruptive. One of the effects is that Amplats is wholly South African, an emerging market, which some shareholders of Anglo American will have to sell after the spin-off. Forced selling will be rough for anyone holding before. It’s also a political process because the South African government may have something to say about all this, with Anglo American in general being a major South African employer, and with Amplats being a South African listed mining major. Its balance sheet will also have to be carefully decided, since lots of South African jobs are in Amplats’ care. The government will be watching this and could complicate a deal that requires everything to happen at once. For now, the Mines Minister Mantashe has made comments indicating he is not opposed to the spin-off.
Nonetheless, the political aspect remains important. Amplats, along with Kumba, would likely be more limited businesses without being part of the Anglo American umbrella. In part, it’s due to the matter of shareholder appeal already mentioned, both being South African pure plays, but also potential conditions on the business that may be imposed by governments like South Africa if they were to be operating separately from their current parent, as the emancipated companies would no longer have responsibilities covered by the parent. These are the reasons Anglo American says they are rejecting the deal, as it’s obvious BHP doesn’t want the business but also doesn’t want to deal with the risks of spinning them off. The risk for Anglo American shareholders is that the spun off suffer from dissynergy in an amount that is difficult to determine, and able to negate benefits to shareholders from taking BHP’s bid up offers.
Bottom Line
The issue for Amplats shareholders is that while not under pressure from a merger agreement, the plan is still underway to split off Amplats which will have some of the effects discussed above, although perhaps mitigated by careful planning and stakeholder management. We focus on the forced selling risk, which is also an opportunity, so long as you don’t own the stock until the completion of the spin-off.
Outside of that, we quite like Amplats. There is the issue of industry commentators talking about impending production cuts, as PGMs are considered a business in decline due to the supposed reduction in demand of ICEs. We aren’t confident about that, we think ICEs are here to stay, and any volume pressure will be offset by higher intensity of PGMs for catalytic converters as environmental standards start to rise in the developing world, let alone the developed world. EVs aren’t even selling that well right now, with major US manufacturers revising plans for their factories. Beyond that, there is optionality for the hydrogen economy, which we focused on in our initiating coverage on the company. There’s also the relative case against other PGM picks like Sibanye Stillwater (SBSW), which also has gold production, but trades at PE multiples as if it’s a gold pure play and doesn’t also have PGMs.
Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.
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