Copper (HGN24) recently hit $10,000 a ton for the first time in two years. The reason? Investors are beginning to realize that the world’s copper mines will struggle to meet a coming wave of demand, led by green industries.

Millions of tons of new supply will be needed in coming years for use in electric vehicles (EVs), renewable energy, and vastly expanded and upgraded power grids. The mega-bid by BHP Group (BHP) for Anglo American PLC (NGLOY)last week highlights that many mining companies would rather buy rivals than pull the trigger on entirely new projects.

Anglo rejected the offer from BHP, saying that it “significantly undervalues” the company. Let’s take a closer look at the proposed deal.

Why BHP Wants Anglo American

BHP’s proposed takeover of Anglo American valued the smaller miner at nearly $39 billion - or 0.7097 BHP share for each Anglo share. The deal would create the world’s top copper producer, while sparking the industry’s biggest shakeup in over a decade.

BHP, already the world’s largest miner, proposed an all-share deal in which Anglo would first spin off controlling stakes in South African platinum (Amplats) and iron ore (Kumba Iron Ore) companies to its shareholders before being acquired by BHP. Anglo owns a 78.6% interest in Anglo American Platinum and a 69.7% interest in Kumba Iron Ore.

That’s a major reason why its stock is so dirt cheap - it is a mining conglomerate. Its business spans those much-coveted copper mines in Peru and Chile, iron ore and platinum operations in South Africa, and the 136-year-old diamond company De Beers.

If the deal happens, adding Anglo’s copper assets to its own (the third-largest globally) would give BHP roughly 10% of global copper mine supply. Anglo owns some of the sector’s most coveted copper mines in Peru and Chile. BHP produced about 1.2 million tons of copper in 2023, while Anglo’s output was 826,000 tons.

BHP’s existing copper assets include: Escondida, the world’s biggest copper mine in Chile (BHP owns 57.5% and operates the mine); Pampa Norte, which consists of two wholly owned operations in Chile, Spence and Cerro Colorado; Antamina, a copper and zinc mine in Peru (BHP owns 33.75%); and Olympic Dam in Australia.

Also, BHP acquired OZ Minerals in May 2023, adding copper and nickel resources that complement its existing resources in Australia.

It’s highly likely that the offer for Anglo will now prompt other big miners to make a move. The next biggest miner, Rio Tinto PLC(RIO), has also been investing in copper production, while Glencore PLC (GLNCY) last year made an unsuccessful offer for Teck Resources Ltd. (TECK)and its coveted copper business, before eventually reaching a deal for Teck’s coal assets.

Also possibly in the running is Barrick Gold(GOLD), the world’s second-biggest gold miner. It has sought to increase its access to copper under its CEO Mark Bristow. He is South African, and may be able to come to a deal with the government there, which will have a big say if Anglo is to be sold.

There is also one person who knows Anglo better than most - its former CEO Mark Cutifani, who was appointed chair of the independent base metal division of ValeSA(VALE) in July 2023. The Brazilian iron ore powerhouse spun out the copper- and nickel-focused unit into a new structure last year, selling a 10% stake to Saudi Arabia for almost $3 billion.

And there are also a number of Chinese firms that have been buying up natural resources all over the globe. They may become contenders in the bidding war for Anglo American.

Why Copper?

This proposed deal highlights the disconnect at the core of the industry: miners just aren’t building enough mines.

The biggest producers all want to increase copper output to take advantage of rising demand in electric vehicles, grid infrastructure, and data centers. But that bullishness isn’t translating into the huge investments needed to develop new mines.

Production from the world’s existing copper mines is set to fall sharply in the coming years, and miners would need to spend more than $150 billion between 2025 and 2032 in order to fulfill the industry’s supply needs, according to industry experts.

The reasons behind the underinvestment are the same as they have always been, but they’re getting worse: high-quality deposits are getting harder to find, and so is funding for small mining firms that do much of the exploration. In addition, social and environmental resistance to mining is growing globally, and the cost of labor, equipment, and raw materials has surged.

Total it all up, and the world is today more reliant on older mines, with lower ore grades, than in the past.

What Comes Next

I think it's highly likely that BHP’s rivals Glencore and Rio Tinto will not need much of a push to consider making competing offers. And Anglo could lead its own break-up – perhaps merging its copper division with Freeport McMoran (FCX).

So if BHP really wants Anglo, it will have to dig deeper and pay more of a premium for the company. The numbers involved as to whether to build or buy copper mines suggests that BHP should be willing to go higher. So I believe it will, and that Anglo will again reject it.

As mentioned earlier, building mines is getting harder and more expensive. That translates to a long lead time to produce cash flows from the mine.

And keep in mind that it takes decades for a mine to move into production and become profitable. According to S&P Global Market Intelligence, moving from exploration to production has required an average of 16 years in the past two decades! Add to that possibly $3 billion to $3.5 billion on a 100,000-ton-per-year mine.

That’s why I expect a bidding war to break out for Anglo American. I recommend buying it on any temporary weakness in the stock and/or copper prices. NGLOY is currently trading at $16.66.