Its capacity to fund the growth projects latent in the South American copper business at the core of Anglo’s appeal to BHP and others is limited given its financially constrained circumstances.

Anglo’s plight is exacerbated by the biggest growth project in its pipeline, the Woodsmith polyhalite fertiliser project in the UK.

Whether or not its offer is successful, BHP has done Anglo shareholders a service because the bid will act as a catalyst to promote deeper analysis of Anglo’s performance, its prospects and the impediments to maximising both.

Anglo has already written $US1.7 billion off the value of the project, having invested $US641 million into it last year and committed to pumping in another $US900 million this year, with a further $US1 billion or so of annual spending expected before the project, if completed and completed on time, brings its first fertiliser to market in 2027.

It has been looking for a partner as the investments into the project could run up close to $US9 billion, which is a massive bet on a product for which there is no market of any significance yet, and which will compete with more conventional and established alternatives like potash.

Anglo spent $US4.4 billion on what is described as “sustaining” capital expenditures last year, from a total of $US5.7 billion of spending. Given the scale of investment that will be sunk into Woodsmith over the next three years, Anglo can’t be spending money on other growth projects if it is to meet its targeted reduction in capital expenditures.

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Whether it was BHP or another of the other heavyweight resource groups or, as some have speculated, a state-backed Chinese bidder, a new owner of Anglo would have the balance sheet and cash flows to deal with Woodsmith. They could either complete it or shut it down.

BHP, with its massive balance sheet and cash flows, or any of the other potential bidders touted, would also have the financial capacity to fund Anglo’s highly prospective growth projects in copper and, to a lesser extent, within its Brazilian iron ore interests.

BHP’s proposal envisages a demerger of Anglo’s 80 per cent-owned platinum metals group and its 70 per cent-owned Kumba iron ore business. The two separately listed South African entities generated more than a third of Anglo’s underlying EBITDA last year.

As they are already listed, a demerger – a distribution of Anglo’s shares in those subsidiaries to its shareholders – wouldn’t be particularly complicated and, with BHP effectively absorbing the costs and tax liabilities of the spin-offs, would be more affordable than if Anglo were to try to replicate the strategy itself.

In fact, Anglo probably couldn’t emulate BHP because the cash flows from those businesses are too central to its viability in its current circumstances.

While the initial reaction to BHP’s approach to Anglo from within the South African government has been less than welcoming, the demerger, which would see two of the three key South African businesses gaining control over 100 per cent of their cash flows rather than seeing them diverted to South America, might eventually be seen more positively.

The “other” South African business is De Beers, the diamond company which plunged into loss last year as lower production interacted with a big slump in diamond prices.

The Wall Street Journal has reported that Anglo has been sounding out the market for potential buyers of the business, which BHP has put in the “to review” basket if its offer succeeds.

There would be significant interest in De Beers, whether from other resource groups, private equity, luxury goods groups or the Chinese.

With valuations that range from significantly less than $US1 billion to more than $US7 billion, a sale of De Beers would be either inconsequential for Anglo or potentially enable it to transform its balance sheet and prospects. It could provide Anglo with an escape route from the predators now stalking it or make it more appealing to BHP or a third party by simplifying its portfolio. It’s copper that BHP and others want, not diamonds.

BHP has, under London’s takeover rules, until May 22 to declare whether it proceeds with the offer or not. It is most unlikely that it entered this process believing its first bid would be its last.

It’s getting a chance to gauge the market’s reaction – including that of its shareholders and its share price, which has softened – and seen Anglo’s response. By May 22, BHP will know the likely price for success and have decided whether it is prepared to pay it.

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It also has a window of opportunity to talk to Anglo’s shareholders and remind them that Anglo’s share price hasn’t reflected anything approaching its “sum of the parts” value in decades. Nothing good will flow from that engagement for the current board and management.

The value of the South African businesses that BHP wants to demerge is heavily discounted by international investors because they operate within a very troubled society and an economy whose infrastructure has been severely degraded. That has weighed on Anglo’s share price for decades and, unless it distances itself from those businesses, will continue to impact it for the foreseeable future.

Whether BHP or someone else radically remakes Anglo’s structure, or Anglo itself pursues a somewhat less radical restructuring, Anglo can’t pretend that its current set-up is maximising value for either its own shareholders or the minority interests in its listed subsidiaries.

With the aggressively activist fund Elliott Management recently emerging on its register, it probably would have been forced to confront its operational and structural shortcomings even if BHP hadn’t decided to table its offer.

Whether or not its offer is successful, BHP has done Anglo shareholders a service because the bid will act as a catalyst to promote a deeper analysis of Anglo’s performance, prospects and the structural impediments to maximising both.

It’s already obvious, even at this earliest of stages in the offer process, that significant change is required.

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