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Q+A: How will Anglo and Codelco solve their copper dispute?
August 21, 2012 / 6:02 PM / 5 years ago

Q+A: How will Anglo and Codelco solve their copper dispute?

SANTIAGO (Reuters) - Rival mining titans Anglo American and Codelco appear poised, after months of legal wrangling, to clinch a deal in a billion-dollar dispute over coveted Chilean copper assets.

Investors are betting state-owned copper company Codelco and global miner Anglo will reach a settlement before their Friday deadline and avoid plunging back into a courtroom showdown that could drag on for years.

At stake are assets that include Anglo’s Los Bronces mine, which could produce 490,000 tonnes of copper annually and become the world’s No. 5 copper operation - an enticing prospect given a lack of big new copper finds in recent years.

Following are some questions and answers on the dispute, which involves companies from three continents.

HOW DID IT UNFOLD?

The conflict between Codelco CODEL.UL, the world’s No. 1 copper producer, and Anglo (AAL.L) centers on an option agreement dating back to 1978.

Last October, Codelco said it would exercise the option to buy a 49 percent stake in Anglo Sur mining complex in central-southern Chile when the option window opened in January, 2012.

Codelco secured a $6.75 billion bridging loan from Japan’s Mitsui & Co (8031.T) to exercise its Anglo option, with the right, but not the obligation, to pay off part of the loan via the sale of an indirect stake of half the shares acquired.

Weeks later, Anglo dented Codelco’s ambitions with a stunning pre-emptive sale of a 24.5-percent stake in Anglo Sur to Japanese trading house Mitsubishi Corp (8058.T). Anglo said the $5.4 billion deal secured better value for investors.

Since then, the companies have been tussling for the properties. Ironically, the Los Bronces mine used to be called La Disputada, “the disputed one,” in Spanish.

WHAT KIND OF DEAL IS MOST LIKELY?

The firms have maintained silence over the content of the confidential talks since late May, but sources familiar with the negotiations have told Reuters Mitsubishi could cede part of its stake in Anglo Sur to allow for a deal.

Sources said an agreement is set to see Anglo retaining a 51 percent majority in Anglo Sur, and Mitsubishi yielding a small percentage of about 5 percent to Mitsui, which had agreed to finance Codelco.

Codelco would then get the remaining 24.5 percent at a “compromise” discount to the option value of around $2.8 billion - below an earlier $3 billion value due to weaker copper prices. It is also set to get land, the sources said.

Such a deal would avoid a protracted and costly legal battle that could distract management and worry shareholders.

WHO STANDS TO WIN?

Both mining titans should benefit financially, and Chile, the world’s No. 1 copper producer, stands to gain by ridding itself of a potentially nasty legal battle and likely reaping a hefty capital gains tax from the various sales.

Codelco could end up with a sizeable share in the assets at an attractive price, along with land. Anglo says it has preserved value for shareholders with its Mitsubishi move, while a negotiated settlement would avoid a distracting legal tussle.

“This is a good solution to get out of the mess. It would be a win-win,” said Winston Albuquerque, professor of natural resource law at the Universidad Catolica in Santiago. “Perhaps this result would be better for Codelco than for Anglo, but Anglo had this contract... (which was) a rock in its shoe.”

Key to Anglo’s decision to pre-empt the option was a big discrepancy between the price of the assets on the market, where copper assets are rare, and under the option formula. Codelco has valued its option for the 49 percent at around $6 billion. That is not even half of what Anglo’s 24.5 percent stake sale to Mitsubishi implies that chunk is worth.

Due to the significant difference between the two pricing formulas and even if it ends up having to pay compensation, Anglo will likely still gain far more than if it had let Codelco buy up 49 percent of the prized properties.

It would also rid itself of a lingering woe at a time when shareholders have complained about low returns, trouble with its Brazil iron ore project and South African platinum mines.

Both Codelco and Chile appear set to portray a deal as a victory. The deal would enable the state miner to gain participation in a coveted copper asset adjacent to its own Andina mine and show itself as a serious global player.

Increasing its assets could also permit Codelco to take on more debt as the miner ramps up ambitious plans to lift output at its massive but tired deposits to over 2 million tonnes. This depends on whether the assets become part of Codelco or Acrux, the investment vehicle it formed to buy part of AAS.

State-owned Codelco’s profit lands in Chile’s coffers, so the company is constantly seeking ways to finance its mining plans without compromising its enviable debt rating.

“In general, we think Codelco (benefits more), because Anglo’s poor first half results will appear even more dramatic once its reduced stake in its best operation becomes evident,” said Jose Pedro Fuenzalida, a senior analyst with LarrainVial in Santiago. “On its end, Codelco would show a healthier cost outlook just before releasing its second quarter results, when costs rose due to energy prices.”

But the state miner also has politics, public opinion and its powerful unions to take into consideration.

A perception that the firm ceded part of its “right to the 49 percent” to a foreign private miner could spark outcry over the company that annually contributes billions of dollars to state coffers.

Japan’s Mitsui and Mitsubishi are paying steep prices to enter the properties as minority shareholders, but this usually constitutes their business model.

WHAT ARE THE UNKNOWNS?

The sparring miners will likely be associates in exploiting Los Bronces, perched 3,500m (11,483 feet) high in the Andes and just kilometers from Codelco’s Andina, set to be the company’s most productive mine as of 2021.

Some in the industry have long speculated about breaking down the thin wall between the deposits to create one mega mine. It would at least make sense for Anglo and Codelco to share common infrastructure.

The exact forms of payment, the attractiveness of the two deposits Anglo may cede to Codelco and how future investments in the mining area would be divvied up also remain unclear.

Another question mark is the future of Acrux, the investment vehicle Codelco formed to allow its potential purchase of a stake in the Sur properties.

“It’s said this could be a bridge towards internationalization for Codelco,” said Raul Castro, an assistant professor at the Universidad de Chile’s mining engineering department.

Copper heavyweight Codelco lacks a significant presence outside of Chile, save for a few exploration projects in Latin America.

After an acrimonious 10-month battle, it remains to be seen how Anglo’s shareholders, Chile’s public and Codelco’s unions assess the deal.

Reporting by Alexandra Ulmer; Editing by David Gregorio

Our Standards:The Thomson Reuters Trust Principles.
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