LONDON/SANTIAGO, May 25 (Reuters) – Chile state mining
company Codelco and miner Anglo American are restarting
talks to resolve a multi-billion dollar dispute over copper
assets in Chile’s centre-south, after months of increasingly
acrimonious legal altercations.
But they will do so under a new boss at Codelco, after the
abrupt departure of Chief Executive Officer Diego Hernandez, set
to be replaced at the helm of the world’s largest copper
producer by Chief Financial Officer Thomas Keller on June 1.
At stake in the dispute with Anglo are assets that include
the Los Bronces mine, which could produce 490,000 tonnes of
copper annually, positioning it as the world’s No. 5 copper
operation – an enticing prospect given an absence of notable new
deposits in recent years.
Following are some questions and answers on the dispute.
HOW DID IT UNFOLD?
Codelco announced in October that it intended to
exercise a long-standing option to take a 49 percent stake in
the Anglo American Sur (AAS) mining complex in central-southern
Chile and had secured a $6.75 billion bridging loan from Japan’s
Mitsui & Co to allow it to do so.
Weeks later, Anglo surprised Codelco and markets with a
pre-emptive sale of a 24.5 percent stake in those properties to
Mitsubishi for $5.4 billion — almost the same value it would
have gotten for selling the entire 49 percent to Codelco. Anglo
says there is no contract clause that forbade it from selling
part of its assets.
Codelco disputed the sale and says it exercised its option
for a 49 percent stake in the assets on Jan. 2, the day the
option’s window opened. Anglo has refused to hand over any
shares in its prized properties and argues the option is void,
as Codelco tried to pre-empt it.
WHERE IS THE SPAT LEGALLY?
The two sides, which had been due to meet as part of standard
“conciliation” proceedings, said on Tuesday they had instead
agreed to suspend the court battle for a month.
They have a window of opportunity until June 22 to reach a
deal through talks. The window marks a “last opportunity” to
reach a deal out of courts, Hernandez said.
The alternative, a multibillion dollar, tricontinental legal
battle between the firms, could take three to five years.
Codelco accuses Anglo of acting in bad faith and selling a
stake from under it, while Anglo argues it was entitled to sell
a share in the assets to Japan’s Mitsubishi before
Codelco’s window to exercise the option opened in January.
The two sides dug in, launching a series of legal actions.
Local courts granted Codelco’s requests for a sales freeze on
part of the contentious Sur properties and the release of
Anglo’s stake sale contract to Mitsubishi.
Anglo has also attacked on the legal front, suing Codelco
for breach of contract and requesting Codelco’s contract with
Mitsui be revealed. A court last month rejected a bid by Codelco
to freeze 49 percent of dividends from AAS.
IS AN OUT-OF-COURT AGREEMENT THE NEXT STEP?
The two sides failed to reach a deal after secret talks in
December and January, but a settlement out of court is what many
legal experts, shareholders and industry players recommend.
And there is much incentive to reach a deal in the coming
weeks. Experts cite a backlog in Chilean courts, steep legal
fees and time-consuming diversion of management focus as the
chief reasons a bitter legal battle is seen best avoided.
The battle has also created significant uncertainty for
Anglo shareholders.
Anglo has said it is open to a “commercial solution that
takes into account the interest of both parties”. Codelco has
said it wants to “overcome the controversy”.
Many legal experts see a deal that grants Codelco 24.5
percent of the properties – the stake Codelco initially said it
could ultimately end up with according to its bridging loan with
Mitsui – and some sort of financial compensation as the most
feasible potential deal.
“It’s natural, obvious for them to reach a deal,” said
Winston Alburquenque, professor of mining law at the Universidad
Catolica in Santiagoi¿1/2. “This is the opportunity….I think the
deal will be for the 24.5 percent.”
Depending on the price paid for the stake, that would be a
welcome scenario for Anglo, analysts say, though thanks to the
Mitsubishi deal virtually any outcome would boost the miner’s
cash balance.
But big differences need to be bridged before an agreement
can see the light.
WHAT DIFFERENCE WILL KELLER MAKE?
Keller was Hernandez’ right-hand man and will not change the
tune in Codelco, a high-ranking Codelco source told Reuters, a
view shared by many in the industry.
But the arrival of a new face could somewhat ease tensions
at the negotiation table. Keller, however, must also answer to
Codelco’s board and the Chilean public.
“Keller seems a sensible guy, though he was pretty vocal
when he came round to see London investors,” one London-based
sector analyst said. “Codelco suggests this won’t change their
position in the dispute, but I guess this is a small positive.”
Known as a sharp, committed executive, Keller was also an
architect of the plan to exercise Codelco’s stake option.
HOW MUCH IS THE OPTION WORTH?
A copper-hungry market and the option’s pricing formula
significantly diverge in their valuation of the coveted
properties – seen as a factor that pushed Anglo to sell a stake
at a far more attractive market rate.
Codelco has valued its option for the 49 percent at around
$6 billion – roughly half of what Anglo’s 24.5 percent stake
sale to Mitsubishi for $5.4 billion implies that chunk is worth.
When Codelco in October announced it had secured the bridging
loan from Mitsui, it added it had reached a second accord that
gives it the right to pay off part of the loan via the sale of
an indirect stake of half the shares acquired in Anglo Sur. That
sale would be based on the 49 percent stake being valued at
around $9.76 billion.
HOW COULD THE SPAT AFFECT ANGLO?
While some shareholders approve of Anglo’s moves as efforts
to defend shareholder value, a few have fretted over the
heavy-handed approach and the decision to invest around $2.8
billion in Los Bronces before securing full ownership.
Anglo says it will recoup the portion of its investment made
in Los Bronces if the option is exercised.
If the miner fails to secure a deal and the spat ends in
lengthy or costly battle, more investors could turn against the
miner’s approach and specifically the management team led by CEO
Cynthia Carroll.
A cash boost from the deal could also leave Anglo with the
problem of where to invest, with analysts speculating on
possible buy-backs or acquisitions to replace lost tonnage.
HOW COULD THE SPAT AFFECT CHILE?
The government and most public opinion in Chile, the world’s
top copper producer, firmly back Codelco, which contributes
billions of dollars to the country’s coffers.
But avoiding a home turf legal setback is critical. That
could further pressure conservative billionaire Sebastian
Pinera, Chile’s most unpopular president since General Augusto
Pinochet’s 1973-90 dictatorship, according to recent polls.
A deal would also likely avoid a situation in which Codelco
loses the option outright, depriving it of a welcome windfall as
the firm seeks to maintain its copper leadership in the face of
dwindling ore grades. Codelco’s Andina mine is nestled right
next to Los Bronces, and industry players have long discussed
the potential synergies of the two deposits.
The odds of Codelco ending up with no stake in Anglo Sur are
seen as very low.
WHICH PROPERTIES ARE IN DISPUTE?
At the heart of the dispute are the flagship Anglo Sur
properties, where Anglo has heavily invested to expand its
prized Los Bronces mine.
The ramped-up Los Bronces is expected to more than double
annual copper output from 2010 levels in its first three years
of full production.
The surrounding properties include the El Soldado mine, the
Chagres smelter and Los Sulfatos and San Enrique Monolito
exploration projects, with estimated resources of 1.2 billion
and 900 million tonnes respectively.
