Anglo American, Codelco settle copper clash in Chile

Following 10 months of mediation and a looming courtroom showdown, Anglo American (AAL-L) and Chile’s state-owned copper miner Codelco have reportedly reached an agreement over the ownership rights of Anglo’s South American subsidiary Anglo American Sur.

The dispute began last October, when Codelco announced its intent to exercise a 34-year-old condition in Anglo’s agreement, which allows for a limited time once every three years for Codelco to buy a 49% stake in Anglo American Sur.

At the heart of the matter is Anglo’s flagship Los Bronces copper mine, which is 65 km from Santiago, and is expected to be the world’s fifth-largest copper operation at peak capacity. Anglo is completing a US$2.8-billion upgrade at the copper mine in order to increase copper production by 200,000 tonnes annually over the next 10 years.

The proceedings also involved two Japanese mega-corporations, which had attempted to separately buy stakes in Anglo’s asset. Codelco secured financing from Mitsui to buy 49% of Anglo American Sur for US$6 billion in October, while Anglo signed an agreement with Mitsubishi shortly afterward to divest 24.5% for US$5.4 billion.

The valuation of Los Bronces was a major sticking point in any deal. Where many analysts had estimated the mine’s asset value at nearly US$20 billion, Codelco forwarded a valuation of around US$12 billion, and maintained an exercise price of US$2.5 billion on a 25.4% stake. Anglo claimed it was protecting its shareholders by pre-emptively selling a stake to Mitsubishi at a market rate.

All four parties will retain an interest in Anglo American Sur, with Anglo holding onto its controlling stake. Under terms of the settlement, Anglo and Mitsubishi will sell a combined 29.5% interest in the asset, which could cut Anglo’s ownership to 50.1%.

Though on the surface the deal is worth roughly US$2.8 billion in cash, a series of concessions will force Anglo to realize a far lower profit on the sale. The company could be paying up to US$1 billion in taxes on the transaction, and Codelco will receive an unspecified land package next to its Andina mine valued at US$400 million. Minus the considerations, Anglo will receive total cash compensation of US$1.6 billion for 25.4% of its South American subsidiary.

In a two-pronged transaction, Anglo will first sell 24.5% of its South American assets to the Codelco-Mitsui partnership for US$1.7 billion. The Anglo-Mitsubishi group will then tender an additional 5% stake for US$1.1 ­billion. As a result Anglo will hold a 50.1% stake, Mitsubishi will hold a 20.4% stake and the Codelco-Mitsui partnership will hold 29.5%.

“Today’s commercial agreement demonstrates Anglo American’s and Codelco’s focus on our future and potential, as partners in the best interests of both companies,” Anglo CEO Cynthia Carroll states. “We have both gained significant value for our shareholders and other stakeholders, and recognize Mitsubishi’s contribution to facilitating today’s agreement.”

At the end of 2011, Los Bronces’ reported mine life was 34 years, with proven and probable reserves in the sulphide-flotation category of 1.5 billion tonnes grading 0.62% copper for 9.3 million tonnes contained copper, plus another 684 million reserve tonnes in the sulphide-dump-leach category grading 0.33% copper for 2.2 million tonnes contained copper.

 The deal is expected to add 115,000 tonnes of copper to Codelco’s annual production.

According to BMO Capital Markets analyst Tony Robson, the sale represents a 50% discount on a valuation of US$3.3 billion for the equity stake, and results in a net present value drop of US$1.37 per share for Anglo. Robson notes the earlier sale to Mitsubishi netted Anglo close to US$2 billion in value over what Codelco would have paid, however, calling it a very “shrewd move” by Anglo’s management.

“Positively, the deal settles a possible protracted dispute between Anglo and Codelco that has been ongoing since November 2011, and which could have continued for several years,” Robson writes in an Aug. 23 research note. “But the net result is still a loss of nearly 50% of one of its best growth assets, and a reduction in forecast profits relative to BMO Research’s current outlook.”

The settlement comes at a time when shareholder discontent has fostered a growing demand for Carroll’s removal as Anglo’s CEO. According to a report in The Telegraph on Aug. 12, some major institutional investors have  contacted Anglo chairman John Parker in a bid to replace Carroll.