Plot thickening in US$1.7B Asarco asset-sale to Vedanta

Vancouver – Despite a ruling that approves certain conditions of a proposed US$1.7 billion sale of Asarco’s operating mines to Vedanta Resources (VDNRF-O, VED-L), as part of the former’s reorganization plan, the future of the beleaguered American copper behemoth is far from decided.

The favourable ruling by bankruptcy-court judge Richard Schmidt in Corpus Christi, Texas, was over contractual assurances concerning the sale between Vedanta’s 59.9%-owned subsidiary Sterlite and Asarco.

In March Asarco agreed to support a deal that would see Vedanta acquire three open-pit copper mines in Arizona – the Mission, Ray and Silver Bell mines – for US$1.1 billion in cash and a US$600 billion loan payable over nine years.

But the approval is only one of numerous daunting hurdles the reorganization of Asarco – under Chapter 11 creditor protection since 2005 – must still clear.

While Asarco’s lead-counsel Jack Kinzie says the “endgame is closing” he acknowledges it is not near over and may not proceed smoothly.

“No. Not without hitches,” he says.

Complicating matters for Asarco is what will likely be a second plan of reorganization competing for approval of the courts and creditors.

Grupo Mexico, which acquired Asarco in 1999 and lost control of its board of directors after it put the company under creditor protection in 2005, is still officially Asarco’s parent company and, according to Kinzie, said in court last week that it intended to submit its own US$1.3 billion reorganization plan for Asarco.

Grupo did not respond to interview requests.

Ultimately, if Grupo files its own plan and judge Schmidt approves its design, then the dueling reorganization plans will both have to go to creditors for a vote, likely sometime this summer.

At this stage Kinzie says Grupo’s proposal does not impact the Asarco-Sterlite agreement “unless and until they file a plan.”

But the convolutions of the case, which the U.S. Department of Justice has called the most complex bankruptcy case in American history, do not end there.

Asarco’s two major creditors now appear split on which plan they intend to support.

Asarco’s version has the support of the federal and state governments, to which Asarco has agreed to pay about US$1 billion as part of an environmental settlement over costs incurred and to be incurred at numerous Environmental Protection Agency Superfund sites across the U.S. The three sites accounting for the bulk of remediation costs are: Coeur d’Alene (or the Bunker Hill metallurgical complex) in Idaho, Omaha in Nebraska and Tacoma in the State of Washington.

But Asarco’s other major creditor, a group vying for a settlement over Asarco’s past production of asbestos and asbestos-containing products, appears to favour Grupo’s plan. Asarco had in a previous permutation of its reorganization plan reached a tentative settlement over asbestos claims, estimated at between US$1-2 billion, with the group.

“But they announced in court that they have an agreement with the parent (Grupo),” Kinzie says.

And, if that doesn’t complicate matters enough, there still remains a US$6 billion twist to the tale.

At the beginning of April, in a separate court case initiated by Asarco against its parent Grupo, judge Andrew Hanen ordered Grupo return to Asarco a 30.5% stake in Southern Copper, worth about US$5 billion, along with missed dividends and interest valued at US$1.4 billion (as offset by what Grupo paid Asarco for the shares in Southern Peru). The award stemmed from Hanen’s finding in August, 2008, that Grupo fraudulently transferred the shares of Southern Copper away from Asarco in 2003.

At the time of the transfer the interest was a 54.8% stake in what was then called Southern Peru Copper. Grupo subsequently diluted that to a 30.5% stake in Southern Copper by merging Southern Peru with its 100% owned subsidiary Minera Mexico.

With Asarco on the verge of bankruptcy or in the so-called “insolvency zone” Hanen found that Grupo knew plucking away Asarco’s “crown-jewel” would hinder repayment of Asarco’s creditors.

Asarco’s lead-counsel in the case Irvin Terrell says that among the most contentious issues argued in Hanen’s court was that Grupo did not let outside-bidders compete for the stake which, if Grupo had allowed to happen, might have secured Asarco a better price for the asset. Added to that Terrell says Grupo then unfairly directed how Asarco dispersed funds to its debtors.

“Here you have the most low-cost prolific producer within the Asarco set of assets…the majority stake of Southern Peru Copper…making a profit when nothing else was at low prices,” Terrell says. “And they sell it. But, oh by the way, they sell it to themselves and, by the way, we’re not going to allow anybody to compete for it.”

Whether Asarco will see the around US$6 billion worth of assets is uncertain as Grupo has since announced it will appeal Hanen’s decision.

“It’s gonna be interesting,” Terrell says. “I may be seeing a lot of German (Grupo’s president German Larrea). I don’t know. But we’re going to insist on our rights and that our rights be protected as minority shareholders under Delaware law. He does owe us a fiduciary duty.”

The appeal case – if judge Hanen agrees to hear one, a decision he is set to make in May – might not be heard until this fall, potentially well after Asarco has arranged its reorganization.

But nonetheless, while a lengthy appeal process is on the horizon, the enticing award begs the question: If Grupo’s efforts to reverse Hanen’s decision fails, how would the return of Southern Copper shares to Asarco affect creditors?

“US$6 billion more than pays everybody in full,” Kinzie says.

He says Asarco’s reorganization plan alone – which includes the sale of assets to Vedanta – would pay off its environmental liabilities at about US70¢ to the dollar. The settlement more than fills the gap.

“But (the creditors) are not going to know about that until after the appeal and we collect,” Kinzie says. “That may be two or three years from now.”

In the meantime it looks like Grupo and Asarco’s independent board of directors will be duking it out over how to best reorganize a 110-year old American mining institution entangled in that country’s largest environmental settlement.

The next hurdle for the Asarco-Vedanta plan of reorganization is court approval of Asarco’s disclosure statement, a document that, much like a circular bid, outlines the reorganization plan to creditors who then put it to a vote. A disclosure hearing is set for April 28, Kinzie says.

A court date has also been set for June 22 to allow asbestos claimants and Asarco to hash out the value of Asarco’s asbestos liabilities related to former milling and manufacturing operations through its subsidiaries Lake Asbestos of Quebec and the CAPCO pipe company.

The asbestos liabilities primarily relate to injury claims due to exposure to potentially deadly asbestos particles.

Additional court dates will have to be scheduled for Grupo if it files a plan of reorganization.

So, while the end to Asarco’s messy reorganization looks closer than ever with a summertime resolution possible, only one thing is for certain. “You can only confirm one plan,” Kinzie says.