Anglo, Codelco reach agreement in copper clash

VANCOUVER — Following 10 months of mediation and looming courtroom drama, London-based major Anglo American and Chile’s state-owned copper miner Codelco have reportedly reached an agreement over the ownership rights of Anglo’s...





VANCOUVER — Following 10 months of mediation and looming courtroom drama, London-based major Anglo American 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 the Chilean company to purchase a 49% stake in Anglo American Sur every three years. At the heart of the disagreement was Anglo’s flagship Los Bronces copper mine located 65 km from Santiago, Chile, which 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 purchase stakes in Anglo's asset. Codelco secured financing from Mitsui & Co. to purchase 49% of Anglo American Sur for roughly US$6 billion in October, while Anglo signed an agreement with Mitsubishi Corp. shortly afterward to divest 24.5% for US$5.4 billion.

The valuation of Los Bronces was one of the main sticking points 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.

As the dust settles it is evident 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 will cut Anglo's ownership down 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. Firstly, the company will be paying roughly US$1 billion in taxes on the transaction. In addition, Codelco will receive an unspecified land package next to its Andina mine valued at roughly 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% in 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 stated. “We have both gained significant value for our shareholders and other stakeholders, and recognise Mitsubishi’s contribution to facilitating today’s agreement.”

Los Bronces’ reported mine life exceeds 30 years, with proven and probable reserves totalling 35 million tonnes grading 0.33% Cu for a total of 2.4 million contained tonnes of copper. The deal is expected to add roughly 115,000 tonnes of copper to Codelco's annual production.

According to Bank of Montreal (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 August 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 from U.K. publication The Telegraph dated Aug. 12, a number of major institutional investors have been in contact with Anglo's chairman, Sir John Parker, in a bid to have Carroll replaced.

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