Nifty footwork in Chile pays dividends

Chantelle Benjamin

The market heaved a sigh of relief last year when Anglo American and the Chilean copper giant, Codelco, reached an out-of-court settlement.

After a protracted legal battle that threatened to ruin the relationship between the Chilean government and Anglo American, the two parties finally came to an agreement. (Oupa Nkosi, M&G)

Ending a 10-month fight over shares in the diversified Anglo American Sur (AAS) division, which also includes the world's fifth largest copper mine.

After a protracted legal battle that threatened to ruin the relationship between the Chilean government and Anglo American, the two parties finally came to an agreement that saw Codelco receiving a 24.5% stake in AAS, rather than the 49% stake the copper giant initially claimed.

The dispute led to anti-British sentiment in Chile and even elicited calls for resource nationalisation. But Anglo American is one of the biggest investors in Chile, which presented problems for the government.

Some observers believe Codelco got the assets cheaply whereas others say that former Anglo chief executive Cynthia Carroll negotiated the best possible deal.

In October 2011, Codelco announced that it was preparing to exercise a long-standing option to buy 49% of AAS in January last year, under a contract option that comes around every three years and is backed by a loan from Mitsui. But, soon afterwards Anglo American sold 24.5% of the assets to competing Japanese company Mitsubishi for $5.4-billion, which appeared to be a much more lucrative deal for Anglo.

In a protracted legal battle, Codelco argued that its announcement that it planned to exercise its rights to buy 49% meant that Anglo had breached its rights by selling off part of the asset.

Share option
Anglo denied this. In the end a compromise was reached with Anglo's partner, Mitsubishi, which agreed to sell some of its stake, ensuring that Anglo retained 50.1% of AAS.

The deal saw Anglo selling 24.5% to Codelco for $1.7-billion rather than the $2.5-billion that would have been paid under the previous share option.

However, the sale of the combined 49%, including Mitsubishi's share, was $2.3-billion more than if it had sold the whole chunk of shares to Codelco, according to analysts. Anglo paid Mitsubishi, which keeps 20.4%, a $40-million fee for taking part in the transaction.

But Anglo's shareholders were not happy, feeling that the protracted legal fight could have been avoided. There were added concerns about Carroll's performance, including cost overruns on the Minas-Rio iron ore project in Brazil and paying too much for some assets, such as the Oppenheimer family's stake in diamond giant De Beers for $5.1-billion.

"Carroll came in and spent a bunch of money at the top of the mining cycle like we have never seen. She bought a lot of assets at top dollar," a Cape-based analyst said. "She wasn't buying bargains, which put her under a lot of pressure when it came to showing decent returns."

Referring to Chile, the analyst said: "I believe she did well in that case in the end. There was a chance that the case would have gone to court and it could have gone against Anglo. Anglo realised it would lose out on the deal to Codelco so it sold it to a Japanese company to protect shareholder value."

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