Anglo faces Chilean test as investors vent frustration

* Latest deadline for deal with Codelco is Aug. 24

* Negotiations continue, deal expected in days

* Anglo faces platinum, Brazilian iron ore challenges

By Clara Ferreira-Marques and Sinead Cruise

LONDON, Aug 20 (Reuters) - Anglo American, wrestling institutional investors frustrated with a battered mining sector, faces a major test this week in the shape of a deal to end a bruising, 10 month-long row with Chilean copper giant Codelco.

Sources familiar with the matter have said an agreement is expected in days, with Anglo preparing to sell Codelco a 24.5 percent stake in its coveted Anglo American Sur properties in Chile - which include the Los Bronces copper mine, potentially one of the world's largest - ending their legal battle.

Depending on price and the depth of the conciliatory discount offered, a deal could offer breathing space for Anglo's bosses, under pressure over low returns, trouble with its Brazil iron ore project and in South African platinum - where violent clashes over the past week have added to the woes of an industry squeezed between feeble prices and sky-high costs.

An imperfect Chile deal, though, could revive criticism of the miner's diplomatic abilities and its decision to invest $2.8 billion in Los Bronces before securing full ownership.

"If we see a situation where they resolve with Codelco, and they have still got a better price than they would have got through the (original) option, you would say Anglo has won something," analyst Des Kilalea at RBC Capital Markets said.

For Anglo, a perceived victory in the battle over Chilean copper is key, as fund managers, facing criticism from their own investors, begin to lose patience with the sector.

After years of investing as miners ploughed cash into growth, investors find returns are now hampered by a worsening economy.

Anglo, led by Chief Executive Cynthia Carroll, has been at the sharp end of criticism, not least because of a return on equity which fell in the first half of the year to the worst level since the 1930s, according to Citi analysts.

"Frustration is the best word for shareholder feelings on Anglo," said one of the company's top 15 investors, who requested anonymity.

"Like other shareholders, we are looking to open a dialogue with the chairman and senior independent director to explore whether the company's strategy is on the right lines."

Others said they were fretting over Anglo's capital allocation. The company, set to see free cash flow rise as investment eases, has spent some $7 billion in deals over the past 12 months, including two in the past month.

"While we are not gunning for Cynthia's head, we do have serious concerns about Anglo," another top 15 investor said.

"Reliance on South Africa is a definite concern, and their attempt to diversify with their major project in Brazil - Minas Rio - has showed far from perfect execution."

Minas Rio, like several other large projects in Brazil, has been beset by delays, cost overruns and hitches over permits.

"Investors in general are biased against mining equities and with Anglo there are a lot of problems people can point to," analyst Chris LaFemina at Jefferies said.

Solving Chile would tick at least one problem off the list.

CHILEAN SOLUTION

Anglo and the world's top copper producer have been at loggerheads since last October, when Codelco said it would exercise its option to buy a 49 percent stake in AAS in January.

Just weeks later, Anglo surprised markets with the pre-emptive sale of a 24.5 percent stake in AAS to Mitsubishi with a $5.4 billion deal - almost double the value of the same stake under the original option terms. That dented Codelco's ambitions but, Anglo said, it secured better value for its own investors.

Many Anglo investors welcomed what they said was an active defence of shareholders' interests, while others fretted over an aggressive stance that irked the host country and was partly borne of the company's failure to understand Codelco's intentions.

Codelco, for its part, said Anglo had violated the Chilean legal principle of "good faith" by selling pre-emptively. Both Anglo and Codelco sued each other for violation of contract.

An agreement this week is set to see Anglo retaining a 51 percent majority in AAS, Mitsubishi yielding a small percentage - roughly five percent according to two sources familiar with the matter - to Mitsui, which had agreed to finance Codelco.

Codelco would then get the remaining 24.5 percent at a "compromise" discount to the option value of around $2.8 billion - below an earlier $3 billion value due to weaker copper prices. It is also set to get land, the sources said.

"In monetary terms, this isn't going to be a loss compared with exclusively selling to Codelco, it will be a profit," Gustavo Lagos, a professor at Universidad Catolica's Mining Center in Santiago. "But in terms of image, I don't know."

Codelco declined to comment. Anglo said the two sides were still negotiating and declined to comment further.