LONDON/SANTIAGO, May 25 (Reuters) - Chile state mining company Codelco and miner Anglo American are restarting talks to resolve a multi-billion dollar dispute over copper assets in Chile’s centre-south, after months of increasingly acrimonious legal altercations.
But they will do so under a new boss at Codelco, after the abrupt departure of Chief Executive Officer Diego Hernandez, set to be replaced at the helm of the world’s largest copper producer by Chief Financial Officer Thomas Keller on June 1.
At stake in the dispute with Anglo are assets that include the Los Bronces mine, which could produce 490,000 tonnes of copper annually, positioning it as the world’s No. 5 copper operation - an enticing prospect given an absence of notable new deposits in recent years.
Following are some questions and answers on the dispute.
Codelco announced in October that it intended to exercise a long-standing option to take a 49 percent stake in the Anglo American Sur (AAS) mining complex in central-southern Chile and had secured a $6.75 billion bridging loan from Japan’s Mitsui & Co to allow it to do so.
Weeks later, Anglo surprised Codelco and markets with a pre-emptive sale of a 24.5 percent stake in those properties to Mitsubishi for $5.4 billion — almost the same value it would have gotten for selling the entire 49 percent to Codelco. Anglo says there is no contract clause that forbade it from selling part of its assets.
Codelco disputed the sale and says it exercised its option for a 49 percent stake in the assets on Jan. 2, the day the option’s window opened. Anglo has refused to hand over any shares in its prized properties and argues the option is void, as Codelco tried to pre-empt it.
The two sides, which had been due to meet as part of standard “conciliation” proceedings, said on Tuesday they had instead agreed to suspend the court battle for a month.
They have a window of opportunity until June 22 to reach a deal through talks. The window marks a “last opportunity” to reach a deal out of courts, Hernandez said.
The alternative, a multibillion dollar, tricontinental legal battle between the firms, could take three to five years.
Codelco accuses Anglo of acting in bad faith and selling a stake from under it, while Anglo argues it was entitled to sell a share in the assets to Japan’s Mitsubishi before Codelco’s window to exercise the option opened in January.
The two sides dug in, launching a series of legal actions. Local courts granted Codelco’s requests for a sales freeze on part of the contentious Sur properties and the release of Anglo’s stake sale contract to Mitsubishi.
Anglo has also attacked on the legal front, suing Codelco for breach of contract and requesting Codelco’s contract with Mitsui be revealed. A court last month rejected a bid by Codelco to freeze 49 percent of dividends from AAS.
IS AN OUT-OF-COURT AGREEMENT THE NEXT STEP?
The two sides failed to reach a deal after secret talks in December and January, but a settlement out of court is what many legal experts, shareholders and industry players recommend.
And there is much incentive to reach a deal in the coming weeks. Experts cite a backlog in Chilean courts, steep legal fees and time-consuming diversion of management focus as the chief reasons a bitter legal battle is seen best avoided.
The battle has also created significant uncertainty for Anglo shareholders.
Anglo has said it is open to a “commercial solution that takes into account the interest of both parties”. Codelco has said it wants to “overcome the controversy”.
Many legal experts see a deal that grants Codelco 24.5 percent of the properties - the stake Codelco initially said it could ultimately end up with according to its bridging loan with Mitsui - and some sort of financial compensation as the most feasible potential deal.
“It’s natural, obvious for them to reach a deal,” said Winston Alburquenque, professor of mining law at the Universidad Catolica in Santiago�. “This is the opportunity....I think the deal will be for the 24.5 percent.”
Depending on the price paid for the stake, that would be a welcome scenario for Anglo, analysts say, though thanks to the Mitsubishi deal virtually any outcome would boost the miner’s cash balance.
But big differences need to be bridged before an agreement can see the light.
Keller was Hernandez’ right-hand man and will not change the tune in Codelco, a high-ranking Codelco source told Reuters, a view shared by many in the industry.
But the arrival of a new face could somewhat ease tensions at the negotiation table. Keller, however, must also answer to Codelco’s board and the Chilean public.
“Keller seems a sensible guy, though he was pretty vocal when he came round to see London investors,” one London-based sector analyst said. “Codelco suggests this won’t change their position in the dispute, but I guess this is a small positive.”
Known as a sharp, committed executive, Keller was also an architect of the plan to exercise Codelco’s stake option.
A copper-hungry market and the option’s pricing formula significantly diverge in their valuation of the coveted properties - seen as a factor that pushed Anglo to sell a stake at a far more attractive market rate.
Codelco has valued its option for the 49 percent at around $6 billion - roughly half of what Anglo’s 24.5 percent stake sale to Mitsubishi for $5.4 billion implies that chunk is worth.
When Codelco in October announced it had secured the bridging loan from Mitsui, it added it had reached a second accord that gives it the right to pay off part of the loan via the sale of an indirect stake of half the shares acquired in Anglo Sur. That sale would be based on the 49 percent stake being valued at around $9.76 billion.
While some shareholders approve of Anglo’s moves as efforts to defend shareholder value, a few have fretted over the heavy-handed approach and the decision to invest around $2.8 billion in Los Bronces before securing full ownership.
Anglo says it will recoup the portion of its investment made in Los Bronces if the option is exercised.
If the miner fails to secure a deal and the spat ends in lengthy or costly battle, more investors could turn against the miner’s approach and specifically the management team led by CEO Cynthia Carroll.
A cash boost from the deal could also leave Anglo with the problem of where to invest, with analysts speculating on possible buy-backs or acquisitions to replace lost tonnage.
The government and most public opinion in Chile, the world’s top copper producer, firmly back Codelco, which contributes billions of dollars to the country’s coffers.
But avoiding a home turf legal setback is critical. That could further pressure conservative billionaire Sebastian Pinera, Chile’s most unpopular president since General Augusto Pinochet’s 1973-90 dictatorship, according to recent polls.
A deal would also likely avoid a situation in which Codelco loses the option outright, depriving it of a welcome windfall as the firm seeks to maintain its copper leadership in the face of dwindling ore grades. Codelco’s Andina mine is nestled right next to Los Bronces, and industry players have long discussed the potential synergies of the two deposits.
The odds of Codelco ending up with no stake in Anglo Sur are seen as very low.
At the heart of the dispute are the flagship Anglo Sur properties, where Anglo has heavily invested to expand its prized Los Bronces mine.
The ramped-up Los Bronces is expected to more than double annual copper output from 2010 levels in its first three years of full production.
The surrounding properties include the El Soldado mine, the Chagres smelter and Los Sulfatos and San Enrique Monolito exploration projects, with estimated resources of 1.2 billion and 900 million tonnes respectively.