Mining rights: Fierce tug-of-war over assets ends peacefully

It could all have gone badly wrong, so the announcement on August 23 of a deal to end a fierce transatlantic legal fight between Codelco, Chile’s state-owned mining group, and the multinational miner Anglo American, radiated relief.

The tug-of-war over assets, including a copper mine in central Chile – ironically formerly known as La Disputada, or the Disputed One – turned into a saga of nationalist passions, clashing executive egos and corporate scheming, all of which evaporated in a clever something-for-everyone solution pulled off at the 11th hour.

The dispute erupted a year ago when Codelco, the world’s top copper producer, dug out an option dating back to 1978 that the market – and, it seemed, Anglo – had forgotten.

Judging the January 2012 exercise window to be a now-or-never chance to grab a 49 per cent stake in the attractive Anglo American Sur assets cheaply, Codelco lined up $6bn from the Japanese trader, Mitsui, and showed its hand.

Anglo, which had invested $2.8bn in the assets’ centrepiece mine, Los Bronces, and had embarrassingly listed the option on its books as being worthless, looked to have been caught on the back foot.

But its reading of the option contract opened a legal can of worms. It maintained it had the right to sell down the option stake before it was exercised, and promptly sold 24.5 per cent to Mitsubishi, another Japanese trader, for $5.4bn.

Many observers quietly concluded that, never mind Chilean national pride, Anglo’s legal case looked more watertight.

Jon Benjamin, the UK ambassador in Santiago, says: “It was clear that there was at least a theoretical legal possibility that Anglo could have won against a state company in Chile. In how many other countries would that be possible?”

That such an outcome could even be contemplated speaks volumes about the independence of institutions in the world’s top copper-producing nation, despite its precipitous slide in a widely watched ranking of the world’s best mining jurisdictions.

Canada’s Fraser Institute think-tank, which has been surveying mining executives to produce its rankings since 1997, placed Chile 18th out of 93 in 2011-12, down from eighth in 2010-11, and the first time the copper giant has fallen out of the top 10. Executives were less upbeat about incentives for investment, political stability and land claims.

So has the dispute done lasting damage to Chile’s image? The answer is no.

Thomas Keller, Codelco’s chief executive, says: “I don’t think it’s bad at all for Chile as a destination for foreign investment, because a very acrimonious corporate dispute involving a state-owned company was resolved in an exemplary way.”

Anglo plays down any risk it could have ended up with just a quarter-share in Anglo Sur, and notes that its hardball tactics meant it still divested virtually half the shares in Anglo Sur, but scored $2.3bn more for its shareholders than if it had simply granted the option under a price formula worth roughly half the Mitsubishi valuation.

Anglo might have got more if it had won the lawsuit, but any resolution could well have been years away, and neither side was assured of victory.

And although all parties involved had to compromise to make a deal possible, the final accord curiously ends up getting more for everybody than if the option had been exercised: Anglo more money; Codelco more rights in Anglo Sur; Chile more tax and more value.

As for the Japanese partners, Mitsubishi gained a share – and thus a guaranteed copper sales stream – that had never been on the cards originally. Though in the end it reduced its participation to 20.4 per cent, it was not out of pocket, despite falling copper prices and a gloomier outlook since it bought its stake last November. Mitsui, meanwhile, obtained a long-term joint-venture with Codelco, and despite only having 5 per cent in Anglo Sur, a privileged relationship with the government.

What is more, Codelco has quietly secured an advantageous financial deal to pay back Mitsui that Mr Keller acknowledges will be “difficult to turn down”.

Codelco can, by late November, sell a further 4.5 per cent stake in Anglo Sur to Mitsui for about $1bn (again at the Mitsubishi price), which would boost Mitsui’s stake in the joint-venture to 15.25 per cent. This means Codelco is likely to emerge from its Anglo Sur adventure with debt of some $900m, repayable to Mitsui over 20 years at a fixed interest rate of 3.25 per cent.

Mr Keller also says Mitsui would be “ideal to partner with in any international undertaking”, though that is not a priority right now.

Juan Carlos Guajardo, executive director of the Chilean copper industry think-tank CESCO, adds: “I think this is a road they will start to travel. Mitsui’s size is very attractive for a company such as Codelco.”