The Americas
Chile's mining industry
Good copper bad copper
Nov 21st 2011, 22:39 by G.L. | SUR POINT
CHILEAN business has historically been a cosy, clubby world, where deals are sealed with a handshake in social settings. However, now that the price of copper, the country’s chief export, has reached record highs, Chile is getting a taste of proper corporate drama.
The mining industry has boomed in recent decades under a hybrid structure, in which Codelco, the state copper company, competes with private firms. Codelco hired Diego Hernández, a former BHP Billiton executive, as its CEO primarily to oversee an expansion strategy.
The easiest way to grow is by acquisition, and no acquisition would be easier to complete than taking a stake in the Sur project owned by Anglo American, a British conglomerate. It consists of two mines, a smelter, and two recently discovered copper deposits in the mountains north-east of Santiago, the capital, which Anglo estimates contain 2.1 billion tonnes of ore. If confirmed, that would increase the company’s reserves by half. The deposits lie in a valley adjacent to Andina, a Codelco mine that is already being expanded.
In 1978 Codelco acquired an option to buy up to 49% of Sur during a one-month window in January every three years. Its next opportunity falls in 2012. Last month the company announced it would exercise the option. Its contract contains a formula for calculating the price, which is based in part on Sur’s profitability in the five years before purchase. Codelco says this equation values the project at $13.5 billion. It has secured a $6.75 billion loan from Japan’s Mitsui to pay for its share.
However, the formula takes no account of the lucrative new finds at Sur. Anglo American is in no mood to offload shares at a fraction of their value. To fend off Codelco, the company reached a deal with Mitsubishi, a Japanese trading house, to sell a 24.5% stake for $5.4 billion—a valuation of almost $22 billion, nearly double Codelco’s figure. Anglo American said Codelco would have to settle for a smaller holding after its deal with Mitsubishi is finalised.
Codelco’s managers are livid, and accuse Anglo American of breaching their contract. “When we talk about an infringement of good faith, we’re not talking about a pact of honour or a gentleman’s agreement,” Mr Hernández said recently. “We’re talking about a legal obligation with which Anglo American has to comply. They’re trying to stop us from exercising our legitimate right.” In response, Anglo American said it had not violated its obligations and had simply found a better deal for its shareholders.
The dispute could sour Chilean attitudes towards Britain. Copper is the lifeblood of the Chilean economy, and state-owned Codelco is the only company that excites any degree of nationalist sentiment in the country. Indignant politicians and union leaders have accused Anglo of trying to rob Chileans of their God-given copper. In London, where Anglo’s shares are traded, the British government has spoken to the Chilean ambassador.
It will also serve as a test of the Chilean legal system. The country is widely seen as a stable, business-friendly environment where contracts are enforced. In this case, however, the contract seems open to interpretation, and both sides say there are clauses in it to support their arguments. Ultimately, the winners of this battle might be not the companies themselves, but their lawyers.
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Copper was not given By God to Chile, as the author states. Ironic it is that the copper Chile now enjoys and fights for with British firms, was in fact stolen (along with the territories where it is buried in) from Bolivia and Peru, in a war that had on one side Bolivia and Peru, and on the other Great Britain and Chile.
Guest-Iialwna, I believe your geography is off by over 1,000 kilometers. The Anglo American Sur mining complex (Los Bronces, El Soldado and the Chagres foundry), which is what this article is about, is located only a few kilometers northeast of Santiago. It is not part of the territory lost by Bolivia and Peru to Chile in the War of the Pacific (1879-83).
Even though these new copper reserves could potentially increase the Chilean economy, it already is creating conflicts between people and companies. With this recession going on, most people are feeling the pressure to do whatever they have to do to make more money, even if that means breaching a contract. I believe this fight over the mine's ownership will hurt the Chilean economy, by changing business deals from relatively peaceful to manipulative. Once people get the idea that breaking rules will sometimes get you what you want, in this case more money, there could possibly be more of the same types of interactions in the future.
Add to this that Chile's budget is going through a huge and radical overhaul to provide for increased social services and school and tuition funding, and thus is forcing the government to find any means possible to raise revenue (outside of raising taxes by 2% or 3%, which of course would be unacceptable), and this is an urgent issue. And one that might add weight to demands that the government re-nationalizes the industry to finance a better society.
The boom in the mining industry has the potential to be a great asset to Chilean economics. Considering their archaic way of handling business in the past, my only concern is that Chile isn't taking advantage of and ends up at the receiving end of being cheated financially. Hopefully the Chilean government will recruit counsel from a savvy businessmen or consulting firm so that they will get top dollar fro their copper.
Modern mining requires tremendous long-term investment in order to achieve profits. The ongoing good will of the host State is of critical importance in order to ensure the long-term viability and security of such projects.
Anglo American's (AAS) decision to sell a 24.5% stake in Anglo Sur to Mitsubishi in essence put a price of $5.39 billion on its relationship with Chile’s people and government. The fact that the center-right, pro international business administration of Sebastian Piñera, is condemning this transaction in the strongest terms does not bode well for any eventual resolution.
I can clearly understand AAS’ short term motives, but why did Mitsubishi step into a hornets nest, which both BHP Billiton and Xstrata refused to become involved in when offered the same 24.5% stake?
Ok it seems Anglo A acquired Sur when it bought out Exxon's Chilean mining business in 2002 (and all of the agreements and contracts between Exxon and Codelco).....but still for a mining company of Anglo A's size to fail to provide for a pricing structure for future finds seems almost negligent to Anglo A shareholders.
Codelco believes they have an option over 49% of the total Sur property.
Anglo A believes that their 51% in inviolable and that Codelco have option rights over whatever is available of the remaining 49% thus by selling 50% of that 49% to the Japanese (at a current market price where they lessen their perceived loss) they assert that Codelco can only exercise their option on the 25% which is left over.
Codelco argue breach of good faith....which is pretty obvious since Anglo A never considered selling any of Sur to anyone until Codelco stated that they were going to exercise their option.
If you ever wondered why some foreign mining conglomerates get their interests nationalized or are forced to sell to local enterprises...
Then keep watching this space.
LaContra, I wholeheartedly agree.
The most interesting point of this article is that this will be arbitrated in court. Santiago is going to show many other Latin American governments how a free market truly works.
Compared this to Venezuela and a lesser extent Ecuador.
There is a reason that Chile will be UNASUR's first first-world member.
"However, the formula takes no account of the lucrative new finds at Sur."
This would be the formula that Anglo A agreed to when it also agreed to the 49% option in 1978?
Sounds like Anglo A's contract lawyers dropped the ball by not including a mechanism for pricing new finds at Sur...which for a mining company is a pretty big ball to drop.
Tuff shit Anglo A