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The unexpected resignation of Codelco’s CEO last week is increasing worries about how the Chilean mining giant’s dispute with Anglo American may pan out. As the conflict drags on, there is growing wariness about investing in Chilean mines from Mitsubishi, which has invested $5.4 billion for a 24.5 percent stake in Anglo American Sur, as well as from other potential overseas investors.
Former Codelco CEO Diego Hernandez became the first casualty of the company’s ongoing dispute with Anglo American (LSE:AAL) when he unexpectedly resigned last Thursday. The question now is whether Codelco will continue to pursue what it sees as its right to acquire a sizeable stake in Anglo American’s Chilean properties, and how the bitter spat between the two major miners may impact foreign interest in the country.
Hernandez stated that his abrupt departure was solely for personal reasons, and nothing to do with the legal battle that Codelco and Anglo American have been engaged in since last October. Still, the fact that Hernandez’s resignation came only days after both companies began tentative discussions to reach an out-of-court settlement regarding Anglo American’s sale of a 24.5 percent stake in its Anglo American Sur properties in Chile, which includes the Los Bronces mine, to Japan’s Mitsubishi Corp. (TSE:8058), suggests otherwise.
In October 2011, Codelco made public its intentions to implement an option agreement that would allow it to acquire a 45 percent stake in Anglo American Sur under a 1978 agreement. The following month, however, Anglo American sold half of that stake to the Japanese trading company for $5.4 billion, leaving only 24.5 percent for Codelco. Since then, the two companies have been at loggerheads about how to implement the 1978 agreement, and even after Hernandez’s departure, Codelco is expected to continue pursuing its 49 percent stake in Anglo American Sur. Hernandez had been in the top post for two years, having been the head of BHP Billiton’s (ASX:BHP) base metals division prior to his appointment.
“The strategy that Diego Hernandez devised for Codelco remains completely valid to me,” said current CFO Thomas Keller, who will be taking over as CEO June 1. In an interview with El Mercurio, Keller stated that “our objective continues to be to reach an agreement which is acceptable for Codelco and has to do with (Anglo) recognizing that we have the right to 49 percent.” Codelco reportedly has secured financing from Mitsui & Co. (TSE:8031), another Japanese trading company.
Given his reputedly solid relations with Anglo American CEO Cynthia Carroll, there are hopes for a swifter resolution between the two companies once Keller takes the helm. Other analysts, however, fret that a change in leadership will only delay the two sides reaching an agreement, as the drama continues to unfold in the courtroom.
As for Mitsubishi, which remains caught in the middle of the dispute, the latest development regarding its shares is only increasing its anxieties. The Japanese trading giant’s strategy in acquiring a stake in Anglo American Sur was straightforward enough, namely to secure a steady supply of high-quality copper. Having a stake in a major mine would allow it to breathe easier through the ups and downs of copper prices on the global market, which remains volatile. The Los Bronces mine alone is projected to produce 490,000 tonnes of copper a year, which would make it the world’s fifth-largest red metal mine. That plan has not panned out, and is expected to remain in limbo as long as Anglo American and Codelco are unable to reach a resolution regarding shareholding.
“Had Mitsubishi ever considered such a development when it made its massive investment?” questioned Toyo Keizai, a leading Japanese business magazine. While the possibility exists for Mitsubishi not to acquire its 24.5 percent stake in Anglo American Sur, Toyo Keizai argued that“[t]o fight against Codelco may mean fighting against (Chilean) lawmakers and the public.” Codelco is wholly-owned by the Chilean government, and with copper accounting for nearly half of the government’s exports, Codelco remains a critical state corporation.
“This latest development has done little to steady the nerves of Japanese investors,” said one Mitsubishi executive on condition of anonymity. Whatever the outcome may be, the best thing to happen now would be for “uncertainties to be lifted,” he added.
The legal dispute may lead many foreign investors both large and small to consider carefully what opposition they could face when trying to acquire a stake in a Chilean mining asset. In the meantime, the final date for the two companies to reach an out-of-court settlement is June 22.
Securities Disclosure: I, Shihoko Goto, hold no direct investment interest in any company mentioned in this article.