[miningmx.com] – DID the founder of psychoanalysis, Siegmund Freud
once say, “sometimes a cigar is just a cigar’? It’s almost certainly apocryphal, but
whoever coined it should be congratulated for finding an amusing way of warning
against the excesses analysis.
For my ends, however, I’ll ignore the good advice because I want to believe the
resumption of talks between Anglo American and Codelco, followed days later by the
resignation of the Chilean firm’s CEO, Diego Hernandez, are causally linked. As one
analyst said: “He [Hernandez] became an obstacle, so he had to go.’ Although, he
added: “This is more feeling than fact.’
On the issue of belief, I’m inclined to be upbeat about renewed discussions between
Anglo and Codelco, even though their provenance has been described as a legal
technicality. In fact, I find it likely that Anglo jumped at the chance of re-
engagement, partly because this is Anglo CEO Cynthia Carroll’s style. Remember her
personal engagement with the South African government at the beginning of her
Anglo career? In any event, Anglo and Codelco have until June 22 to find each other,
after which the matter returns to the courts.
The dispute is about ownership of Anglo American’s Minera Sur asset in Chile. The
asset consists of three copper mines, including Los Broncos, which are expected to
produce between 480,000 tonnes to 540,000 tonnes of copper in 2014 – a near
doubling over the 268,000 tonnes in 2011. Codelco tried to exercise a long-standing
option for 49% of Minera Sur and on-sold it to Mitsui; only for Anglo to pull the carpet
from beneath Codelco in a quick-fire counter deal with Mitsubishi at a premium to
Mitsui’s offer. A public fight ensued in which Hernandez revealed a short fuse,
labelling Anglo a bully. I think he got booted because Codelco’s shareholder found
him to be overly aggressive. Hernandez’s replacement is a former Collahuasi
executive, Thomas Keller. “He knows the Anglo guys perhaps which is probably a
positive,’ says an analyst of the fact Anglo is a joint venture partner in Collahuasi.
Analysts say Anglo’s legal position is watertight, and could take the dispute through
the courts, but it needs to negotiate a solution. It is missing a trick if it doesn’t.
Anglo’s peer group, including BHP Billiton and Rio Tinto, are feeling the pinch of their
capital programmes. Anglo, however, is well financed and should be letting out the
clutch on growth this year despite some headwinds with Anglo Platinum. It could do
with a boost from settling the ownership of Anglo American Sur notwithstanding a
cooling in the world’s copper market.
The likely outcome is that Anglo will allow Codelco to buy the remaining 24.5% stake
in Minera Sur. The question will be the value of the option. Based on Anglo American’s
backward-looking earnings formula for valuing Minera Sur, which factors in items
such as previous capital expenditure, the asset is worth $11bn. Given that Codelco
had agreed with Mitsui it would buy 49% for $6bn and sell it to them for $11bn, the
option is worth $5bn.
But the implied option value in terms of Anglo’s deal with Mitsuibishi is $6bn.
Analysts valued 24.5% of Minera Sur at a maximum $3bn with the lowest valuation at
$1.6bn. In a falling copper market, the Mitsui and Mitsubishi implied valuations
represent pretty good business for Anglo. It needs to sell to Codelco and press on.
