[miningmx.com] — ANGLO American CEO, Cynthia Carroll and her board of directors will have to show the steel that helped repulse Xstrata’s merger of equals bid more than two years ago if it is to happily resolve the cash dilemma into which Chile’s state-owned Codelco may thrust the firm.
This is after Codelco said yesterday it had financed from Mitsui & Co a $6.5bn option to buy a 49% stake in Anglo American Sur, a company which houses Los Bronces, a low-cost copper producer with significant upside potential.
Described by one analyst as Anglo American’s prize horse, Los Bronces is estimated to comprise between 14% to 17% of Anglo’s net asset value. While the cash it is expected to receive from Codelco will see Anglo swing from $5.2bn net debt to a cash positive $3.4bn, it nonetheless deprives the group of a quality growth asset that its cash is unlikely to buy anywhere else.
Analysts are hoping Anglo will use the cash for a buy-back or even a special dividend, possibly $1bn, but there’s also risk the cash will burn a hole in the collective pocket of Carroll and her board that will see them dive back into merger and acquisition market.
“If Codelco exercises the option it will deprive Anglo of growth in a favourable
commodity (copper). This is negative, in our view,” said Des Kilalea, an analyst for RBC Capital Markets in a note today.
Anglo American Sur also houses the El Soldado mines, the Chagres smelter and Los Sulfatos and San Enrique Monolito exploration projects.
“Los Bronces is Anglo American’s prize horse, with the expansion expected to add 278,000 to annual [copper] capacity (taking production to over 400,000 tonnes/year),” said one bank analyst. The mine contributed 10% or $318m to Anglo’s recent earnings and is valued at about $9bn giving a value of $4.4bn to a 51% stake.
The option, which Codelco passed over in 2009, was first created when the Chilean mines were privatised.
Anglo American then inherited the option when they acquired Disputada del las Condes from Exxon Mobil in 2002. “The option is sometimes referred to as the Disputada (Enami) option from when Enami inserted the option in 1978 when it sold Disputada to Exxon,” an analyst said.
Codelco said it had reached a second accord that gives it the right, but not the obligation, to pay off part of the loan extended by Mitsui via the sale of an indirect stake of half the shares in Anglo Sur acquired.
Anglo is a mining company, not a bank, and the cash surplus is expected to see Carroll fall under some pressure from analysts.
If the cash is not returned to shareholders, analysts speculated Anglo could use it to buy coal assets or even expand the Minas Rio iron ore deposit, although that would be effectively swapping cheap copper tonnes for expensive iron ore ones (Minas Rio was bought at a premium).
“We believe options include a further expansion at Minas Rio, coal growth in Australia, buying more of De Beers and merger and acqusitions potential in the midcap base metal and coal sectors,” said Kilalea. “There is also the prospect of some form of special dividend, in our view,” he added.
Collaborative relationship
Codelco said it hoped to continue a collaborative relationship with Anglo if it exercised the option which can be done in a 30-day window, starting January 1, and then every three years.
“If, as we currently anticipate, we exercise the option to buy, we expect to work closely with Anglo American, with whom we already have a mutually collaborative relationship in the Andina and Los Bronces mines,” Codelco CEO Diego Hernandez said
in the statement.
Hernandez said the option was a “very good investment opportunity” for Codelco, adding that price volatility that has seen a sharp sell-off for the red metal in recent weeks did not affect the company’s investment decisions, Reuters reported.
