Anglo may line up Kumba Iron Ore

John Parker, Anglo American chairman

[miningmx.com] — ANGLO American’s recent corporate maneouvres have really caught the eye, especially the sale of its 24.5% stake in Anglo American Sur, its Chile base metals company, to Mitsubishi.

Analysts have described it as ‘fancy footwork’ and ‘corporate theatre’; another, in martial terms as Anglo having ‘outflanked’ Codelco. Codelco is Chile’s state-owned mining company that last month announced its intention to exercise its option agreement over Anglo American Sur in January.

For me, I can only wonder, again, at the power of the team. In rejecting Xstrata’s merger of equals proposal two years ago, Anglo CEO Cynthia Carroll not only saved her job but got herself a steely board of directors.

As a colleague of mine once said, the softest part of Sir John Parker, the industrialist drafted into Anglo at the time of the Xstrata bid, is his tooth enamel. The swiftness of the Mitsubishi move has the paws of a sly fox all over it. I’d love to know how this plan was hatched, when, and by whom.

In any event, Anglo has at a stroke achieved a few things. It has increased the valuation of 100% of Anglo American Sur 10% to $22bn against the $19.9bn value attached to the company by Codelco (and financier, Mitsui).

Secondly, Anglo seems confident it has reduced the amount of the stake over which Codelco has its lower value option agreement. So if Codelco exercises its option, the company will be shared as follows: Anglo American (51%), Mitsubishi (24.5%) and Codelco (24.5%).

Thirdly, Anglo also has the optionality of dispensing the remaining 24.5% Codelco still has rights over which the government can only do in January. An Anglo spokesperson confirmed the group could have sold 50% of Anglo Sur if it had wanted.

Assuming Anglo doesn’t do this, and waits for Codelco to exercise its option, it will stand to bag some $8.4bn (before capital gains tax on the Mitsubishi sale which is a whopping $1bn). This fourth element of Anglo’s coup raises the question again: what will Anglo do with the cash?

One analyst, who asked not to be named, said there would be enough cash left over to build a balance sheet robust enough to buy out the Oppenheimer family’s stake in De Beers – the other corporate manoeuvre which earned Carroll kudos earlier this month – and take out Kumba Iron Ore minority shareholders, equal to 35% of total shares in issue valued at some $7bn.

Shares in Kumba Iron Ore have increased 11.5% since November 1. It’s worth noting that the volatility in iron ore prices didn’t much affect the company given the niche value of its product suggesting the possibility of a takeout might be getting priced into the share, perhaps.

Anglo’s Codelco side-step, however, is not without risk.

The swiftness of the Mitsubishi move has the paws of a sly fox all over it.

Codelco has suggested, perhaps in the heat of the moment, that it will sue Anglo American. “Life isn’t always fair and Anglo will suffer some reputational damage if the Chilean courts find convincingly against it,” said Steve Meintjes, an analyst for Imara SP Reid in a note on November 11.

Yet the idea of Anglo having stuck it to a government, especially during these days of aggressive resource nationalism, is a massive vote for those who still believe in capitalism in these fiscally straitened times.

Let’s just remind ourselves of Codelco’s tactic: allow Anglo to spend the money and just when the asset matures, come in for a cut-price deal.

UBS has Anglo on a buy; Macquarie Securities has an outperform, while RBC Capital Markets has an outperform.

It’s been suggested shareholders would really like Anglo to return the extra cash it has in the form of a special dividend, but they may not be likely especially as Carroll seemed at such pains recently to scotch the notion the bid for De Beers was a function of the Codelco announcing its intention to exercise its option.