State-owned Chilean copper miner Codelco, which is forcing an unfair transaction on Anglo American, has been caught red-handed.

Anglo’s sale of 24.5% of Anglo American Sur (AAS) SA to Mitsubishi values 100% of Anglo’s Chilean assets at $22-billion.

Codelco should thus have offered far closer to $10.78-billion for 49% of Anglo Sur, and not the $6.75-billion that it is borrowing from Mitsui.

The low $6.75-billion is, moreover, only the assumed amount, as the State miner has alluded to paying even less.

Even that is not the end of the story.

The moment Anglo receives payment in the forced sale arrangement, it will be liable for capital gains tax.

On the basis of $6.75-billion being paid, some $900-million would likely be in capital gains tax, which would leave the London- and Johannesburg-listed Anglo with close to the $5.39-billion that Mitsubishi has paid for less than a quarter of the business, let alone the virtual half that Codelco is demanding.

In a side deal, Codelco – headed by CEO Diego Hernandez, formerly of BHP Billiton – intends to on-sell part of the wrested shareholding back to Mitsui, at a price considerably higher than what it paid, which is proof of the unevenness of what is undermining investor faith in a country that up to now has been seen as a reputable investment destination.

Codelco secured the $6.75-billion loan from Mitsui to acquire 49% of Anglo Sur and then to sell 24.5% to Mitsui for $4.9- billion, valuing 100% of AAS at $19.9- billion, which again underscores the nationalisation by stealth involved in this reprehensible deal, which does not reflect at all to Chile’s credit.

Codelco has been playing fast and loose with its status as a State enterprise and putting Anglo at its mercy.

Anglo’s astute sale of half of what Codelco is seeking proves beyond any doubt that the Chilean company is trying to walk off with as much as $4.03-billion of what is the property of the shareholders of Anglo, which includes previously disadvantaged South Africans whose pension funds and provident funds are invested in a company that has very deep South African roots going back to 1917.

Even that is not all.

Another aspect is that a potential $4.03-billion is being denied to a group of shareholders whose charge is a diligent Chilean foreign investor and which employs more than 10 000 Chileans and which rushed to the aid of Chilean communities following last year’s devastating earthquake.

Codelco’s case, on the other hand, is based on a 33-year-old document that Anglo had no part of.

Further, if Codelco succeeds, a portion of a copper portfolio that Anglo has been working hard to build up will be lost to Anglo shareholders over the long term, and Anglo’s copper production loss would become Codelco’s direct production gain.

Against that background, Anglo appears to be totally justified in outmanoeuvring Codelco with the sale to Mitsubishi of 24.5% of the 49% that was available for Codelco to buy.

“This looks a clever and bold move by Anglo,” Liberum Capital’s Dominic O’Kane said in a note.

But the Chilean miner has not only attacked first, but has also proceeded quickly thereafter to counterattack following Anglo’s defensive Mitsubishi transaction.

The Financial Times quoted Codelco president Gerardo Jofré as saying that Anglo’s belief that it had a right to sell was nonsense and Reuters reported similarly from Santiago that Codelco would be taking 49% of Anglo Sur come what may, which would put Anglo into a minority position, while still being saddled with the running of its Chilean operations.

Both publications concluded that Codelco was digging in for a battle with Anglo over Sur.

Chilean copper miner Codelco has set the stage for a heated legal battle against Anglo, one report read.

“I’m sure the government of Chile is well aware that the international community is watching this closely,” said Anglo CEO Cynthia Carroll.

While Codelco was talking, at the time of going to press, of taking the matter to the Chilean courts, others were envisaging that the case, if it does get as far as the courts, could also spill over into an international legal arena.

At stake is Chile heaping new risk upon itself as a foreign direct investment destination.

Positively for Anglo shareholders, it appears that the company is asserting control over the fate and perhaps even valuation of Anglo Sur, O’Kane added.

It has yet to be disclosed what Codelco’s consideration to Anglo would be for 49%.

Liberum Capital had expected that Codelco’s consideration would be equal to its $6.75-billion loan but Codelco has publicly alluded to the price being less.

The $6.75-billion for 49% would value Anglo Sur at only $13.8-billion, while Anglo was selling 24.5% of it for an amount similar to what the market expected for 50%.

Codelco’s call option valuation is a formula based on Anglo Sur’s historic five-year profitability.

Mitsubishi Deal

The Mitsubishi transaction has allowed Anglo to generate additional cash while retaining its 51% stake, which is positive, said Royal Bank of Canada capital markets equity research team in a note.

The $5.39-billion sale price has been paid in the form of a promissory note, which was delivered by Mitsubishi on November 10.

Anglo has regularly reviewed alternatives open to it and, posttransaction, continues to hold 75.5% of Anglo Sur.

Anglo saw the transaction with Mitsubishi as being fully compliant with the option agreement between itself and Codelco.

Anglo said that Codelco expressly contemplated the eventuality of Anglo disposing of some of its shares in Anglo Sur at any time prior to the three-yearly January period that extended to January 2027.

Mitsubishi is an existing investor in Chile.

The terms of the transaction completed with Mitsubishi highlight the inherent value of Anglo Sur as a top-tier copper business with extensive reserves and resources, Anglo added.

It has invested $6.5 billion since 1980 and its growth ambitions have the potential to bring more investment and employment to Chile.

“Our approach is to build long-term partnerships with national and local govern- ments and to support local communities in countries in which we operate.

“We’ve been among the first to offer assistance to Chilean communities and to government in times of need,” Carroll added.

Anglo chairperson Sir John Parker said that the sale of an interest in Anglo Sur demonstrated the Anglo board’s commitment to delivering value.

He said that the company remained fully committed to its major inward investment programme in its Chilean business and to continuing its significant social and com-munity investment programme in Chile.

Anglo had paid $4.5-billion in taxes in Chile in the last five years and donated $10-million, expertise and equipment to get 4 500 children to resume classes just three-and-a-half months after the earthquake.

Anglo had also committed $3-million to help more than 4 500 families in shanty towns across the metropolitan area of Santiago and intended to use the proceeds of the Mitsubishi transaction for general corporate purposes.

Codelco produced fewer tons of copper last year than it did five years ago and has ageing mines that need recapitalisation.

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