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Where did this option at the heart of Codelco and Anglo American’s disagreement come from?
The option dates back to 1978, when Chile’s government offered contractual protections to buyers of state assets. Granted to Chile’s state-owned Enami for 49 per cent of the aptly named Disputada copper assets, the option was designed to reassure buyer ExxonMobil it could retain control and get a fair price if the government wanted back in. Anglo renegotiated the option in 2002 when it bought Disputada (now Anglo American Sur, which includes the Los Bronces copper mine) for $1.3bn. Codelco bought the option in 2008 for $175m.
Why the disagreement?
Exercisable in January every three years, the option price was intentionally set high and for many years it seemed unlikely it would ever be used. The surging copper price changed that. The two sides briefly discussed Anglo buying back the option in 2009 for about $200m.
Last July, Anglo (as required by the contract) sent a letter, estimating the exercise price for 49 per cent at $6bn. Subsequently, Anglo again offered to buy the option, for about $700m in cash plus $300m dependent on the copper price. Negotiations did not get far.
In October, Codelco announced an agreement with Japan’s Mitsui for a $6.8bn loan, implying a much higher value for AA Sur than previously thought. The next month, Anglo agreed to sell 24.5 per cent of AA Sur to Mitsubishi for $5.4bn, valuing the whole at double that implied by the option.
So what is the legal case about?
There are several points. In the central one, Codelco claims it is entitled to 49 per cent of AA Sur and that Anglo was not permitted to sell part of that stake to a third party. Anglo also argues Codelco’s actions constituted an attempt to exercise the option early and frustrate their alternatives.
Who has the upper hand?
Anglo’s case rests on a section of the 2002 contract, which works through scenarios where Anglo no longer owns 100 per cent, including one where a third party holds 25 per cent of AA Sur. Part of Codelco’s argument is that under Chilean law the parties have to act in good faith to uphold the intention, as well as the letter, of the contract. There is also the question of how Chilean public opinion and politics could affect matters which, frankly, is anyone’s guess.
Is there scope for a settlement?
Unclear. A court hearing scheduled for on Tuesday could provide an opening for one side to make a move. But until last week, there had been no talks since January and little common ground. With years of court battles potentially ahead, both stand to gain from a negotiated settlement, carving up the 49 per cent stake or the corresponding value of AA Sur between them.