Anglo faces big Chilean test as investors get jittery
ANGLO American, wrestling institutional investors frustrated with a battered mining sector, faces a major test this week in the shape of a deal to end a bruising, 10-month-long row with Chilean copper giant Codelco.
Sources familiar with the matter have said an agreement is expected in days, with Anglo preparing to sell Codelco a 24.5% stake in its coveted Anglo American Sur properties in Chile to end their legal battle. The deal includes the Los Bronces copper mine, potentially one of the world’s largest.
Depending on price and the depth of the conciliatory discount offered, a deal could offer breathing space for Anglo’s bosses, under pressure over low returns, trouble with its Brazil iron ore project and its South African platinum operations — where violent clashes over the past week have added to the woes of an industry squeezed between feeble prices and sky-high costs.
An imperfect Chile deal, though, could revive criticism of the miner’s diplomatic abilities and its decision to invest $2.8bn in Los Bronces before securing full ownership of the mine.
"If we see a situation where they resolve with Codelco, and they have still got a better price than they would have got through the (original) option, you would say Anglo has won something," analyst Des Kilalea at RBC Capital Markets said.
For Anglo, a perceived victory in the battle over Chilean copper is key, as fund managers, facing criticism from their own investors, begin to lose patience with the sector. After years of investing as miners ploughed cash into growth, investors find returns are now hampered by a worsening economy.
Anglo, led by CE Cynthia Carroll, has been at the sharp end of criticism, not least because of a return on equity which fell in the first half of the year to the worst level since the 1930s, according to Citi analysts.
"Frustration is the best word for shareholder feelings on Anglo," said one of the company’s top 15 investors, who requested anonymity. Other investors said they were fretting over Anglo’s capital allocation.
The company, set to see free cash flow rise as investment eases, has spent about $7bn in deals over the past year, including two in the past month.
"While we are not gunning for Cynthia’s head, we do have serious concerns about Anglo," another investor said. "Reliance on SA is a definite concern, and their attempt to diversify with their major project in Brazil — Minas Rio — has showed far from perfect execution."
Minas Rio, like several other large projects in Brazil, has been beset by delays, cost overruns and hitches over permits.
"Investors in general are biased against mining equities and with Anglo there are a lot of problems people can point to," analyst Chris LaFemina at Jefferies said.
Solving Chile would tick at least one problem off the list.
Anglo and the world’s top copper producer have been at loggerheads since last October, when Codelco said it would exercise its option to buy a 49% stake in Anglo American Sur in January this year.
Many Anglo investors welcomed what they saw as an active defence of shareholders, while others fretted over an aggressive stance that irked the host country and was partly borne of a failure to understand Codelco’s intentions.
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