Disputada legal dispute heats up (August 27, 2002)

Vancouver — US oil giant ExxonMobil (XOM-N) has filed a civil suit against Chile’s state mineral company Enami, moving further into a legal quagmire that has delayed the US$1.3 billion sale of its Chilean mining assets.

Exxon, which acquired Minera Disputada de las Condes from Enami for US$92 million in 1978 and subsequently invested US$1.2 billion in its development, agreed to sell the company to London-based Anglo American (AAUK-Q) in May for US$1.3 billion. Enami immediately launched a legal challenge because the original sale agreement gave the company an option to acquire 49% in Disputada up until 2028.

Exxon responded by filing a counter suit, arguing that Enami’s legal action was hindering the sale of Disputada and that the U.S. firm had never denied Enami its right to the option. At issue is whether the value of the option should be based on the 1978 contract or the current market value. As the court battle intensifies, Enami and Exxon are simultaneously trying to settle the dispute out of court.

The proposed sale, which would be one of the largest mining deals in recent Chilean history, has also sparked a number of disputes with the Chilean government.

The sale is structured so that the company will not pay taxes on the capital gain profits generated because the transaction is set to take place outside Chilean borders. The government has responded by seeking legislation changes to its tax act by pushing through congress a bill to extend capitals gains tax to deals involving Chilean-registered companies outside of its borders. If passed, the transaction will incur an estimated US$300million tax bill, or 35% of the difference between the book value of Disputada (some US$500mn) and the price agreed. The bill has been passed by the Lower House and is now in the Senate. This latest move could further complicate the sale, by increasing the cost of the transaction.

Exxon put Disputada on the block late last year in an attempt to exit the mining arena. Subsequently, several firms signed confidentiality agreements to evaluate the assets. Chilean state-owned Corporacion Nacional del Cobre de Chile (Codelco), which claimed a keen interest in the assets, withdrew from the bidding process in early March, after its offer was rejected.

The Anglo American deal, which was slated to close on June 30, also includes future contingent payments of up to an additional US$120 million in the event of higher future copper prices over the next three years.

This year, Disputada is expected to produce 300,000 tonnes of copper per year from its Los Bronces and El Soldado mines. In 2001, Disputada produced 254,000 tonnes copper from the combined copper mines in central Chile. Nearby, the firm also runs the Chagres smelter.