The Minas-Rio iron-ore mine in Brazil led Anglo American to rethink how it finances big projects. Picture: SUPPLIED
The Minas-Rio iron-ore mine in Brazil led Anglo American to rethink how it finances big projects. Picture: SUPPLIED

Avoiding a repeat of mistakes at its $13bn iron-ore mine in Brazil, Anglo American has reached agreement with Mitsubishi Corporation to lift the Japanese firm’s stake in a Peruvian copper project at a cost of $600m.

In line with comments from CEO Mark Cutifani, Anglo is not wholly exposed to the $5bn-$6bn bill to build a mine and processing plant at the Quellaveco project, with Mitsubishi raising its stake to 40% from 18.1%.

Cutifani has long spoken of looking for joint ventures or partnerships to develop big projects within the company after running up a bill of at least $13bn to buy and build the Minas Rio iron-ore project in Brazil — an asset that has yet to be brought to account and which put enormous strain on Anglo’s balance sheet.

Anglo ran up net debt of $12.9bn by 2014, prompting a sale of assets and a restructuring of the business.

The tail end of that process coincided with an upturn in commodity prices, bringing net debt down to $4.5bn by the end of 2017, halting the asset disposal programme and allowing Anglo to revisit growth projects.

“This injection of cash, as well as a lower capital burden, will improve Anglo American’s free cash flow through the Quellaveco construction phase as the company continues to de-lever its balance sheet — especially outside of SA, where the net debt lies,” said RBC Capital Markets analyst Tyler Broda.

“This is aligned with management strategy to share risks on large capital projects but comes at the cost of what is becoming scarcer and scarcer high-quality growth in the sector,” he said.

On Thursday, Anglo said it had signed heads of agreement with Mitsubishi to up its stake in Anglo American Quellaveco by 21.9% on top of the 18.1% it already owns in the venture, valuing the business in Peru at $2.74bn, about $1bn higher than RBC’s valuation.

Various media reports have estimated the cost of building a mine and processing plant at $5bn-$6bn and that the project could produce 225,000 tonnes of copper a year. Anglo has owned Quellaveco since 1992.

The transaction “aligns with our disciplined approach to how we allocate capital”, Cutifani said. Mitsubishi will buy shares in Anglo American Quellaveco for $500m once the transaction is closed in the third quarter of 2018, which Anglo will use to fund part of the cost to build the mine and processing plant.

Mitsubishi will pay a further $50m once the Quellaveco mine achieves ore throughput of 150,000 tonnes a day and the final $50m once the daily run rate is 180,000 tonnes a day.

One of the conditions to conclude the transaction would be the approval of the Anglo board to build the mine.

The decision is expected in 2018, but with Anglo already having started early stage development work at the site, the chances are good the project will be approved.

seccombea@bdfm.co.za