Family feud

The price of copper per pound is more than twice what it was on Aug. 9, 2005, when Asarco LLC filed for bankruptcy, but that's only one reason why the mining and smelting company and its parent, Grupo México SAB de CV, are squabbling.

There are others. Asarco blames Grupo México for its bankruptcy, alleging it was insolvent when the parent forced it to sell one of its prized assets -- its 54.2% interest in Southern Peru Copper Co., now Southern Copper Corp. The animosity between the two grew worse four months into the bankruptcy, when Judge Richard Schmidt of the U.S. Bankruptcy Court for the Southern District of Texas in Corpus Christi stripped Grupo México of control over Asarco.

Now Grupo México wants that control back.

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On May 31, Asarco selected the $2.6 billion offer by Sterlite (USA) Inc., an affiliate of global mining company Vedanta Resources plc, for the Tucson, Ariz.-based company's three open-pit copper mines, Arizona smelter, Amarillo, Texas, refinery and an inactive copper smelter in El Paso -- despite the fact that Grupo México claims it would better that offer. The parent says it would spend $2.7 billion in cash and has ready access to $5 billion more to back that up.

A further complication: a jury trial that started May 12 in U.S. District Court for the Southern District of Texas on Asarco's $10.5 billion fraudulent conveyance lawsuit against Grupo México as related to the Southern Peru transaction. A decision in that trial is expected this summer.

"This has been like a really big family feud between Asarco and Grupo México," says George Leaming, an economist at the Western Economic Analysis Center in Marana, Ariz., who started his career as a mining engineer. "Grupo México has been fighting Asarco all the way and doesn't seem to be showing any signs it wants to give up."

Now Schmidt appears to be listening to Mexico City-based Grupo México. Schmidt dropped a bombshell in court on June 13 when he questioned why Grupo México's bid shouldn't be given further consideration and then stalled approval of the bid procedures that led to Sterlite's selection. Schmidt also denied Asarco's motion to file a sole plan until Aug. 1 by limiting its exclusivity to July 2 as he pondered whether to reopen the bidding to Grupo México.

Then he made a startling ruling as he approved bid procedures on July 1. The judge allowed Grupo México to file a separate plan from Asarco, thus setting up a situation with dueling plans.

Asarco's parent has good reason to hang in there, particularly now. When Asarco filed for Chapter 11, copper was selling for $1.60 a pound. Now it's at $3.50 a pound, thanks to rising global demand. Asarco had profits of more than $530 million in 2007 on revenue of $1.68 billion.

Given supply constraints and soaring demand from economies such as China and India, prices should remain firm. According to Thomson One Analytics, the price per pound of copper is expected to stabilize at $3.23.

So Asarco's desire to claw back Southern Peru is understandable, even if it benefits Sterlite. "Grupo México isn't giving up on Asarco, and I think it's a defensive action on their part, because they don't want to give up their interest in Southern Peru," Leaming says. "Southern Peru has three big copper deposits in the Andes, and they've only started on the first two and are said to have enormous reserves in the third."

Incorporated as American Smelting and Refining Co. in 1899, Asarco merged with M. Guggenheim's Sons in 1901 and made its first acquisitions nine years later, when it bought mines and copper smelters in Texas and Arizona.

Grupo México did a $1.18 billion leveraged buyout of Asarco in 1999, outgunning Phelps Dodge Corp. But by the new millennium, Asarco found itself devoid of leadership -- its CEO and most of its directors resigned -- and was the subject of some $6.5 billion in environmental claims from 16 states, the federal government, two Native American tribes and private parties involving 75 sites, as well as nearly 95,000 asbestos claims worth well beyond the initial estimate of $2.7 billion.

When a work stoppage led by the United Steelworkers union reduced copper production by 48%, a filing in 2005 became necessary.

Despite all that, Acarco alleges in its lawsuit that Grupo México's sole intention was to strip it of its majority stake in Southern Peru. "Grupo México structured the LBO so that Asarco assumed huge amounts of debt, [and] Asarco was then left inadequately capitalized to conduct its business," the suit says.

Grupo México formed Americas Mining Corp. in October 2000 to house Southern Peru, also known as Southern Copper Co., and keep it out of the reach of Asarco's creditors and from its massive environmental liabilities.

It wasn't until January 2003 that Asarco sold the Southern Peru stake to Americas Mining for $765 million. As Leaming notes, Southern Peru enabled Asarco to generate a profit even when copper prices fell. "Southern Peru was so vital to Asarco because its operating costs are just a half to two-thirds of what it costs U.S. companies to produce copper, so Asarco was able to use its profits to help pay its debts when it was losing money," he says.

Nor has Southern Peru lost its luster. "Asarco seeks the return of its majority ownership in a company [Southern Peru], whose current market capitalization is more than $20 billion, plus dividends during the last five years and damages based on a state-law claim for breach of fiduciary duty, among other things," the suit asserts.

But the money isn't all that Asarco covets. If it gets Southern Peru back, Asarco, the third-largest copper miner in the U.S., would become a major player in international copper mining, says Juan Pablo Becerra, a Mexico City analyst who follows Grupo México for Standard & Poor's. If Asarco wins the lawsuit, it could conceivably sell a hefty portion of the $8 billion to $9 million that Southern Peru's Andes Mountains mines are currently worth and use it to repay creditors, he adds. "Asarco has a relatively high cost of production, since it costs them between $2.00 and $2.50 per pound of production, but the current price of copper is $3.50 a pound," Becerra says. "We believe copper prices will remain high for 2008 and 2009, and Asarco should then be in pretty good shape, since it's expected to settle what were massive environmental and asbestos claims in bankruptcy court."

Leaming agrees. "Asarco's operations are first-class, and it's been getting rid of that legal cloud piece by piece, but you're never sure until all those claims are resolved," he says.

Of course, there's still the sale proposal from Sterlite, which is guaranteed by its immediate parent, Sterlite Industries (India) Ltd. (Ultimate parent Vedanta, based in London, has operations in India, Australia and Zambia.) Sterlite won in a bidding process that whittled the interested parties down to four finalists. Asarco permitted 14 prospective buyers, including several private equity firms and hedge funds, to perform due diligence and shaved that list down.

Asarco unveiled Sterlite's winning bid on May 23 at the end of a two-day meeting and then gave the other three finalists 90 minutes to raise their offers. None of the three did.

Grupo México was among the final four, along with a partnership of buyout shops, Harbinger Capital Partners and Citigroup Global Markets Inc. and Swiss conglomerate Glencore International AG. Harbinger and Citigroup had acquired more than two-thirds of Asarco's bonds during the bankruptcy.

Debtor counsel Baker Botts LLP didn't return calls, while creditors' committee attorneys Reed Smith LLP and Stutzman, Bromberg Esserman & Plifka PC separately declined comment. Harbinger counsel Kramer Levin Naftalis & Frankel LLP previously vowed not to publicly discuss Asarco, and Grupo México's counsel, Milbank, Tweed, Hadley & McCloy LLP, couldn't be reached.

Still, they're all likely to be vocal in the days ahead, because Asarco needs to get an extension on its exclusive right to present a plan. A plan outline was presented to Sterlite as part of its sale proposal, and the extension is needed so the prospective buyer has time to review it, Asarco says. The acquisition is a plan of reorganization sale, and time is critical since Sterlite has the right to terminate if it isn't closed by Jan. 20.

Ascarco also needs the extension so it can resolve its asbestos and environmental claims and insert an asbestos trust agreement. At filing, Asarco and its nonoperating subsidiaries faced more than 95,000 asbestos-related personal injury claims and 850 toxic tort claims from 75 sites over 17 states. Meanwhile, the company has been working through environmental claims filed by states. (Asarco recently reached an $8.1 million settlement with Montana on claims at more than 40 mines there.)

Grupo México repeatedly tried to file a rival plan, arguing that Asarco is solvent and that the $300 million it initially proposed injecting into it would be enough to pay creditors back.

That offer was hiked, however, in the midst of its battle over Asarco's assets. Grupo México now says it would beat Sterlite's cash offer and bolster it with enough capital to assure post-bankruptcy control. Jorge Alberto Pulid Fregoso, treasurer of Grupo México's Americas Mining parent, said on June 13 that Americas Mining could easily raise $5 billion in 30 to 60 days. "I have spoken with our senior bankers at UBS, who assure me that raising such a large amount of cash will be easy because of AMC's investment grade and available assets," he said.

Grupo México submitted a plan with its bid, which made it to the final four offers, guaranteeing full payment of all claims. Asarco's $28.8 million in secured debt, $265 million in unsecured claims, $187.4 million in environmental liabilities and $74.8 million in asbestos-related claims would be paid whole.

Grupo México knows that proving solvency goes a long way toward getting a seat at the bargaining table. Under the absolute priority rule of the federal Bankruptcy Code, a debtor must pay all creditors in full before shareholders can get a recovery. The rule can be set aside, however, under a deal between unsecured creditors and shareholders trying to avoid often drawn-out valuation hearings. Shareholders would seek to show that a debtor is solvent and that they're entitled to a payout.

Calpine Corp. was a typical example of a debtor that returned to solvency during Chapter 11 and of how it was spared a potentially bruising valuation battle. A deal was worked out between equity holders and creditors, and shareholders walked off with warrants for up to 10% of a reorganized Calpine.

When a deal isn't worked out, it can get ugly. In the Mirant Corp. bankruptcy, shareholders and creditors didn't cut a deal, and the Atlanta utility endured a record 27 days of valuation hearings.

Eventually, Judge D. Michael Lynn of U.S. Bankruptcy Court for the Northern District of Texas in Fort Worth ordered Mirant to update its value by relying on natural gas market prices after equity holders argued that it was tying its use outdated rates. Mirant was required to boost its valuation by $450 million, and shareholders went from a projected wipeout to a 3.75% recovery.

But Grupo México hasn't been able to advance its plan, because as Asarco's sole shareholder, it hasn't been able to negotiate a deal with Asarco creditors.

In fact, creditors seem as angry with Grupo México as Asarco is. The creditors' committee filed a $100 million breach of fiduciary duty lawsuit against nine former officers and directors at Grupo México in August 2007. The suit alleges that they "systematically liquidated" Asarco's most valuable assets and orchestrated the sale of Southern Peru at a below-market price that pushed Asarco into bankruptcy.

"Almost from the beginning, the actions by the directors and officers demonstrated that their loyalties were to Grupo México ... resulting in devastating financial losses to Asarco," the complaint said. "The directors and officers were anything but independent directors of Asarco ... [but] served in multiple capacities for Grupo México, Americas Mining Corp. and Asarco."

The complaint is expected to be heard this summer.

Others have lined up against Grupo México. Asarco defied its parent by signing a $92.5 million, 3-1/2-year contract with major unions that requires union recognition upon reorganization. The United Steelworkers are now aggressively fighting to keep Asarco out of Grupo México's hands.

But Grupo México isn't backing down. The company has objected to the contract and attacked it as giving labor too much say over the reorganization.

And Grupo México has landed a few blows. It succeeded in getting an examiner named in March to probe Asarco's finances, despite opposition from the debtor, creditors' committee, official asbestos committee, most bondholders, suitor Harbinger Capital and the U.S. Trustee.

Grupo México even sought to wrest control of the bankruptcy by petitioning the court to block Asarco from unilaterally acting on creditors' claims without its consent. Once again, big guns opposed it -- the U.S. Environmental Protection Agency, the U.S. Department of the Interior and the U.S. Agriculture Department all objected. The agencies argued that Schmidt had already usurped the parent's control and shifted it to creditors.

Grupo México's motion was denied.

All the lawyering will undoubtedly continue through the summer, even beyond the sale to Sterlite and the fraudulent conveyance suit. Now Grupo México can file its own plan, meaning havoc will likely reign. And where Southern Peru lands is anyone's guess.

"We have Asarco as a U.S. company suing its Mexican parent for its assets in Peru that would belong to a unit of an Indian company if Asarco wins the fraudulent conveyance suit," says Leaming. "What we have is what's been a very, very messy situation that may become a lot messier if Asarco wins that suit and claims its stake in Southern Peru."

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