Chile and the United States Copper Companies

Compensating the Multinationals: Chile and the United States Copper Companies Carlos Fortin In 1967 the Chilean government purchased 51 per centofKennecott'sinterestinthe Teniente In 1971 the government of Chile under President company, as part of a global agreement that Salvador Allende nationalized the partly Ameri- included a significant tax reduction for the new can-owned copper companies that made up the joint venture and an expansion programme cost- so-called Large Copper Mining sector (Gran ing approximately $230 million. The price offered MineriadelCobre),namely thoseexploiting for the 51 per cent equity was $80 million, which mines with a production capacity of at least was $13 million more than the total book value 75,000 metric tons a year.' of Teniente. Kennecott had argued that the book value under-estimated the real worth of the fixed The nationalization gave rise to a sharp conflict assets of the company, and requested an outside between Chile and the American companies which appraisal to determine their current value. The resulted in legal and commercial reprisals being Chilean government agreed and an appraisal undertaken by the companies both in the United carried out by a US firm produced a figure of States and in Western Europe, and was by all over $244 million, raising the total book value to accounts an important factor in determining the $286 million. As it was politically difficult for the policy of economic isolation of Allende pursued government to pay more than $100 million, by the American government and by international further tax concessions were offered to persuade organizations with strong American influence. Kennecott to accept that only $160 million be entered ascapital, the rest being imputed as That conflict is now ended following the comple- tion of compensation agreements between the reserves.2 American companies and the present Chilean military regime according to which the firms The sum of $80 million was paid by Chile in cash involved stand to receive far more than under the between 1967 and 1970. However, an additional terms of the 1971 nationalization, the orders of agreement established that Kennecott would lend magnitude being, in fact, comparable to those back to the new joint venture the instalments paid discussed with the companies ten years before. by the Chilean government, plusinterest,to This article will attempt to describe and tenta- contributetotheexpansionplan.This loan tively evaluate the agreements, placing them in amounted to $92 million and was repayable over the context of those previous instances in which a period of 15 years starting in 1971 with an issues regarding paymentfornationalized annual interest of 5+ per cent per year. As far as property were raised between the Chilean govern- Kennecott was concerned, this was in fact the ment and the American companies, and suggesting payment for the 51 per cent interest acquired by factors that may account for the high repayment Chile;Chile, however, had had effectively to terms agreed upon. transfer that amount from its own resources to the new company in the preceding four years. The Frei agreements: valuation and compensation Other featuresoftheagreement includeda The question of the compensation for the acquisi- reductiôn in Kennecott's tax burden as minority tion of American copper interests in Chile arose shareholder from over 80 per cent to 44 per cent for the first time as a major political issue in of gross profits, a level that was furthermore connectionwiththepartialnationalizations guaranteed by the government for a period of effected by the government oftheChristian 20 years. Additional contracts gave Kennecott the Democratic President, Eduardo Frei (1964-70). 2 This valuation has been thesubjectof considerablecon- troversy. The point has been made that if the book value was I The companies included were those operating the mines of less than thereal worth of the assets, this could only be ChuquicamataandSalvador,inwhichTheAnaconda due to accelerated depreciation or to imputing to operational Company was a 49 per cent shareholder; El Teniente, with costs expenditures that were really ofa capital flaturC. In a 49 per cent equity belonging to Kennecott Copper Cor- both cases there isavoidance of taxes by means of artifi- poration; and Exotica, with a 75 per c2nt Anaconda interest. cially inflatingcosts. In the first case taxes are postponed, Also nationalized was the Andina company, in which Cerro and hence the procedure amounts toan interest-free loan Corporation had a 70per centinterest and which was ofthe government tothe company; in thesecondcase contemplating expanding above the 75,000 metric tons mark capitalizationtaxesare avoided altogether.See K.Griffin, within the next few years. Together the five mines accounted Underdevelepment in Spanish America, (George Allen and in 1970 for 78 per cent of thetotal copper production in Unwin, London),1969,p.154.E. Novoa. La batalla por Chile and for59 per cent ofthetotal valueof Chilean elcobre (Editorial Quimantu,Santiago),1972, providesa exports. general description and critique of the Frei agreements. 23 management of the mine and control over the the amount of about $175 million corresponding sales of copper and the purchase of inputs for to 24 six-monthly instalments beginning June periods of between 10 and 20 years. 1970 with an annual interest of six per cent. Anaconda retained the management of the new Taken as a whole, the terms of the agreement companies and the sales of copper and procuring with Kennecott offered quite generous compensa- of inputs for a period of eight years, and was to tion for the transfer of ownership of 51 per cent be paid for these services a fee of one per cent of of itsinterest in Chilean copper. In the end the total value of sales per year. KennecQtt had written off its books assets for As for the remaining 49 per cent of the shares $34 million (51 per cent of the 1966 book value) Chile undertook to purchase them by 1982, at a but had added a credit for $80 million and price based on the annual averageprofit of retained a 49 per cent interestin a company Anaconda as minority shareholder from January which was now worth $286 million. At the same 1970 to the time of the purchase, multiplied by a time it had secured for its Chilean subsidiary a factor of eight.4 It was also agreed that a pref er- twenty year tax regime that cut its tax liabilities ential dividend be established in favour of Chile inhalf,and had retainedcontroloverthe on the profits of the joint ventures whenever the operation of the company for a similar period. price of copper rose above 40 US cents per pound. This agreement was conditional upon The reason for this generosity on the Chilean side Kennecott accepting a similar arrangement, which is probably two-fold: on the one hand, the Frei it eventually did. government badly needed to be able to show a concrete result ofits much emphasized copper In some respects the agreement with Anaconda policy, particularly in the face of hostility both in 1969 was more favourable to Chile than the from the parties of the left, that were pressin.g for agreement with Kennecott in 1967, and no doubt complete nationalization, and from right-wing this is at least partially due to a political climate sectors, that were strongly against Frei's other generally hostiletothe companies mentioned main policy, the agrarian reform programme; on above. Thus book value was used to determine the other hand, the world copper price level and the price of the 51 per cent; the preferential its future prospects appeared good. In fact, the dividend in favour of Chile was established from actual level of prices far exceeded the expectations the outset; and no down payment was contem- of the government negotiators, and as a result plated. In other respects,the two were quite Kennecott enjoyed extraordinarily high profits in similar:again control over management, sales 1967-69. The same was the case with Anaconda, and purchases remained inthe hands of the which in 1967 had refused to accept joint owner- American company. In fact, here Anaconda fared ship with Chile and had offered instead, in ex- better than Kennecott, asit was to be paid a change for tax reductions, an investment pro- handsome fee for the services. gramme of about $126 million to be financed from its own resources.3 In one main respect, the Anaconda agreement was more favourable to the company than the Kerinecott one, particularly considering Anacon- lt was precisely the political furore prompted by da's corporate policy of rejecting partial divesti- the windfall profits of the companies that forced ture as a more or less permanent solution, and the government in ¡969 to introduce changes in that is in the price to be paid for the 49 per cent the companies' regime. This time it was. agreed of the equity. Even though Anaconda did not that Anaconda would sell to Chile 100 per cent challenge book value as a true reflection of the of itsinterestin Chuquicamata and Salvador. worth of theassets, the system agreed upon This would bdone in two stages. In the first, could have easily yielded figures more than twice following the Kermecott model, joint ventures as high as book value, depending on the price of were constituted and Chile bought 51 per cent of copper and the time of the purchase. the shares. The price paid was based on the book value of Anaconda's subsidiaries at the end of The 1971 nationalization: compensation and 1969. Promissory noies were issued by Chile in excess profits Salvador Allende took office on 4 November, 3 The last element of the 1967 agreements was the establish- ment ofajointventure with Cerro Corporation for the 1970; the bill proposing the nationalization of the exploitationofthe RíoBlanco mine.

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