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    Grupo Mexico Investors Hit by Asarco Court Battles

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    Grupo Mexico Investors Hit by Asarco Court Battles

    Post by sang_garuda on Thu Aug 28, 2008 8:21 am

    Grupo Mexico SAB may be forced to pay $8.25 billion, or $1.03 a share, and give up U.S. copper producer Asarco LLC because of fights between the companies in two federal courts in Texas.

    Mexico's biggest mining company is accused in a lawsuit of illegally stripping Asarco of its most valuable asset before it put the unit into bankruptcy in 2005. A verdict may come next month. Another judge this fall will weigh competing reorganization plans and decide whether the Mexican company will keep control of the Tucson-based subsidiary.

    ``It would be a very bad situation -- the worst, worst scenario'' for the parent company to lose in both courts, said analyst Rodrigo Heredia of IXE Grupo Financiero in Mexico City, who recommends buying shares.

    Asarco's independent court-appointed directors, who now control the company, are seeking $8.25 billion in actual damages in Brownsville, almost five times Grupo Mexico's 2007 net income. They also want $8.25 billion in punitive damages. Regaining the miner would let the parent end the suit.

    Losing control of Asarco in U.S. Bankruptcy Court in Corpus Christi, Texas, would expose the Mexico City-based company to the risk of damages from the directors' lawsuit.

    The disputes stem from Grupo Mexico's $2.25 billion purchase of Asarco in 1999. The U.S. company claims the buyer left it with insufficient cash. When the parent transferred Asarco's majority interest in Southern Copper Corp. to another unit in 2003, Asarco was already insolvent, its new directors say.

    Insolvency Zone

    Under federal law designed to protect creditors, once a company enters a ``zone of insolvency'' before a bankruptcy, an owner can't strip it of assets. The $8.25 billion demand represents the value of Southern Copper shares and lost dividends.

    Before the asset shift, Grupo Mexico failed to persuade a financial consultant to verify Asarco's solvency, according to undisputed documents and testimony at a nonjury trial in June.

    That amounted to ``damning'' evidence against Grupo Mexico, bankruptcy lawyer Charles Tatelbaum, who's not involved in the litigation, said in an interview after reading court papers. The Mexican company ``has a very significant problem'' if Asarco presented the facts accurately, said Tatelbaum, of Adorno & Yoss in Fort Lauderdale, Florida, who represented creditors in the Enron Corp. and WorldCom Inc. bankruptcies.

    Grupo Mexico has denied wrongdoing. Its chairman, German Larrea, 54, defended the transfer at the trial, saying the move was necessary to lower Asarco's debt, including billions of dollars in asbestos and environmental damage claims.

    Asarco's Payment

    The Mexican company paid about $765 million for the Southern Copper shares, allowing Asarco to redeem some bonds and providing it with no cash, according to court records.

    Asarco ``sold one of their best assets, or one of their good assets, and they've got nothing to show for it?'' U.S. District Judge Andrew S. Hanen asked while questioning Larrea. The judge has said he'll rule by mid-September.

    Southern Copper, a Phoenix-based operator of Latin American mines, had net income of $2.2 billion in 2007, a year of rising copper prices. The metal has more than quadrupled in five years.

    Grupo Mexico through yesterday dropped 49 percent since its 52-week high on Oct. 29, following more than four years of increases. The shares today rose 47 centavos, or 2.8 percent, to 16.99 pesos at 12:13 p.m. in Mexico City.

    They reached a 16-month low Aug. 12, mainly because of uncertainty over the bankruptcy case and a yearlong strike at its mine in Cananea, Mexico, according to analyst Heredia.

    Bankruptcy Focus

    The market has focused on the bankruptcy issue rather than the Brownsville suit, Heredia said. He's one of 11 analysts in a Bloomberg survey rating Grupo Mexico as a buy. Three advise holding; none says ``sell.''

    ``It would be a surprise'' if Grupo lost the suit, Heredia said.

    Grupo Mexico's shares would be hurt should the company lose both court battles, Morgan Stanley analyst Carlos De Alba said in an interview. The market doesn't expect a double loss, he said. ``It's a difficult story to follow.'' De Alba ranks the company as overweight.

    Bankruptcy Judge Richard Schmidt hasn't heard arguments on the reorganization plans.

    Asarco's directors say its creditors would benefit more from a sale to a unit of Vedanta Resources Plc, India's largest copper producer, for $2.6 billion, according to a July court filing.

    Asarco Plan

    Under Asarco's plan, bondholders may receive more than three years' interest on their claims should Grupo Mexico lose the lawsuit. Harbinger Capital Partners and Citigroup Global Markets own about $298 million of Asarco's roughly $440 million in bonds, according to court records.

    Asbestos plaintiffs would collect at least $852 million from sale proceeds. Federal and state governments and two American Indian tribes would be paid about $1.7 billion to repair mining- related damage in Western states. They would all collect more should Asarco win the lawsuit.

    Grupo Mexico yesterday filed an alternative plan to pay creditors in full, reclaim Asarco and begin a process to determine how much it owes asbestos victims and governments for environmental damage. The company claimed in court papers that its proposal is worth a maximum $6.74 billion to creditors.

    Schmidt has rebuffed the parent company's request for renewed control of Asarco. Grupo Mexico offered in June to pay creditors at least $2.7 billion and guarantee the payment with a $440 million deposit. The judge told the company to write its offer into a plan.

    Grupo Mexico's Lawyer

    Grupo Mexico's lead bankruptcy lawyer, Luc Despins, argues the law is on his client's side because Grupo Mexico has promised to pay creditors in full.

    Asarco lawyers say Grupo Mexico intends to regain control before actually paying off creditors, potentially causing a long delay.

    Asarco's creditors are skeptical about Grupo Mexico's reorganization plan, said Robert C. Pate, a retired judge who represents asbestos victims who may develop health problems.

    The company's plan would force a series of court battles over how much to pay asbestos victims and governments trying to clean up pollution, Pate said today in an interview.

    ``This is just a continuation of their litigation plan,'' Pate said. ``They want to litigate the claims of the United States of America until the cows come home.''

    Schmidt is to choose between the plans this fall. By law his decision must be based on what's best for creditors.

    The bankruptcy case is In re Asarco LLC, 05-21207, U.S. Bankruptcy Court, Southern District of Texas (Corpus Christi). The lawsuit is Asarco LLC v. Americas Mining Corp., 1:07-cv- 00018, U.S. District Court, Southern District of Texas (Brownsville).


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