Memorandum by the Assistant Secretary of Commerce for International Affairs (Anderson) to the Assistant Secretary of State for Inter-American Affairs (Cabot)1



  • Chilean Copper

As a consequence of the softening of the copper market, the Chilean Government has accumulated unsold stocks of copper of about 75,000 tons under its present deal with the companies. Up to now, this copper has been offered at 35½ cents FOB Chilean port. A special representative of the Chilean Government, Mr. MacKenna of the Central Bank of Chile, under instructions from the President of the Bank, is in Washington and has made a written proposal substantively as follows:

The Chilean Government will negotiate a new deal with the American copper companies, substituting an income tax at a presently unspecified rate, for the present scheme of requiring the companies to return dollars for Chilean expenses at 19.37 pesos per dollar, and for the present scheme of buying the companies’ copper at 24½ cents for resale at higher prices. The new exchange rate will be 110 pesos to the dollar. The Chilean Government will also concurrently adopt certain anti-inflationary policies, long overdue. The government will also authorize the companies to sell their copper in the normal way at world prices from now on. Pursuant to this undertaking, which Mr. MacKenna insists can be passed quickly through the Congress, the government will press the United States to purchase at world market prices, approximately 100,000 tons of unsold copper (75,000 tons now on hand, plus near-term accumulations).

My impression is that the Chilean Government is, for the first time since 1951, seriously resolved to carry out rationalization of the copper deal with the companies, and has a fair chance of success. [Page 704] There is also some evidence that it may have greater success in dealing with inflation than has been the case heretofore.

It seems obvious to me that under the present circumstances, the U.S. cannot purchase $50 million to $60 million worth of spot copper for fiscal reasons. If we are, therefore, to make any compensatory gesture to the Chileans to encourage them to carry out their part of this scheme, we must devise some alternative idea.

I propose the following plan for debate. The U.S. Government, through ODM or DMPA, propose to the two copper companies, Kennecott and Anaconda, that it would be prepared to execute a “put” to these companies of 100,000 tons of copper at say 25 cents a pound ($50 million). The “put” would be exercisable in whole or in part, only at the end of five years and not during the five years. The companies would agree that if during the five-year period of the ownership by them of the 100,000 tons of copper, they should propose to sell any of the copper, the U.S. Stockpile would be afforded a first refusal at the proposed selling price, less ½ cent per pound. The companies thereupon would make a purchase of 100,000 tons from the Chilean Government at whatever price could be negotiated with the Chilean Government (say, for the sake of this discussion, 28 cents a pound). The companies would thereupon borrow from American private banks on a five-year note $50 million, at say 4%. The note would not be serial, but would mature at the end of five years and would be collateralized with 100,000 tons of copper protected by the U.S. Government “put”. The companies, of course, would be obligated on their own credit to pay interest charges currently on the loan.

The effect of this transaction would be that the companies would put up an initial margin of about $6 million and would be further obligated during the five-year period, if no selling off of copper took place, to an aggregate interest charge of about 20%, or $10 million. The companies’ risks would thus be a maximum of $16 million, if no sales were made during the five-year period, and if all of the copper had to be put to the government at the end of the five years.

It is reasonable to expect that during the next five years, the opportunity to sell or consume this much copper at a price higher than 25 cents per pound (indeed higher than 28 cents per pound), would be presented. This amount of copper is only about one month’s consumption in the United States. To the extent that such opportunities appear and were accepted, the companies’ risks would be progressively reduced.

It is believed that the question of whether DPA funds would have to be obligated pursuant to this deal would be dependent entirely upon whether ODM’s present judgment was that the government would be likely to suffer a loss at the end of five years. If the answer to this [Page 705] question is negative, no obligation of DPA funds would be required. If it is positive, the amount required would depend upon the estimate of the possible loss. Thus, there is a chance that this kind of a transaction would not affect the debt limit problem and, of course, it would, under no circumstances, affect the cash outflow.

We do not, of course, know the reaction of the companies except that we are aware of the fact that the companies have a large stake in rationalizing their deal with Chile, which they have desired for many years. Chile has a substantial stake in accomplishing this rationalization in that a rate of 110 pesos to the dollar for return of dollars would stimulate the companies to purchase materials and supplies in Chile, as against imported.

In view of the fact that Anaconda proposes a sharp reduction in its mining activities at the end of August, there is great urgency in reaching a decision as to what, if anything, can be done in this matter.

Samuel W. Anderson
  1. Addressed also to Assistant Secretary Waugh, Assistant Secretary of the Treasury Overby, Director of the Office of Defense Mobilization Flemming, and Acting Assistant Administrator of the Defense Materials Procurement Agency Gumbel.