What’s the biggest risk with $ARG.TO? A follower asked me about Codelco’s right to terminate its contract with Amerigo in advance, and whether that was something to worry about.

Here I’ll explain why I don’t think so, with the caveat that I am not a lawyer and don’t even pretend to play one on Twitter, let alone an expert on Chilean contract law.

Quick background: Amerigo produces copper concentrate from the tailings of Codelco’s El Teniente, the largest underground copper mine in the world.

They have contractual rights to process the fresh and existing tailings from the mine through to 2037, in exchange for a royalty they pay to Codelco.

The contract, most recently modified in 2014, has an advance termination clause that allows Codelco to pull out of the contract for “unforeseen events” or material breaches.

Most relevant today, Codelco has the right to terminate the agreement by end-2021, in which case it would be required to compensate Amerigo with 90% of future project cash flows.

Here’s why I don’t think there’s any need to panic. “Unforeseen events” are typically defined as “acts of god” or force majeur. We are taking about wars, rebellions, major natural disasters etc (not simply a rising copper price)

It’s also key to understand the symbiotic relationship between Amerigo and Codelco. They’ve operated together since 1992. Dealing with tailings is a pain in the ass and Amerigo helps improve Codelco’s environmental footprint.

Also worth mentioning that Codelco is a giant with revenues of over 110x that of Amerigo. Highly unlikely they would want to deal with the tailings themselves. It’s not core to their business.

Bottom line is I’m comfortable holding this one and think it’s dramatically undervalued given the copper price outlook. Check out @puppyeh1 ‘s excellent thread for the basics of why.

And I welcome input from anybody else who has looked at the Codelco agreement. Again I’m not a lawyer, I could be missing something and you should do your own due diligence!