May 26 (Bloomberg) -- An affiliate of Harbinger Capital Partners won court permission to try to reorganize Asarco LLC, making the hedge-fund manager the third group trying to take over the bankrupt copper miner.

U.S. Bankruptcy Judge Richard Schmidt said today he would allow Harbinger to compete against Asarco’s parent, Grupo Mexico SAB, and Sterlite Industries (India) Ltd. with a proposal to spend $500 million to reorganize the mining company and pay creditors. Schmidt overruled objections from Asarco and from an attorney for asbestos creditors allied with Grupo Mexico.

“This is clearly a bottom fishing value,” Asarco’s attorney Shelby Jordan said today, referring to Harbinger’s $500 million opening price.

Harbinger said Citigroup Global Markets Inc. would also participate in its reorganization plan. Harbinger and Citigroup together are owed about $300 million, according to court records. Harbinger attorneys said the hedge fund was hoping another entity would offer more by Aug. 31, the deadline to reorganize Tucson, Arizona-based Asarco set by all sides in the case.

Schmidt ordered Harbinger to work out the logistics of providing a detailed description of all three plans to creditors, who will be given a chance to vote on the proposals. He said that Harbinger should be willing to provide some kind of financial guarantee that would fulfill its financial obligations under its proposed plans.

Bankruptcy Code

Harbinger attorney Gregory Horowitz said that the hedge felt obligated to file its own plan after it was persuaded that the rival proposals could not meet the standards in the U.S. Bankruptcy code.

Horowitz claimed that Schmidt will be forced to reject the Sterlite proposal when it comes to court because of the way that reorganization plan handles the claims of those injured by the asbestos products of an Asarco unit.

The plan by Grupo Mexico’s U.S. unit cannot be approved because it would allow Mexico’s biggest mining company to keep Asarco even though all creditors would not be paid in full, Horowitz claimed in court. Under the U.S. Bankruptcy Code the owner of a company cannot retain its equity unless it first fully repays the company’s debts.

Creditors will be allowed to vote on the three plans before Schmidt makes a final ruling on which one he will approve.

Asarco Creditors

Asarco’s creditors would get $1.3 billion in cash under Grupo Mexico’s plan, the Mexico City-based company has said. Grupo Mexico said its plan fully repays all creditors.

Grupo Mexico put Asarco into bankruptcy in 2005 and then lost control of the company when Schmidt approved an independent board.

That board has proposed selling Asarco to Sterlite Industries for $1.1 billion in cash and a $600 million note.

Creditors are split between the two plans. Government agencies responsible for cleaning up Asarco’s pollution support the Sterlite sale, while people harmed by the asbestos products of an Asarco unit support the Grupo Mexico plan.

The case is In re Asarco LLC, 05-21207, U.S. Bankruptcy Court, Southern District of Texas (Corpus Christi).

To contact the reporters on this story: Steven Church in Wilmington, Delaware, at schurch3@bloomberg.net;

Last Updated: May 26, 2009 17:16 EDT