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7/19/08

LatAm bonds overview: La plus ça change..........

This post gives a quick'n'basic overview of the last 12 months in the LatAm bonds market. Specifically, it looks at how the JP Morgan EMBI+ rating, normally known as "country risk" has evolved in the last 12 months for the countries with commonly traded bonds. All the charts are pretty small, but you can click them to enlarge, so no worries.

This first chart gives the general overview of the bonds in question, namely those of Argentina, Brazil, Colombia, Ecuador, Mexico, Peru and Venezuela (before you ask, Chile's bonds are a rather slight market on the world stage and don't make the cut). Also included in this messy chart are the EMBI+ average and the EMBI+ LatAm average. Also, full apologies to Colombia for the mis-spelling in the chart; the service I used either needs to run spellcheck or get an education.

What we clearly see is a group of four "serious" bonds, namely Brazil, Colombia, Peru and Mexico, then the other three ugly sisters with much higher risk ratings, namely Argentina, Venezuela and Ecuador.

So zeroing in on the 'exotic' three....

.... we see that although Ecuador has lost some ground recently (and remember Otto called it so), it has had by far the best year of the three. Venezuela and Argentina country risk has basically doubled in the same time. The main risk for all three countries is, according to JP Morgan, the inability to pay if the countries' main commodities suffer a prolonged downturn. So if anyone reading this thinks oil is going to drop under $80/bbl and soya under $6/bushel they can join in with the fears of the risk raters, but otherwise just read this for what it is, namely three countries that reject the Northern way of doing business.

As for the 'serious' regional bonds......

.......it's notable how all four countries move in lock-step. This suggests that it doesn't really matter if you have high interest rates (Brazil), a nasty bout of inflation going on (all of them really, but Colombia is worst of the four), oil production sliding fast and drug-gang deaths soaring (Mexico), Presidential approval ratings (the 50 point difference between Uribe at 80 and Garcia at 30) investment grades recently awarded (Peru and Brazil) or if MSCI is thinking about downgrading you from "emerging market" to "frontier market" (Colombia). The only thing that matters is "we buy LatAm or we sell LatAm, dudes?", because it's pretty clear that the braces-wearing Gekko-world doesn't care much about the macroeconomic changes seen in the four countries.

This news will come as a downer for Peru, a country that suddenly thinks it's special. It'll come as a downer to Brazil, a country that has thought itself special for a full century. But Mexico won't care and Colombia is Colombia...it's just different.

Finally, here's the Latam EMBI+ rating compared to the global average. And what this says is "dudes, it's not just this region that's the same...it's the whole world. Just one big bonds market. Either none of you default or you all default."

So the question is "why hold Peru bonds when you can hold Brazil bonds and get more whack per buck?" And why listen to the EM bonds expert explain why s/he's trimming their Mexico exposure and adding to Colombia? It's all angels and pinheads, anyway. Right now the only bonds that would tempt me value-wise are those of Ecuador. With sovereign debt to GDP ratio dropping and oil revenues going through the roof, the chances of default while oil stays over $100 (or maybe even $80) are precisely zero. Why own Peru at 200 basis points spread when Ecuador gives me another 4.5% interest per annum? But right now, the Ecuador election-to-come puts me off owning its debt. Once the air has cleared in October, Ecuador paper should be a worthy addition to your LatAm portfolio.

Resignation Sweepstakes: The new Argentina game

After the unprecedented success of out "SoyaWars™" series which managed to keep going for no less than 126 days, today we shift slightly and start the "Resignation Sweepstakes". The rules are simple; just pick the Argentine politico who will resign, get the boot, or even disappear (ahem) first. To help you out, photos and offered prices come at no extra charge. ¡Buena suerte!

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Alberto Fernandez 8/11 favourite
Tough life......

Our current frontrunner is Cabinet Chief Alberto Fernandez. Last seen Friday almost literally running out the door of the 'Casa Rosada' after declaring the export tax law null and void, he's likely to be the victim of his own fat mouth. Otto reminds viewers of his near legendary foot-in-mouth line from July 3rd, which compares to the casting vote made by Julio Cobos that shot the law down.

" (Julio Cobos) has no legislative function, no vote, no opinion...can't do anything like that..."

Red hot favourite to "spend more time with the family".

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Julio Cobos 6/4
Hello? Job centre? Julio here........

Second favourite is the soon-to-be-ex VP Cobos. You don't need to be a close follower of Argentine politics to know the guy is toast sooner or later, but the game is to identify the first to go, so at the moment Alberto F edges the Mendoza man. He's quoted in Clarin this morning as saying he'll phone Klishtina in a few days for a chat. Not a likely candidate for "love call of the year", gotta be said.

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Guillermo Moreno 3/1
Moreno displaying his usual attitude to dissenters

Minister of Interior Commerce, ouster of Lousteau, attack dog supreme and one of Neshtor's loyal minions in the Klishtina gov't. Moreno has been hitting headlines for some pretty ugly scenes in restaurants recently, as he threatened to hit other diners and his wife slapped another woman across the face in some scene or other. If Klishtina decides to purge her cabinet of Neshtor-ites, Moreno will be first to go.

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Julio De Vido 5/1
Guess which one is Julio?

The minister for interior planning (i.e. the dude responsible for the energy disaster in the country) is another loyal Neshtor-ite. He's slightly less likely to get the chop as Klishtina likes the guy, too. Still makes the list though, as the whiff of corruption has been hanging round the guy for years. Klishtina could send a message that no one is indispensable by letting De Vido 'enjoy early retirement'.

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Graciela Ocaña 20/1
No snarky comments here. Graciela's ok

Not the most mediatica of the current ministerial show and many would expect to see Anibal Fernandez or some other talking head on the list, but Otto has a sneaky feeling Graciela may be under pressure. Argentina's Health Minister has done a fairly good job so far...gotta be said, but she may be coming in for some flak very soon. The pre-paid medicine companies are about to raise coverage prices by an average of 15% "to cover costs" and if there's one thing we know about the Teflon couple, we know they love a sacrificial lamb when things go wrong. As for that 15% number to cover costs, strange how this gov't insists that inflation is only running at 8%, innit?

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Klishtina Fernandesh de Kirchner 100/1
Amazing what a bit of make-up can do, no?

The Prez herself is a rank outsider at the moment. Very unlikely to see her do a full Evita and sacrifice herself in public, however much she tries to emulate Doña Duarte in other ways.

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Neshtor Kirchner 10,000/1
A month is a very long time in politics....

As President of the Peronist (PJ) party, he certainly has a post from which to step down, but the very thought of Neshtor giving power away voluntarily is laughable. More likely to be hit by lightning while crossing the Atacama desert.

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Place your bets, ladies and gentlemen!

7/18/08

Now Lima is rejecting Alan Garcia

Whatever happened to all the heroes?
All the Shakespearoes?
They watched their Rome burn.
No More Heroes, The Stranglers 1977

There's a long-standing monthly survey done in the Lima area of Peru by the "Universidad Catolica" (PUCP), and along with the Apoyo survey its results is one of the most respected polls in the country. You can access this month's version by clicking here and here (the PDF comes in two parts). I thought I'd take a closer look at the numbers this month, because the results clearly show how 'The Other Peru' is getting pretty fed up with being told how things are better for the country when they are most clearly not.

Kicking off with the classic headline number of Presidential approval....

....it looks like even the normal Garcia stronghold of the Lima region is turning its back on Alan. While you look at this chart, remember that this is one of his best areas in the whole country, and the last national survey gave him 30% support at the same time Lima+Metro gave him 37%. With six points lost since then, Alan at 25% for the whole of the country would be a fair guesstimate. By the way Mini-me Del Castillo scores 24%.

But if we look at the socio-economic breakdown of that Presidential approval.....

....we can see that what's left of Alan's approval is propped up by the high strata. The D and E levels approval is down to a miserable 15%, while the higher earners still rate Garcia at 46%.

This result is backed up by two other findings in the survey:
  • When asked if things economic are better now than 12 months ago, 39% of A/Bs said "better or much better" and only 26% said "worse or much worse". Whereas in the D/E strata, just 15% said things were "better or much better" than a year ago and 63% said "worse or much worse".
  • Looking to the future, 37% of the A/B strata said they expected things to be better in a year's time and 15% said things would get worse. In the D/E strata the results were again reversed, with just 25% saying things would get better and 39% saying they expected things to get worse in the next 12 months.
This lack of hope is, of course, directly related to the industrial unrest we've seen mounting during the Garcia administration. Stats from the Peru gov't statistics office (INEI) show increases in figures for strike actions and hours lost due to industrial actions in the last two years. By way of perspective, the final 20 months of the Toledo gov't produced 737,800 lost man hours. The first 20 months of the Garcia gov't that followed produced 2,959,500 lost man hours.

The end of the Fujimori reign (1998-2000 approx) was turbulent, but things were relatively quiet (bar two big spikes caused by strikes against Toledo in 2003) until Garcia took control. Since then, industrial disputes have shown a resurgence, and it should be stressed that the official gov't figures used do not yet take into account the very recent general strike, agro workers strike and mining strikes of this month and the month past. Pencil some big bars on the end of that chart, dude

On the other hand, lack of a credible opposition plays into the hands of Garcia. This chart shows the approval ratings in the Lima+Metro area of three key opposition leaders.

Ollanta Humala is the leader of the Nationalist Socialist movement, and continues to be extremely unpopular in the capital*. Lourdes Flores Nano is a prominent leader from the right wing who was pipped for second place by Garcia in the first round of the 2006 elections. She has sustained support in the capital, but her brand of politics is not very popular in Peru's provinces. Alejandro Toledo is of course the ex-President, and is enjoying a bit of a comeback in popularity in recent months. This compares to the (literally) single digit approval ratings he scored while President. It seems like people are now comparing him to what they have now and thinking "Y'know what...he wasn't that bad after all." But all the same, none of these can get over 50%, and that leaves room for an "outsider" to make a run at the presidency next time round, methinks. Yehude Simon is a name that was mentioned to me by a smart gentleman nearly six months ago, and since then I've been quietly impressed by what I've seen. Just a name for the notebooks, people.....

The bottom line to the present feeling in Peru is that of ever increasing anger and frustration with Garcia. Other results of the survey show that most people think his government tailors decisions and legislation to suit Lima over the rest of the country, and looks after the rich sectors and the foreign companies before the poor and the local companies. Slowly but surely hope for the average Joe in Peru is being eroded, and that's the way that real trouble starts. If Garcia is as good as his word (well, he isn't, but it's just a turn of speech, ok?) when he says he wants the next gov't to continue on the same path, he'd better make an effort to help the lower echelons in Peru and he'd better do it quick. Otherwise he'll be most remembered as the President that opened the door to the extremists....again.

*And rightly so. The guy's a dick

UPDATE: Good news for all Spanish speakers. You can now get a better, more academic and wiser take on the current survey results by high-tailing it over to Jurgen Schuldt's blog, and you can get there by clicking right here. Highly recommended.


Trading Post (yawning edition)


I put in a stink bid for FCX, but I doubt it'll fill now. It'd only be a small trade anyway.

The junior miners sector is being overwhelmed by apathy again. A few are up, a few are down, but the lack of volume in 97% of the stocks is the only thing that matters. As just one example, I could point to Vena Resources (VEM.to) and go whoopy doopy about its 5.8% rise today, but as it's only done 41k shares the next trade coud easily whack it back to UNCH. And be clear; that's just one example of many.

There is one stock I follow closely that has been strong on good volume today, but as it seems to dump every time I mention it I'm not going to mention name nor ticker. But if you look at yesterday's scrawls you'll see which one i'm talking about.

Not a word on the Ecuadorian mining law, and sources have dried up on me, too. Another bummer. More patience needed, both my end and yours.

Amerigo (ARG.to) has dropped away after showing signs of life earlier in the week. Another good exmaple of the lack of love for small miners, be they producers or not. When the earnings are printed at the end of the month nobody should be surprised about a good showing. But will anybody care, that's the big question?

It's Friday. You can tell by looking at the market. The most exciting thing that's happened to me today (so far) is the tuna+mayo sandwich I had for lunch. Have a good weekend, dudesses and dudes. May all your dreams become reality in the next 72 hours.

Vale (RIO) bidding for Freeport (FCX) is the big rumour down here

Word is zooming around that Vale (RIO) is going to bid for Freeport (FCX) after all. FCX stock suddenly took off at the same time, climbing over 8% in about a nanosecond. The stock then fell back a bit and stands up 5% on the day. To dampen the rumour slightly, it should be noted that volume is not especially heavy in FCX today.

My first reaction is that it's not a very good fit. After being rebuffed by Glencore on its bid for first choice Xstrata, rumours about Freeport being in RIO's line of fire surfaced soon afterwards. But then attention turned to Anglo as the target. Now with this very strong rumour today it seems RIO has been knocked back yet again by Anglo, and may finally be plumping for its third choice.

FCX is heavily reliant on its Grasberg open pit in Indonesia. Copper accounts for 60% of its revenues, with gold accounting for the second biggest chunk.

I hasten to point out that all of the above is based on rumours only. There is no official word from any source right now so be very careful. However, this one has "real deal" feeling, gotta be said. DYODD

Discloure: No position in either of 'em.

UPDATE 1PM: This is the link to a Bloomberg note that has Vale denying the rumours. Note the cute use of semantics by the Vale spokesperson "We are not in talks (obvious...they've talked before..you think FCX materially changes inside a month?) and denies it has made an offer (obvious...we'd know that by now...but what about the near future, dude?). This kind of denial-that-is-not-denial is a clear tactic to stoke up interest in the deal. Makes me want to buy some FCX here.

By the way, the Bloomie note also has some suit from UBS quoted as saying the deal would be "a good fit" for Vale. I'd like to know what he was smoking when he wrote that. If his idea of good fit is "well, they both do metals, dude", then yeah, it's a better fit than RIO buying Hasbro or Bed Bath and Beyond. But apart from that.....good fit? And you might like to know that pumper supreme Jim Cramer has bought FCX today, too.

Colombia shows signs of recession

This report from Reuters caught my eye yesterday, that points to Colombian industrial production down 4.3% year on year. That's a pretty hefty drop, and the blame is laid at the door of the local car industry which relies heavily on exports to maintain its rhythm.

The combo of a US slowdown and newly introduced import restrictions in Venezuela has put the dampers on Colombia somewhat. The USA woes are known to all, and the US is Colombia's biggest customer. But as a quick aside, in February 2008 Venezuela cut import limits on autos from Colombia and has insisted that more cars for its market are made in the country....and it's a policy that has worked as GM for one shifted much production to Venezuela...betcha they didn't tell you that one.

Back to Colombia, and the problem of rising inflation and slowing production is likely to put pressure on the country's currency in the weeks to come. The normal device for combatting inflation is raising rates, but with negative growth already, the chances are that the Central Bank will think it has already applied sufficient brakes to the economy. A bit of a conundrum. Noteworthy is how those LatAm countries that have commodities as their main economic drivers are doing so much better than the others, isn't it? At school they always taught me that commodities were the cyclicals. This time it really is different, ya knowz.

Presidential whispers

Ever wondered how diplomacy works down here? How you manage to get a message to and from your worst enemies? It works like this.

Last week, the dude with the glasses went to visit the other dude for a nice long chat.

Then the other dude went visiting his pals, and last Tuesday these three dudes got together.

Then this dude got his map out....

.....and decided to go see these two dudes.

So today (Friday 18th) these three dudes....

..... get to talk about what the dude with the red shirt was talking about with the other two dudes, especially this dude.


So then this dude....
.....goes to see these two dudes....

......next week (on the 20th July, to be exact), and he can tell them both what the other dude told him about what went on in the meeting with the first two dudes. Cos this last dude gets on with everybody.....

And I mean everybody
Can somebody please buy these dudes some secure cellular phones?

7/17/08

Gold Hawk Resources (CGK.v) in the news (and it's not good)

As well as making the PR circuit news tonight with the announcement that it has closed its $3,3m placement successfully, Gold Hawk Resources (CGK.v) has suddenly become a whipping boy in the Peruvian press. This is the link to a cached version of a report in Peru's widely read "Caretas" magazine dated July 17th entitled "Time Bomb". Caretas states that the tailings dump at the Coricancha mine (100% owned by CGK.v) has been declared unstable by the Peruvian authorities, something that readers of this blog already know (due to this post last week).

However, the thrust of the Caretas article is that the tailings dump in question may collapse and contaminate the River Rimac with highly toxic waste at any moment, and as the Rimac is the main source of fresh water for the Capital city of Lima, it presents a serious health hazard to the population. What is more the blame is being laid at the door of Gold Hawk by the author of the Caretas report. Journalist Roberto More writes (Otto translation)

"In February 2007 the Canadians renewed extraction activities at the old mine and irresponsibly accumulated the tailings at the old tailings pond. As time passed, the extra weight destabilized the uncommon mass of mining waste."

In fact, CGK has complied with every environmental edict imposed upon it by the Peru gov't. The tailings dump was examined by the relevant Peruvian authorities and given the green light by that important third party. This seems to have escaped the journalist. Also, the journalist makes one of the local farmers look like a victim, when it is in fact his over-watering of his tree plantation that is the main cause of the tailings dump destabilization. There are other biased accusations levelled at CGK by the reporter, too. For example, he seems to think that the recent 55m share offering at 6c was something that suited the company, when in fact the total opposite is true.

All in all, it is horribly biased and unjustified journalism, but unfortunately Caretas magazine carries a lot of weight in Peru. And the Caretas story has already been picked up by Peruvian TV, with reporters stretching the truth even further and saying that the tailings dump may collapse in the next few hours or days. Images of eight million people dying of water poisoning being conjured in the local press will do wonders for that program's ratings, no? If it bleeds it leads........

Gold Hawk now has a public relations mess on its hands, and it needs to address the false accusations and biased press immediately.

Klishtina stomps her feet and sez "not fair"

À la recherche du temps perdu

Klishtina is not a happy chappie. Here's the link to the Clarin report of her speech tonight, and no doubt there will be English versions floating around soon enough. She didn't mention Cobos by name, but lines like "Some not from our party have accompanied me, and others that were with us have defected" don't need a mountain of analysis, dudes and dudesses.

How does this sit with soon-to-be-ex-Veep Cobos's "The President will understand me" line from this morning? Answer: Not. As a smart dude said to me this morning, there will be blood. Sorry Klishtina, but after the way you and your government has treated your UCR Veep, it's way too late to try and claim the moral high ground.

Aurelian's press release, and a few ciggy pack musings

I am the operator of my pocket calculator

Aurelian (ARU.to) released this PR after the bell which, although technical in nature had a little pearl tacked on the end. The release gave good but wonky news about the trial recovery rates for gold at Fruta Del Norte in different rock types, but also handed out a bit more information about the main body of the FDN deposit. According to the PR, roughly half the 13.7m oz Au resource is contained in 11MT of rock (of the 58.9MT total orebody). If we take that as precisely 50% of the resource, that means the average grade of the 300m "sweet spot" at FDN is 19.3g/t Au. Very sexy. I was using 15g/t up to now.

So let's run some very ballpark numbers and see what the fuss is all about, shall we? Let's hypothesize a 5,000tpd processor on top of that orebody, assume 90% recovery rates and see what happens:

5000 x 19.3 x 0.9 = 86,850

86,850g = 2,792 oz gold per day

365 days = 1,019,300 ounces of gold per year

At let's say $950/oz, 1.02m oz Au is worth....errr...a lot....a very lot....... like......dude.

Just for fun, let's say the cash cost comes in at $400/oz (it's likely to be much less) and Ecuador gov't gets very greedy and takes 60% away from Aurelian (again, this really is a worst case % rake). According to my casio, under those circumstances and the present share count, ARU walks away with a U$1.55 annual EPS.

Not look at what forward PE multiples are used to value gold miners. Just a few examples:

Buenaventura (BVN) 13X,
Yamana (AUY) 14X,
Newmont (NEM) 16X,
Barrick (ABX) 18X,
Kinross (KGC) 20X,
Goldcorp (GG) 37X,
Gold Fields (GFI) 11X

Let's throw ARU in at the low end, yeah? So Aurelian at Fruta Del Norte, under the heaviest tax burden imaginable and with a much higher than anticipated cash cost....worth 12X $1.55? Yeah, $18.60 will do me nicely. I'm looking forward to reading that mining law!

Meanwhile that 11MT high grade orebody processed at 5ktpd gives a deposit life of around six years. Once that 11MT is used up, the processor gets enlarged (to let's say 10kptd) and the other 47MT is put through. Total mine life 19 years with the present resource numbers.

So what we have is a company that will turn into a veritable licence to print money even if the Ecuadorian gov't of Correa gets mega-greedy and costs run 50% greater than expected. We also have a country that is committed to fostering its mining sector as long as the foreign mining companies are prepared to play ball. We have a company in Aurelian that has the best possible community relations with the people that really matter (ie the people that live round the area). Most importantly, bluesky potential at FDN goes way beyond the silly little numbers I've stuck together here, because if FDN stays at 13.7M oz Au, I'm Chinese*.

So tell me, do you own shares of Aurelian Resources yet? If not, why not?

*I'm not Chinese

Argentina: Reactions from everyone except the President


It's 1pm in Argentina, and the silence emanating from the Presidential Palace is beginning to roar. We've had:
  • Bs As Province governor Daniel Scioli saying that last night's vote shouldn't be dramatized (which is a real turnaround from the show Neshtor put on just two days ago).
  • Opposition stalwart Elisa Carrio saying plenty of things with the word "historic" included.
  • Julio Cobos saying that he won't resign. Well yeah...he would though, wouldn't he?
  • Various bit-players adding their two cents worth
  • etc
FWIW, I will agree to disagree on several points made by "Latino Observer" but I must oppose the point he made about Cobos perhaps being offered incentives by the agro boys. I've seen recordings of his speech made last night, and also the way he was called upon not once but seven times to vote before he made his stand. It's clear that he was speaking from the heart and not the wallet. If his reasons were purely financial, it was an acting performance that ranks up with Heath Ledger's Joker. Nah, forget that line of thinking. Cobos looked deep into himself and not his back pocket before voting last night.

Also, the biggest loser out of all this is, no doubts, Nestor Kirchner. His dream of dynastic rule is now over. Also, the realization of the loss of face incurred by Alberto Fernandez is beginning to sink in (as mentioned here this morning). The clock is ticking on Cobos and Alberto.

Argentina is now awaiting word from Prez Klishtina herself. This is a good time to point out that constitutionally-speaking only the President has the power to disable the export tax law as stands. Her reaction on this issue will set the scene in Argentina for the next 3 years. It's that simple.

UPDATE 2:30pm EST: Word is that Klishtina will make some sort of speech, or announcement or something at 6pm local time (that's 5pm EST). Let's hope she is "Presidential".

Argentina's soya war is now out-and-out political

GUEST BLOG GUEST BLOG GUEST BLOG GUEST BLOG

Aaaaaaaaaaah........ relief from Otto again! A regular reader wrote me a mail this morning on the Cobos drama, and because his observations were different from mine and very sharp, I asked him if I could post his mail up here. He came back with one better; the note that follows. So thank you "Latino Observer" for taking the time out and giving us another angle on the whole Argentine Agro happenings. Enjoy!

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Argentina's soya war is now out-and-out political

Cristina's government suffered a setback in the early hours of July 17th by losing the Senate vote to approve the soya export tax legislation. The vote was a 36 - 36 tie but Vice President Cobos' casting vote went ….TO THE OPPOSITION, thus defeating the government's proposals.

Veep Cobos' "betrayal" will stir up a political shit storm. We all know that this is not just about taxes and will now become an even more political conflict than it was before. Cobos should be out on his ear in double time. The question is whether he was "rewarded for his vote" by certain economic interests?

No doubt the Argentine media which is clearly anti-Cristina will portray this as a "fracture in the government ranks"; hence political crisis; hence government weakened; this will keep up the pressure on Néstor and Cristina, and in this way maintain indecent historical economic privileges. We will see the outcome shortly, but Cristina's vision of a "new more equitable Argentina" is certainly on hold for the moment.

Cristina's government is facing what Venezuela did in 2001/2003. Chavez passed 49 new laws which prejudiced the ruling oligarchy's interests and so they tried an ouster. Well, not try, they did overthrow him for 47 hours.

There is a similar scenario in Argentina as social conflicts and polarization sets in, especially if the government tries to revive the tax-on-soya legislation. It is obliged to do this in order to have enough income to institute effective social/health programs and in this way revive its flagging popularity and set the stage for Néstor's re-election in 2011.

With soyabeans reaching more than US$15/bushel on the CBOT – the highest level since the Soviet Great Grain Robbery of the early 1970's, Argentina's farmers are raking in billions of dollars. Maybe, they could offset any future conflict with Cristina, if, for example, they made some "voluntary social contributions" to Argentina's poor and excluded? This is very unlikely but it would certainly take the wind out of Cristina's sails.

What is almost incomprehensible is that the Argentines have very, very short memories. The middle classes are supporting the agro boys when, back in 2001, the banks (same economic and political class as the landed oligarchy) shipped all the dollars out of the country in armored vehicles driven to Ezeiza airport, ripped off middle class savers and depositors and so on. There was no law to prevent dollars being flown out of the country, so nothing "illegal" was done. Amazing!?

Now, the historical oligarchic political class which includes the big agro boys, is being supported by the middle classes who were shafted themselves by this very same political class. This is tantamount to self flagellation and can only be explained by 1) the effect of the anti Cristina and anti Néstor media and 2) a general scorn by the moneyed classes for the destiny of their poor countrymen 3) historically Peronism screwed up left and right politics which are not clear cut.

With all the mainstream media supporting the agro boys (as they did with Menem regime, since the media is owned by intertwined economic interests from other financial sectors of the Argentine economy) it's not been too difficult to demonize the government. This is despite the "good intentions" to bring about more social equality in Argentina - as Chavez has done in Venezuela.

You will remember back during the 2001-2002 crisis that there was real hunger among the poor in Argentina, but the agro boys kept on exporting, and exporting. With enough food grown in Argentina to feed 500 million people, how could any government permit hunger? Argentina is not Sudan or Ethiopia, but it could soon be similar to Bolivia, Ecuador and Venezuela when the next battle of government vs. landed oligarchy is announced.

Guest blogger – Latino Observer

Trading Post (green edition)


Call it relief rally, call it "the bottom's in, dude", call it luck, call it what you like. Apart from FAN.to and DNT.to every stock on my long screen is green. w00t

I'm particularly happy bout nailing the bottom in FVI.v (50% luck, 50% judgement), but those aren't for selling into an updraft. I'll happily take profits on other winners, but Fortuna is for keepies. Yesterday A.N Other said to me in a phone call that FVI has put a bit of a ceiling on its own PPS at $2.30 by booting the warrants issue forward (that was due this month). Well...could be, but only for the retail mindset. Instos that hold large chunks of this won't be in a hurry to take profits as $2.30 approaches. All depends on volume, I'd venture to say. Itty-bitty volumes mean itty-bitty players. I's like to see some larger chunks going through, and no matter if the stock trades down a bit when they change hands.

As for other stocks, ARG.to is upping nicely, as is ARU.to from its nasty sell-off yesterday. Still no confirmation news of the mining law from Ecuador. If I hear anything I'll pass it on. NETC continues its rally and is running contrary to a Bovespa in the red. I may take partial profits on that one. On the subject of Bovespa, note the big rally in the airline stocks yesterday (eg Gol, Tam, Embraer).

UPDATE 3:20pm EST: Hahahahahaaaaa! Pride cometh before the fall. FVI touched $1.55, then decided to get whacked all the way down to $1.34. Gotta laugh.....Actually down on the day! I was told the newsletter writer Saville pumped the stock this morning which may account for the early pop. But the oil sell-off combined with the general market attitude shot this relief rally down before it could get started.The bright side is that all the itty-bitties that wanted out have been shown a wide open door today and could take the prices offered on the way up, or finally panic themselves out of the stock on the way back down. Catharsis day today? Vamos a ver.....

Merval likes Cobos

Merval five day chart

The Argentine market is rallying on the Cobos drama from last night. Banks and decent stocks like TEO are moving up nicely.

Volumes are still low, so I'd look for a retrace in stocks like GGAL, TEO, BMA etc and maybe look for a short term trade. But there is a lot of uncertainty in the air in Argentina right now, and the country is waiting to see how Klishtina reacts to the heavy defeat handed to her last night by her own Vice President. Those who go long will be looking for her to eschew party politics and say something "Presidential" along the lines of "we have heard the voice of the people and it is my duty to listen to the............etc etc".

I think, on balance, a few long positions in Argentine equities is a good risk/reward play today. Top pick is still Telecom Argentina. Short term trade, no farm bets, DYODD, watch closely how things develop.

SoyaWars™ : more twists than Chubby Checker

Julio Cobos last night, read the jobs
section of the local newspapers

On getting tired I went to bed last night, not thinking for a minute Cobos would have the internal fortitude to vote against the government.


Those au fait with Argentine politics understand what kind of something has just happened here. This simple "no" vote has brought a full-scale crisis upon Klishtina's govemment. Julio Cobos is now not the soon-to-be ex Veep of Argentina, but the soon-to-be-crucified Veep of Argentina. In the context of Argentine politics, this vote against the gov't proposal by the VP of the country is nothing short of sensational.

The reaction in the Agro boyz HQ
(click to enlarge)

The biggest loser may be Alberto Fernandez, Klishtina's cabinet chief and main line of defence. How he must be regretting saying this on July 3rd:

" (Julio Cobos) has no legislative function, no vote, no opinion...can't do anything like that..."

I've checked in with friends in Buenos Aires this morning, and they say everyone's saying "Wow! What happens now? Nobody expected this. Cobos has real balls" and et ceteras. But one thing is clear; Klishtina has been seriously damaged by this Cobos decision.

7/16/08

What to make of Vale's (RIO) share offering?

Her name is Rio and she dances on the sand

Reports tonight are full of how Vale disappointed the market by only raising $11.5Bn in its stock offer. Here's Bloomberg, for example:

Vale $11.5 Billion Share Offering Falls Short of Expectations

By Diana Kinch July 17 (Bloomberg) -- Cia. Vale do Rio Doce, the world's biggest iron-ore producer, raised 18.4 billion reais ($11.5 billion) in a share sale, less than expected as commodities and oil stocks declined.Vale sold 256.9 million common shares for 46.28 reais each and 164.4 million preferred shares ..............yada yada etc etc

Apparently, an unmitigated disaster that will sink the whole region's industry.

Now I'm no great fan of RIO, but this has got to be said out loud. Anyone, and I mean anyone who writes as such is guilty of journalistic and analytic bullshit of the highest order. Raising $11.5Bn at this moment in financial time and space is not much short of a miracle, and RIO should be warmly applauded. Put it this way; the underwriters of the HSBC Bank (HBOS) rights issue will be green with envy right now, and the world will find out why after the details of its four billion dollar bellyflop are published Friday. The only thing RIO is guilty of is dumbass managers who picked the worst possible moment (quite possibly to the day) to go to market.

Why junior miners?

"So what's the obsession with juniors, Otto? Dontcha like Petrobras, or America Movil, or Cemex, or (fill in with own preference)?"

That one gets thrown at me occasionally, and though it comes up more often when the sector hits a slump (like right now) I do understand it's a valid question. So as I got asked (a variation on) it today, here are a few lines to try and answer, hopefully without falling into the mental masturbation trap.

Firstly, commodities are what South America "does well". The world wants 'em and this region has 'em. Thus following on from that, mining is the sector I'm most asked to cover. For every enquiry that passes this desk about a supermarket chain, 25 come for miners.

As for the producing miners, there aren't that many big producers in the region (surprising?). My client base is English-speaking, live on the other side of the Equator and wants stocks that trade in the USA, Canada or London (and in that order, too). Once you've covered bases with PCU, BVN, SQM, RIO, ANTO.L and a few others, the other large mining companies tend to be world players with operations here (NEM, FCX, BHP etc). There are exceptions of course (e.g. AUY, HOC.L, and I can add a few more on this list), but the vast majority of single target plays are juniors or explorers. And although I follow Peru quoted stocks closely (e.g. Volcan*), there's little call for coverage when the companies don't quote up there. It's the way it is.

But the main reason is the value offered by juniors. As a fundamental analyst by trade, the junior mining sector is home to eye-poppingly cheap stocks. The risk is high (and often very high), and also smaller companies get kicked around by political meanderings more easily (just ask ARU holders). But when the ducks line up right, and a company has great numbers, excellent prospects (usually derived from the quality of management involved) and lies low on the world investor radar, the combo offers me the most benefit from my tiny little niche in the world.

The mix is: number-crunching ability in a sector I understand (though I don't pretend to be a geologist, metallurgist etc by any means) living in the region, speaking the language, easy access to site visits, picking local brains, having a handle on the LatAm way of life, politics and all that jazz. From that, seeing which juniors are untouchable, which might have problems down the line, which are good corporate citizens and which are the outstanding companies gets that much easier. And when you sift through the whole region and find a jewel of a company that sits under 99% of people's radars, any short term sell-off is very easy to ride. I don't just pick 'em out of a hat, ya knowz...

So the bottom line here is that I truly believe there are dozens of companies down here that are currently trading at fractions to their true values. I've mentioned some of them here on the blog already. I don't apologize for heavily featuring juniors on this blog. I'm not wildly flag-wavingly proud about it, either. It's just the way it is. This blog started as and continues to be an extension of my normal daily working life. My work is 70% juniors, and aside from the political stuff so is this blog (I think). Pretty simple, in the end.

*though the good news is that the company is considering a London listing now

SoyaWars™ : Looks like the gov't has won


Here's a photo of Senator Ramon "famous for 15 minutes" Saadi. It's highly likely you've never heard of him and after tonight never will again, but he's enjoying his place in the Argentine firmament right now. Saadi was one of the key "undecided" votes in the Senate debate, and he has just pledged to vote with the gov't and for the export tax law as stands. With his vote, the vote stands at 36 to 35, with just one undecided senator left to make up their mind (though all signs point to the gov't baggin this last vote, too). So some two hours before the final votes are cast (it's due around midnight tonight Argentina time), the gov't seems to have won the day by a 37-35 margin. Even if it goes 36-36, it would be a tsunami-sized shock if soon to be ex-Veep Cobos voted against los Kirchner as the official tie-breaker vote.

So if, as looks most likely, the motion is carried 37-35, the tax will have the stamp of democratic approval (whatever that means). The agro boyz may not like it, but by backing down and sending the law to congress, Klishtina has got what she wanted this time.

I say "this time", because although the gov't has won a battle, the Kirchner franchise has taken an almighty beating. The Kirchners have been seriously damaged by this whole saga, and importantly have pushed away a large faction of the more traditional Peronist supporters into the waiting arms of Eduardo Duhalde. Financially the country has suffered through all this, too. Country risk is at new highs, production has been interrrupted and consumer spending is down. The stock market has been ravaged by an investment community that has simply turned its back on the country. Today, the Merval list is propped up on the globalized props of Petrobras and Teneris, and without those companies it would be hitting embarrassing lows.

Klishtina's best hope now is to make sure the country really benefits financially and socially from the extra fiscal income that will come from agro, for example via the much publicized hospitals, housing and roads programs that are to be funded by the extra tranche of grains tax. The pressure is on her government to provide for its descamisados, and with congressional elections a little more than a year away the clock is running.

Charles de Gaulle's famous phrase about Brazil not being a serious country seems to fit Argentina better these days.

UPDATE: 1:40am in Argentina, there are still two or three speeches left to make from the floor, but the big news is that it looks like we have a 36-36 tie on our hands. If so, it'll all be on Veep Cobos as the tie-breaking vote. It's a close on cert that he votes with the gov't but there's just a sneaking outside chance that he'll cause a shitstorm of monumental proportions by going with the agro side. Whatever...rivetting stuff on live TV (if you are into a bunch of old men saying the same thing 36 different ways, that is)

Los Andes Copper (LA.v) today just about sums up the whole junior sector

If any story sums up the mood in the junior mining world at the moment, it's that of Los Andes Copper (LA.v). It released very bullish news today and was "rewarded" by a 10% sell-off in its stock that made me roll my eyes and laugh at the moon.

LA.v 1 day chart

LA.v is busy working on its Vizcachitas project in Chile, and today published this PR (go see) which was very positive stuff for the company. The headline info from the PR is that Vizcachitas now boasts an 43-101 compliant indicated resource of 515MT at 0.39% copper and 0.011% molybdenum, as well as a 523MT inferred resource grading 0.34% copper and 0.012% moly (all at a 0.3% Cu cutoff). So what's that mean in English, Otto? Here we go with some numbers to explain what kind of contained resources we're talking here:

The Indicated Resource (ie a pretty reliable number)
515MT @ 0.39% Cu & 0.011% Mo = 4.43 billion lbs copper and 125 million lbs moly

The Inferred Resource (ie needs more work to turn it into an indicated, but geologists aren't stupid and can read rocks)
523MT @ 0.34% Cu & 0.012% Mo = 4.29 billion lbs copper and 151 million lbs moly

So add 'em all up and we're talking over 10 billion lbs Cu Eq at Vizcachitas (copper equivalent, assuming 1lb Mo is worth 8lbs Cu).

Now, as always there's a hundred ways of cutting and slicing a 43-101 compliant resource report like this one, but let's aim for the blue sky and assume that the 10Bn lbs Cu Eq which includes inferred numbers turns out to be (after more proving up work) the final reserve number at Vizcachitas. Now let's have a look at the company stats
  • Shares out: 78.6m
  • Shares fully diluted 95m
  • Current share price $0.45
  • Market Cap $35.37m
Or in other words, a company worth $35m is sitting on 10 billion pounds of copper. This allows us to do the in situ calculation, and once you do the crunchin' we get each Lb of copper under the ground at Vizcachitas being currently valued at 0.32 cents per pound. Yeah that's right. You sell copper at U$3.80/lb at market, but this copper is marked at one cent for 3lbs. Starting to smell the possible upside?

Of course the copper under the ground at Vizcachitas isn't worth $3.80/lb right now, but if we consider that the latest copper junior buyouts (NOC.to, TYS.v, CUP, GLQ.to) all happened in a range of between 2c and 3c in situ copper, there's plenty of recent precedent to suppose LA.v has a 6X to 10X potential upside. This puts today's sell-off into perspective. Market conditions must be pretty dire to warrant a performance such as that at LA.v today, because less than a year ago this stock would would shot 20% or even 30% higher on news like this.

LA.v 1 year chart

There's plenty of other things to like about this project, too. For one thing it's in Chile, which is about the safest pol risk down here (well, I should say perceived pol risk, but that's another story). For another, it already has partial water rights and has found plenty of underground water besides that...water is a precious commodity in Chile. For another the access is relatively good, and power supply shouldn't pose much of a problem. Management is good and has a proven track record (LA.v's main man is the guy behind the ARG.to success). I could go on, but all I'm trying to whack you over the head with here is "it's cheap", ok?

I'm going to put together a post on the more general aspect of the market for juniors later tonight, but to wrap this post up here's the link to the LA.v website. Go do some DD, dude. This thing is cheap and as long as you possess the necessary patience, buying now is the smart move. It won't stay cheap forever.

Disclosure: part of my long term portfolio

Trading Post (fill yer boots edition)


Fortuna (FVI.v). Yesterday was the nibble, today is the bite. Loading up here. Another batch of fish in dry barrel. See you at $3!

Amerigo (ARG.to) shot out the gate to $1.45, but fell back to $1.39. A great place to add some. Here's the link to today's overview post. The official results come out end of this month. Pays good divis, too.

Southern Copper (PCU) at U$30.87 (works out at sub $93 pre-split). That cheap enough? Yep!! Re-entering here. The same ST trading chunkette used before, with a $34 target pencilled in. Frankly, I'm better at this stock than MELI, and gonna stick with what I know.

Telecom Argentina (TEO): In any normal world, the announcement yesterday of a gov't approved 9% hike on cellphone tariffs would send this stock sailing higher. But this isn't a normal world, this is Argentina. TEO is best described as "best of a bad lot" as Argentine stocks go.

UPDATE: Got all the FVI I wanted at under $1.40. This is a chunky bet. Rien ne va plus, mesdames et messieures

Zinc and Lead and LME Spot and Supply and China and Adam Smith

I've been watching the Zn spot pretty closely for the last few days, waiting for a moment to jump in. I thought the chance had gone begging when spot shot to 90c/lb, but here we are again back at 80c/lb, as the nice people at kitco show with their nice charts.

But there was another interesting development in Zinc and Lead on Monday (cos when it comes to supply, the tow metals walk hand in hand) , and Benito at South-South Cooperation has picked up on it (I knew he would..can't miss a story like this). Check out the link for the full story, but basically the internal Chinese Zn/Pb sector is cutting back production by 10% to shore up prices. Also the note makes a no-so-subtle suggestion that China is mothballing Zn/Pb mines due to the low prices.

What does this mean? Well in the very short term it won't affect spot Zn, but what this is doing is drawing a line under today's prices and saying, "This is as low as we go, boys." With costs rising and spot at 80c there are many Zn/Pb mines that will be running at a loss and will eventually take the temporary closure option. That goes for all around the world, not just in China, dude. Here are some back of ciggie pack numbers to tune you in a little bit:

Mines that run a 10% Zn headgrade ore will still make plenty profit (quick calculation: $60 per tonne cash cost....100kg of zinc per tonne....220lbs....80c/lb.....$176 gross revs....$116 gross profit.....SGA, capex, tax.....$40/MT net for you.....got it?)

Mines that run a 3% Zn headgrade won't like zinc prices right now (quick calculation: $60 per tonne cash cost....30kg of zinc per tonne....66lbs....80c/lb.....$52.8 gross revs.....need I say more?).

These very ballpark numbers show what a fundamental line in the sand looks like. It doesn't take into account the polymetallic nature of most zinc-containing ore, neither does it make adjustments for different costs, tax rates and a multitude of things. It's just a sketch. But all the same, as demand is likely to pick up going into the last quarter of 2008 and supply begins to dry up (the South-South post goes into more detail on the demand side, too), there's plenty to suggest that Zn is putting in a bottom here. Pure Adam Smith stuff.

So what with the low spot prices putting pressure on supply, China already responding to the pressure by dropping production and plenty of other mines likely to follw suit, I think it's about time you took a second look at the beaten up zinc/lead sector and picked up a bargain or two. I like buying when everyone else is selling.....has always worked well for me.

Amerigo Resources: A headsup

Ready for a rebound

Amerigo Resources (ARG.to) is a copper producer with a very different (and smart) business. It takes the tailings from Codelco's El Teniente copper mine and re-processes them, pays a royalty to Codelco for the pleasure and sells the resulting copper and moly. It has been a very successful model and is one of those small copper producers that is always on my radar. It's also smart enough as a company to be a minority shareholder in Candente (DNT.to). Here's the website, so go have a look yourself.

Just after the bell yesterday, ARG.to published these two press releases that made good reading for shareholders. Cutting away the blah blah, the important points were the production numbers of:
  • 7.08M lbs copper
  • 147,508lbs molybdenum
  • booked price of $3.80/lb Cu
  • Energy costs that were down U$4.9m compared to 1q08
So I took ten minutes out yesterday to play with these numbers, and I ballpark Amerigo with a quarterly EPS of $0.0875. If you then take another ballpark leap and project that as a forward PE ratio, it comes in at around 3.9X. Here's a very basic table with some info (that's not the easiest to read, but makes sense if you squint hard enough), and my estimates for 2q08 in the left column. I want to point out that i didn't spend a great deal of time on these estimates and rounded up and down quite a lot, but all the time I think they're close enough for our purposes.

Amerigo Resources ARG.to

2q08est 1q08 4q07 3q07 2q07 1q07
Revenue 34.15 35,933,465 26,974,854 28,536,864 32,011,648 18,171,183
Power costs 9.00 13,903,331 8,288,847 7,781,476 7,821,020 3,609,673
Teniente royalty 5.40 5,146,561 5,836,784 4,654,187 5,291,091 2,891,838
Other COGS 9.00 8,035,829 9,979,043 7,592,407 6,980,611 5,083,299
Gross profit 10.75 8,847,744 2,870,180 8,508,794 11,918,926 6,586,373
Other exs incl tax 2.50 2,464,732 1,053,682 1,926,907 1,586,239 1,035,091
Net earnings 8.25 6,383,012 1,816,498 6,581,887 10,332,687 5,551,282

The bottom line is ARG a producing copper miner in Chile that's pleasantly surprised the market with both limited damage to production from the Codelco strike and much lower than expected energy costs (around $9m instead of $13.9m). It has been sold off throughout this slump and stands at a very low PE ratio, considering it is a nice, profit-making operation.

Recommended value stock at these prices. DYODD etc etc