Investing in Argentina

Dr Steve Sjuggerud - Wed 10 Nov, 2004

...Investing in Argentina...Argentina offers a staggering opportunity for you to ride the very hottest trends of this decade - Chinas growth, and the commodities bull. Plus, this over-sold South American giant also has what may be the best farmland in the world...

While investigating timberland in the Northeastern tip of Argentina (the rainforest region), the Chinese came up. I was visiting Alto Parana, an enormous sawmill operation run by the Chilean firm, Arauco.

Maybe the Chileans “got it” first about the Chinese, as shipping goods from Chile to China isn’t that complicated; just put ‘em on a boat. Whatever it is, I saw a warehouse full of finished lumber, about five football fields long and five stories high, with much of it headed to Asia.

“The Chinese are tough to deal with,” the plant manager confided. “Sometimes it’s difficult to get paid.”

It must be worth it, as Asia is Arauco’s largest market, making up one-third of sales. By contrast, sales to both Europe and the United States make up only half of their Asian sales. Just ask yourself, which is the “growth” market? No wonder Argentines want to work on their Chinese...
 
While in Argentina, I met with Pablo Marcet, the head of Argentine operations for Northern Orion, a copper company with $20 billion in metal in the ground in the middle of nowhere in western Argentina (lots of things are in the middle of nowhere in Argentina).

Investing in Argentina: Cheap!

Pablo is a good man to know. Educated at Stanford and Harvard, he used to travel the world running mining operations for BHP Billiton. No more. Pablo has staked his own future on cheap copper in Argentina. One thing you learn in Argentina is that nearly everything local is really cheap. For example, I had a ham and cheese sandwich and a Coke at Havanna’s, a coffee shop one block from our ritzy Alvear Palace hotel. The sandwich and Coke cost me eight pesos...or less than three dollars [£1.60 at today’s exchange]. And that was in the fancy part of Buenos Aires. In the town of Posadas, near the good timberland, three bucks will get you a full steak dinner at a nice restaurant.

Natural resources are cheap and plentiful too. Pablo’s Northern Orion is a partner in Alumbrera, a world-class copper mine where copper is mined cheaper than anywhere in the world. Literally, the net cost of production is zero, or (unbelievably) less...thanks to gold being a by-product of copper production.

Pablo hinted that Chinese, Korean, and Japanese businessmen have been visiting him; eager to do whatever it takes to secure their supply of copper for years to come. Note, Pablo didn’t mention any American or European visitors.

Last week I visited a farm, La Adela, which is owned by one of Argentina’s leading agricultural companies. One of the company’s strategies has been to buy up “marginal” farmland and then increase its value many times over by making it productive through modern technology. This business happened to already be positioned in the right place at the right time. Marginal farmland is now booming in Argentina. As an example, they sold two pieces of farmland in the latest quarter, totalling roughly 70,000 acres. It had acquired both within the last 10 years. The combined US dollar profit on the sale of both was roughly 300%. This was not an anomaly...

The company also happens to own a “marginal land” farm in the Northwest of Argentina called Los Pozos. This is roughly 600,000 acres, acquired at $4 an acre.
They took tumbleweeds and turned it into productive farmland.

This company makes a strong case that thousands of the productive acres at Los Pozos could soon be worth 50 times what they paid for it...you wouldn’t believe it, unless you were there. On my latest flight home, the man next to me worked for Pan-American Energy. He’s drilling for oil not far from Los Pozos, and he confirmed the marginal lands farming boom. “Everyone’s buying shiny new tractors out there,” he told me. The farmland boom in Argentina is on. What’s driving it? There are many factors. You’ve got higher food/commodity prices worldwide. You’ve got Argentines who don’t want to invest their money in paper assets or put it in the banks. (Remember, their wealth in the banks was frozen for 60 days just a few years ago.) So they’re buying farmland, and now shiny new tractors. They’re buying real assets. And then there’s the new source of demand for what Argentina has...from the Chinese.

Investing in Argentina: The promotion of Argentinean exports to Southeast Asia

At this point in the story, it wouldn't surprise you to learn that the Argentine government has just decided to open an agriculture office in China to promote Argentinean exports to Southeast Asia. The region accounts for an unbelievable 50% of Argentina’s total agriculture and food exports. What took them so long?

On an earlier trip this year, I was waiting in the lobby of the Intercontinental Hotel in Buenos Aires. There was one other group of people in the lobby, two Chinese and two Argentines. Their conversation was painful to listen to, as English was clearly neither party’s first language. And the body language was uncomfortable as well, as neither side knew the other’s customs. But it didn’t matter. Business needed to get done. This was clearly a big business deal for both sides, and it was going to get done.

Simply put, even in my hotel, I couldn’t get away from it...The Chinese desperately want to secure their future supply of basic goods - agriculture and commodities. The reasons are fairly obvious. As the latest issue of The Economist says: “If China’s consumption of raw materials and energy per person were to rise to rich country levels, the world simply would not have the resources to supply them.”

Look, there’s China hype, and there’s China reality. There’s dumb money and smart money. There’s what China knows Western investors are willing to pay any price for, and there’s what China is willing to pay any price for. We want to make sure we’re invested in the second half of each of those sentences above. We want to avoid the first half.

I don’t want to get caught on the wrong side of investor whims. And I don’t really want to put my money in China, as if history is any guide, chances are I’ll get out less than I put in.

What I want to do is what I always do: buy a cheap asset with extraordinary intrinsic value, waiting to be unlocked. Argentina’s natural resources are just such an opening.


Regards,

Steve Sjuggerud
for The Daily Reckoning

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