2 Emerging Market Mining Stocks to Buy

by Ivan Martchev | May 3, 2011 5:00 am

2 Emerging Market Mining Stocks to Buy

I was asked recently for a good reason why Southern Copper Corp. (NYSE: SCCO[1]) was underperforming not just the price of copper, but also other huge copper mines like Freeport-McMoRan Copper & Gold Inc. (NYSE: FCX[2]).

The company-specific news flow certainly didn’t suggest that it should be massively trailing Freeport, especially since Southern had better reserves than Freeport. There were violent protests over a mine in Peru that resulted in a delay after the company had already invested serious money, but that wasn’t unusual — this happens in mining all the time, and it should have been mostly priced into the stock some time ago.

And then I saw the recent election results and I immediately understood — it was Peru itself.

The leftist candidate for Peru’s presidency, Ollanta Humala, won the biggest number of votes in the April 10 election and was leading the polls for the June 5 presidential runoff election. This is similar to what we saw in the 2006 election, as companies with huge exposure to Peru underperformed significantly.

Then, Humala campaigned “wearing red T-shirts and expressing admiration for Venezuelan socialist leader Hugo Chavez. This year, he’s donning business suits and vowing to expand ties with investor-favorite Brazil,” according to Bloomberg. The former army officer’s abrupt about-face has helped put him in first place in polls, and the outcome of the likely runoff is currently too close to call.

While investors want to see Peru go the direction of Brazil, a Latin American success story, there is a fear that the country may go the way of Venezuela and Bolivia, which have been governed with a remarkable lack of pragmatism.

So investors are wary — and with good reason — that Humala may enter office wearing a suit, but he may still have those red shirts from 2006 in his closet.

If mining royalties rise and the state increases control of the country’s gas reserves, there is about $42 billion worth of foreign investment in the mining industry earmarked over the next 10 years that is at risk.

We have seen this recurring problem in many emerging markets where the (primarily leftist) governments are worried that greedy foreign multinationals will plunder their natural resources, not realizing that without foreign investment they don’t have the huge amounts of money or expertise necessary to develop the deposits. Metals and oil deposits in the ground are worth very little if they stay in the ground.

It was pro-business policies that encouraged investment in the mining sector that allowed Peru to have a rapidly developing economy in the past 10 years, and these policies need to stay if Peru expects to capitalize on the second-largest copper reserves in the world after Chile.

Two Ways to Play It

Because the country is relatively less developed than Chile, it has less listed ADRs on the NYSE, more specifically; there is only one — Campania de Minas Buenaventura (NYSE: BVN[3]). Management operates many mines in Peru and has the discretion to increase production in various metals that it deems more profitable. The company is politically well-connected and has great reserves with years of growth ahead of it.

In the first quarter, Buenaventura delivered a profit increase of 40%, its biggest gain in four quarters. Buenaventura sold gold for an average $1,387 an ounce in the quarter, 25% more than a year earlier. Revenue climbed 86% to $375.7 million, while operating costs increased 51%to $17 million. Exploration spending rose 35% to $10.6 million. There were also issues with strikes and other transitory factors, but the stock has massively lagged the precious metals surge precisely because of this June election.

Right now, we have a “beach ball under water” effect developing with Buenaventura and Southern Copper (NYSE: SCCO[1]), as their profits are rising while their share prices are falling.

In the event of Humala losing the election in Peru, both of these companies are likely to see their shares surge. Last week, we saw Peruvian government bonds rally on news that Humala’s lead over Congresswoman Keiko Fujimori had fallen to just 1.2 percentage points — the narrowest lead since he won the April 10 first-round vote with an 8-point lead.

I can give you no guarantees that Humala will lose, but I hope that Peruvians will grasp the big difference between the pragmatism of Brazil and the lack thereof in Venezuela and vote against him. BVN and SCCO are great ways to make the bet that sensibility will prevail.

Endnotes:
  1. SCCO: http://studio-5.financialcontent.com/investplace/quote?Symbol=SCCO
  2. FCX: http://studio-5.financialcontent.com/investplace/quote?Symbol=FCX
  3. BVN: http://studio-5.financialcontent.com/investplace/quote?Symbol=BVN

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