Peru's Lack of Publicity Bodes Well For Investing There

by: Mark Turner

Whilst the rest of Latin America rocks and reels under scandal stories concerning senate members involved with death squads (Colombia), polemic election results and parallel governments (Mexico), far left and far right violent protests against the same government policies (Bolivia), Nationalization Inc (Venezuela), threatened defaulting of sovereign bonds (Ecuador) to name but a few, Peru has not had much publicity recently. The biggest Peruvian ruckus of 2007 has been caused by a spat between the country and its Southern neighbor, Chile, over a patch of land not much bigger than a private potato patch on their borders that both consider home territory, and not exactly the kind of thing that gets overseas analysts sitting up and begging their editors for edition space.

In fact this lack of coverage for South America’s third biggest country by area and home to 28 million people is something of a pity, as Peru has been quietly creating one of the best, longest and seemingly most sustainable growth stories in the region. Peru is presently in the 66th month of uninterrupted economic growth and under the governance of yet another benign government that makes no waves on the international political scene and is as and investment friendly as they come.

On a macroeconomic level, Peru looks great. The expansion that stretches back to the late days of the Fujimori reign and ran non-stop through Ex-President Toledo’s 5 years in office shows no sign of slowing down under Alan Garcia’s mandate. 6 months into his tenure and with the economy controlled by the much-feted finance minister Luis Carranza, Peru keeps on churning out figures that should be more of a talking point amongst analysts and investors than they are currently.

There are plenty of statistics to underline the story, the following selected as examples. According to official government figures, year over year growth stood at 7.5% in 2006. GDP growth has been over 5% per annum since 2002, and GDP per capita has risen steadily from U$2194 in FY02 to today’s estimated U$3496. In the same time period, external debt has dropped dramatically from 48.9% to 28.4% of GDP and, unlike Venezuela or Argentina, these growth figures have not pushed inflation rates to worrisome levels. Inflation is currently running at 1.1%, a figure that would make the US finance bosses green with envy right now. Balance of payments is running at a 1.5% surplus, and Central Bank reserves have ballooned to a healthy looking U$17.3Bn.

Praise for this growth has come from many financial quarters. The IMF, a body rather out of favor in many of South America’s left-leaning states, has been quick to applaud Peru. In a January 2007 report, they stated that:

“Over the past several years, Peru has implemented sound economic policies which, in the context of a favorable external environment, have resulted in the longest economic expansion on record, low inflation, a robust external position, and declining vulnerabilities. The new authorities are taking measures to further improve this excellent performance during 2007-08.”

Glowing stuff. But what lies behind this apparent success story? Frankly the local politicians, never slow in bathing themselves in this economic glory, have less to do with matters than at first sight. The IMF report does mention the “external environment” in passing but goes into little further detail, perhaps for want of appeasing the locals. The fact is much of the monetary growth has been on the back of hard commodities prices, especially those of precious and base metals.

The story of the commodities price boom in gold, copper and the like since the turn of the millennium has been documented in great detail in many other places and we feel it unnecessary to go over the same territory. However this boom has pushed export figures sky-high in Peru, as comparative figures show. In 2002, exports totaled U$9.8Bn. This number stood up 280% at U$37.2Bn in 2006, with metals exports accounting for 54% of this impressive total. Boosts in production figures have helped to some extent, but the prices at the world market are the root cause of Peru’s economic good times.

Success begets success of course, and this boom has attracted international companies to the country in ever-increasing numbers and has made Peru one of the most attractive places to invest in the world of mining. Peru’s ministry in charge of mining affairs reports that the number of requests for mining claims is running at 24% up in 2006. The future of mining also looks rosy. Government projections for the next five years are slating another U$9.9Bn in investments for mining, which would account for 46% of total expected investments in Peru for that period

With all this in mind, it is perhaps not surprising that the Lima bourse has had a world-beating 12 months. Its leading index, the ISBVL, is up over 250% YOY, with many individual stocks showing gains well in excess of this figure.

ISBVL 1-yr chart

Peru stocks quoted on the US exchanges have largely reflected this glory, and again it is the miners who have been in the vanguard. Southern Copper Corp (PCU) has posted excellent growth and earnings throughout the decade. Coupled with a generous dividend policy, its share value has increased over tenfold since 2002 (5 year chart below) and it has become one of the favorite regional plays for both private and institutional investors.

PCU 5-yr chart

Other examples of mining stocks quoted in northern exchanges that have benefited from the “Peru effect” include Peru Copper Inc (CUP), Buenaventura (NYSE:BVN) and a host of junior miners currently ramping up production in the country.

It is with a look to those juniors we end our note, as our job as analysts would not be complete without highlighting some of the many opportunities still available to investors wishing to share in the Peruvian success story. Gold Hawk Resources (OTC:CGHRF) is one that immediately catches the eye. CGK are owners of a gold/silver and base metals project 90km east of Lima in the Sierra region of Peru now on the cusp of ramping into production. The present share price of CAD$0.52 compared to projected earnings when fully operational makes the stock well worth further investigation.

Another on our recommended list is Inca Pacific (OTC:IPRFF), which although in final feasibility stage and not In conclusion, Peru is currently enjoying the best of economic times, with rapid and sustainable economic growth, low inflation, a stable governmental and a positive investment environment. We consider the country to be one of the more attractive plays in Latin America presently and see Peruvian-exposed stocks as well worth considering when looking to add emerging market exposure to one’s portfolio. The mining sector looks particularly attractive sector play in the country, with exploration miners of all metals offering the best value.

Disclosure: Author has no position in any of the above-mentioned securities.