Progress Report: Our Latin American Buy Recommendations

by: Mark Turner

Two months have gone by and we are now updating our LatAm stock recommendations. This will bring us more into line with the classic quarterly progression of stocks. From here we will maintain a three month gap so our next update can be expected mid-October.

As before, each stock’s title line typically features the ticker code, the May 21st closing price (date of our previous progress report), price as of Friday’s close, percentage change in price and finally the new recommendation. Prices are in US Dollars ($), Canadian Dollars (C$) or Brazilian Reales (R$), according to the stock. General comments, comparisons to our benchmark and conclusions are found at the end.

Gold Reserve (GRZ) May 21st $5.81. Now $5.78. Change -1%. Recommend: HOLD

GRZ has spent the last two months procuring equipment and making the first moves to build its mine. In that time the stock has gone lower and come back to the same level.


There are rumblings of ‘toxic financing’ around the stock but we find those easy enough to ignore. A larger cloud over the company seems to be the changes to mining laws about to be announced in Venezuela. Only time will tell on that count, as trying to second-guess the Venezuelan government can be a very expensive hobby. However the basic fact remains; on an ‘ounces in the ground’ basis GRZ’s Las Brisas is one of the cheapest large gold projects in the world. We hold.

Crystallex (KRY) May 21st $5.08. Closed June 15th $4.55. Change -10%.

When Crystallex announced their “virtual permit” on June 14th we closed our position.

PetroFalcon Corporation [PFC.TO] May 21st C$0.68. Now C$1.10. Change +62%. Recommend: BUY

In our last update we said that we expected the fundamental value of shine through in the months to come. And shine it has! Last week’s news on the link-up with Sweden’s Lundlin Petroleum was greeted enthusiastically by the market. Lundlin has obviously seen the same fundamental opportunities as we see in Petrofalcon and its still undervalued assets in the Venezuelan oil and gas sector.

The deal is a classic win-win (we are not going to give the full rundown here; the recent press release is the place to look for details), and we see Petrofalcon moving higher from here. We also note the welcome return of high traded volumes. We reiterate our buy recommendation.

Gold Hawk Resources [CGK.V] May 21st C$0.70. Now C$0.63 Change -10%. Recommend: STRONG BUY

Production at Gold Hawk’s Coricancha mine started on time but ramp up to full production has been delayed, mainly by extended delivery lead times of mining equipment (by no means the only case in the sector at the moment). New CEO Kevin Drover now expects the mine to be at full production by 4q07. These teething troubles are nothing to cause serious concern and quite normal in a new operation. There was an accidental death at the mine however, the company telling us it was a freak accident and not something that is likely to be repeated. We take Gold Hawk at its word on this issue but would not be happy at all to hear of any further accidents. To paraphrase Oscar Wilde, “To lose one worker may be regarded as a misfortune; to lose a second looks like carelessness.”

Accuse us of banging the table if you wish, but we must reiterate our strong buy rating on CGK.v. The compelling fundamental value of the stock will show itself eventually. Without going into much detail on the numbers, we expect zinc and lead production to cover cash costs, and gold and silver production to bring in around $45m in FY08, with $23m of that being net profits. This would give an EPS of C$0.15, a PE of 4.2X at today’s share price. We suggest the gold stock investor takes that PE ratio and compares it to its peers.

As often happens with the ‘under the radar’ small plays, lack of publicity goes a long way to explaining the lacklustre performance up to now. Of course, we see this as an advantage! When the market wakes up and sees the earnings flow at CGK.v, hopefully we would have had time to revisit the stock and buy again and again at these sub C$0.70 levels. Patience is a virtue.

Inca Pacific Resources [IPR.V] May 21st C$1.62. Now C$1.60. Change -1%. Recommend: BUY

Inca Pacific has had both good and bad news since our last update. The good news was that the Sprott Moly Fund bought 53% of company stock in a C$2.00 cash+share deal announced late May and completed on June 6th. This kind of institutional backing makes IPR.v even more attractive as a future concern.

Then the bad news hit: On June 28th Inca Pacific announced a potentially serious administration glitch with the Peruvian government and the stock sunk to sub C$1.20 levels. Once CEO Tony Floyd and the relevant Peruvian officials had met the air was quickly cleared and the stock quickly rebounded.

We believe IPR.v has been strengthened by both recent events. Now that terms have been settled once and for all with the Peruvian government, Inca Pacific can concentrate on the tasks in hand; publish a bankable feasibility study and then build a mine. We upgrade IPR.v to a buy. As a final word, we recommend that anybody interested in the stock should write to the very helpful, gentlemanly and attentive Bill Galine at the company’s IR dept. If only all investor relations departments were run as well!

Braskem S.A. (NYSE:BAK) May 21st $17.44. Now $19.42 Change +11%. Recommend: HOLD

Braskem is doing just fine. The company has moved forward on its expansion plans and made interesting headlines with its new “green plastics” initiative, a new product made entirely from biofuels. The year-to-date chart says all there is to say. Adding value nicely. We hold.


Telemar Norte Leste S.A. [TMAR5.SA] May 21st R$50.50. Now R$58.40. Change+16%. Recommend: HOLD

Doing well. The 16% move in the last two months shows the underlying strength in the Brazilian telecommunications sector. As part of a diversified LatAm portfolio we are quickly coming to the conclusion that this stock is a ‘must have’. We are tempted to upgrade to ‘buy’ once more, but as our original buy price was a low R$42.55 we’ll stick with the price we have for the time being. We hold.

Embraer-Empresa Brasileira de Aero (NYSE:ERJ) May 21st R$22.77. Now R$22.39 Change -4.7%. Recommend: HOLD

Embraer is still treading water on us as a stock. As a company it is still as attractive as ever, perhaps even more so since the announcement that they are looking at building bigger aircraft to directly compete with market leaders Boeing (NYSE:BA) and Airbus. We hold.


Please note that the above chart is for the ADR stock ERJ and is for reference purposes only.

Aurelian Resources [ARU.TO] May 25th C$7.85. Now C$8.00. Change+2%. Recommend: BUY

We opened a long position on Aurelian on May 25th. With 20/20 hindsight the call was good but the timing was poor. The political unrest behind Aurelian’s drop did not clear itself up for a full month, and the stock went as low as C$6.47. What a buy it was at that level!

The company has recently hired a highly experienced COO to run their Ecuador operations and has added new drill results to its Fruta del Norte [FDN] project. The market is now waiting for drill results from the El Tigre concession close to FDN (from a total of 38 concessions held by Aurelian over 95,000 hectares of the ‘Condor’ project) and the much-anticipated resource estimate for FDN.

Guesstimates for that resource of anything up to 16 million ounces of gold at FDN have been thrown at the market by a plethora of analysts. We shall soon see. To give a very rough ‘n’ ballpark valuation estimate, if ARU reports 14m oz Au at FDN and the market values that gold at $100 ‘under the ground’ this would make Aurelian worth over $10 per share. When one remembers that FDN is the first concession Aurelian has examined and they have 37 other spots that they consider worth exploration at ‘El Condor’, one begins to see the value offered in the stock. Plenty of exploration cash at bank too. We fully expect the stock to revisit and beat previous recent highs and therefore buy at this level.

GOL Linhas Aereas Inteligentes SA (NYSE:GOL) May 21st $30.66. Now $28.02 Change -9%. Recommend: CLOSE

We were sailing along merrily in the $33 to $34 range with GOL and far too pleased with ourselves for calling the stock so well when a double-whammy brought a large dose of ego-popping. First in early July the company guided down on FY07 and FY08 growth as part of its consolidation program. Second was last week’s fatal crash of a TAM passenger jet in Sao Paolo and the radar outage over the Amazon region that have once again knocked the stuffing out of safety perceptions in Brazilian air travel just when it seemed to be over the worst. The results are clear to see on the chart below.


So what does the disciplined investor do? Does s/he stamp feet and wail that ‘it’s not fair’? No. The disciplined investor sells up, takes the small loss and moves on. There is not much point in going through a whole house of pain in GOL right now. We still believe the company is fundamentally sound but would rather wait until market conditions move back in its favour.


A frustrating period. An even investment in each stock from May 21th to date would have returned 6.7%. Our benchmark index, the iShares S&P Latin America 40 Index (NYSEARCA:ILF) returned 8.3% in same period. This means that year-to-date our picks have increased 34.5%, which still compares favourably to the like-for-like ILF increase of 23.1%.

In the period, Gold Hawk, Gold Reserve, Aurelian, Inca Pacific and Gol suffered momentum loss for various reasons. Most have clawed their way back but we are forced to cut our losses on Gol at least. Our major investment mistake was to recommend Aurelian too early and not let the political story play itself out. Other drops could easily be put down to bad luck but that would not tell the real story; one must always expect high volatility in LatAm markets, even with the comparative large caps such as GOL. The moral to take away from this period is the need to spread risk over the region and the danger of having too many eggs in one Latino basket.

The highlight of the period is of course, but we are particularly happy we the ongoing evolution in TMAR5.SA and BAK as both are outstripping their local Bovespa index by a handy margin.

Please note that again we have not taken into account foreign currency appreciation, which would have given us an extra 2.7% on the Canadian stocks and an extra 4.8% on the Brazilian stocks in US dollar terms.

Due to our recent buy recommendation, we will be returning Apex Silver (NYSEARCA:SIL) to the recommended list as per the next update. Reference price will be $19.99.

Disclosure: None