Facts Will Make You Money: Got Latin America?

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"Business is business", the old saying goes, and judging by recent developments in Latin America it' s as true today as it's always been. Case in point: CNN Money/Fortune magazine (in Castro’s revenge: The Cuban Oil Rush”, Carolyn Whelan, Fortune magazine, March 7 2007) reported this week that US-based multinational oil companies were "seething" because they are not allowed to join in on the development of very promising undersea oilfields in Cuban waters that purportedly hold 4.6 Billion barrels of crude. Such is their annoyance they are now lobbying the US Congress to get an exemption clause from the famous and long-standing U.S. Cuba trade embargo.

Charles Drevna of the National Petrochemical and Refiner's Association said,

"This is not the 1960s, when the Kennedy administration was protecting the U.S. from a possible missile attack...these resources will be developed and produced, the question is by whom. Prohibiting U.S. companies from developing resources 90 miles away is an Alice in Wonderland approach to policy that must be revisited."

So is it right to imply that political doctrine, even on such a sensitive issue as the decades long Cuban isolation, could be brushed aside suddenly because U.S. companies are missing out on newly found goodies? Well, the straight answer is "yes". But before accusations of bias and political slant are cast our way, let us make it clear that no-one is innocent in this game of musical chairs.

Read my lips

Case in point: Venezuelan president Hugo Chavez constantly rails against what he sees as US imperialism. Speech after speech is peppered with anti-US rhetoric. Sound bite after sound bite throws barbs at his counterpart, President Bush, his entourage, his ideals and his leadership. Some of those attacks are grounded in his own ideology, whilst others are to the point of direct personal slander that are unworthy of a head of state and difficult for even his closest allies to justify. Therefore it seems strange indeed when one remembers that 60% of all Venezuelan GDP depends on oil sales to the USA. Stranger still when one looks at the oil service industry and see a company such as Halliburton operating there and enjoying specific guarantees from Venezuela that they are welcome and that oil services will not be nationalized in any way. Is this really the same Halliburton so intimately linked with the upper echelons of the Bush administration?

So is it right to imply that political doctrine could be brushed aside suddenly because the Venezuelan state might miss out on making the most of their own local goodies? Well, the straight answer is "yes".

Please note that any similarity between paragraph 3 and paragraph 5 of this note is purely intentional. A politician wants to change the world? That's fine. A multinational wants to make money? That's fine too. Viewed another way, the stupid politician cuts off his country's source of income because it is the noble thing to do. Likewise the stupid CEO turns their back on profits in a country under a radical government because it is the noble thing to do.

As we fervently believe that stupid politicians and stupid CEOs are very rare things indeed, the recent decisions of Exxon Mobil (NYSE:XOM), Chevron (NYSE:CVX), Conoco (NYSE:COP), Total (NYSE:TOT) and BP (NYSE:BP) to knuckle under and accept a new minority role in the petroleum industry of Venezuela suddenly seem rather pragmatic and laudable. The choice between reduced profits and no-profits is a no-brainer for these guys.

Learning to love the thumbscrews

However, it is not just the political hot zones that see this kind of realpolitik. The Peru of 2004 saw a debate raging over the implementation of a mining royalty that would divert 1% to 3% of miners. gross revenues to local communities. It goes without saying that the international mining concerns operating in Peru at that time threw their hands up in despair at the mere thought. Bobby Godsell, CEO of AngloGold Ashanti, said that countries should expect miners to make a "...fair contribution to public finance. We need to pay our fair share of taxes but please God, those taxes should be based on profit created not revenue or gross sales." He continued with a thinly-veiled threat aimed at the Peruvian government. "You cannot change the rules every time a parliament feels like it or a new president is elected. You can, but the investors will go elsewhere."

Wayne Murdy, CEO of Newmont, agreed and added that Peru's current tax regime was "...not a bargain. It's not giving us a lot of freebies, but it.s competitive with other countries." Meanwhile, Alberto Benavides, President of Buenaventura, said that the proposed royalty payments would be "...a tragic way to cut investment, reserves and ordinary people's savings. Let us not complain later when there is a lack of capital that, far from helping to foster, we have destroyed. Let us not complain either at a lack of foreign investors whom we are discouraging." (All quotes from “Buenaventura [BVN] - Peruvian Mining Giant in the Making”, Hallgarten and Company, July 14 2004.)

However, against the wishes of the mining community the royalty was in fact made law in late 2004. Cut to 2007 and we see Newmont, Buenaventura, Anglo, Freeport McMoran, BHP Billington, XSTRATA, and a host of other big mine players all happily digging, milling and smelting away in Peru, making good money and quietly paying their dues to the Peruvian state. Meanwhile we note that Peru is expecting around U$9Bn in direct foreign investment from miners in the next five years. No point in letting politics get in the way of making a buck, eh boys?

O Tempora, O Mores!

Up and down the LatAm region, business people from an Anglo-Saxon background have always been and will always be confronted with a society different to their own (as so brilliantly documented by Joseph Conrad in his classic, Nostromo). But whether in the far right Chile of the 70s, the naive Peruvian finance policies of the 80s, the dollarization and decadence of Argentina in the 90s, or the radicalization of Venezuela and Bolivia in this present decade, business will always be around to try and turn a profit. It is part of human nature, and as the North rightly prides itself on its more sophisticated business skills it should look to be in the vanguard of South American growth in this globalized era.

Which brings us to the non-corporate investor: Far too often investors turn their backs on a trade, even a short-term trade, because the country in which the company operates is "a banana republic", or run by "a crazy" or for myriad other reasons. The error, at its most basic level, is allowing emotions to rule investment decisions. Even the most inexperienced know that emotions are the enemy of the successful trader and discipline is one of the keys to successful stock market investments. Running the numbers 20 times over is good. Chasing stock is a mistake. Selling at your target is good. Falling in love with a stock is a mistake. However when it comes to political issues even the wisest and most experienced traders sometimes have an emotional blind spot that will lose them great trades

"They all look the same to me..."

Of course, one certainly should take into account political risk. If a country has made clear and specific threats to expropriate assets from a company in which you own shares, then you.d be mad not to sell up and move on as soon as possible. However, to deduce that because royalty payments are about to be raised 30% in the mining sector of Nortelandia, this means that oil stocks in Sudlandia are a huge sell is not an investment strategy that we would class as logical. Big business doesn't think like that, so why should you? Big business can eschew politics easily to get in on the Cuban action, the Bolivian action, the Nicaraguan action or the Venezuelan action. Meanwhile, stocks that get trashed because of emotional traders' attitudes should at least be ringing bells for value hunters.

The conclusion is simple. Hearsay, rumor and bias will lose you money. Facts, logic and informed decisions will make you money. This is of course true worldwide, but current political and social differences make divides sharper and more topical in the Spanish and Portuguese Americas of today.

Got LatAm?