Latin Mining Via Toronto

2008 Investment Guide
Latin Mining Via Toronto

Canadian stocks give you an entree to copper, gold and silver mines in Latin America.

It's boom time for metal miners. The prices of gold, silver and copper have been on a tear over the past few years. No region has benefited more than Latin America, home to some of the most prodigious metal and mineral riches on the planet. Mining companies' stock down there has surged.

But you can still get in on this boom. You have to assume that metal prices will continue to escalate, of course, or production must be strong to meet undiminished appetites. The way in is via shares in Canadian miners now starting operations in Latin America. They're still affordable, albeit risky (see table).

The forces at work to fuel this: demand from torridly developing India and China; depletion of mines in places like the Democratic Republic of Congo and Zambia; and stricter environmental reviews in developed nations, lengthening the time and cost of getting new operations under way.

Existing mines run by Latin companies have done very well. As copper prices quadrupled since 2002 to a recent $3.15 a pound, revenues at Codelco in Chile, the world's biggest copper miner, grew fivefold to $17.1 billion last year, while mining output expanded by only 10%. The price of gold has climbed 150% over the past five years to $805 a troy ounce; revenue for Yanacocha in northern Peru, South America's largest gold mine, tripled between 2002 and 2006 to $1.6 billion. Silver has tripled since 2002 to $15 a troy ounce.

Most Latin American mining companies aren't overly expensive in comparison with their earnings. The trouble is that they aren't expanding into new finds as rapidly as the gung-ho Canadians. Brazil's Companhia Vale do Rio Doce (nyse: RIO - news - people ), which mines iron ore, nickel and copper, among other things, has risen seventeenfold since 2003. Its American Depositary Receipts trade at $35, 16 times earnings. But analysts expect earnings growth to slow from an average 61% per year to 17% a year. About two dozen Latin miners are publicly traded, most of them on their home exchanges and a majority of them in Peru.

The new Canadian mines in Latin America are projects that were once deemed too difficult to operate because of high costs and political concerns. Now they look like great prospects. So say Christopher Ecclestone and Mark Turner, two longtime Latin America hands who own and run research firm Hallgarten & Co. from New York and Peru. "You just scrape the surface, and in places like Peru and Ecuador, you find [gold or silver]," says Ecclestone, an Australian who lived in Argentina for ten years. "The question is whether it's a good or a great find."

The Toronto-listed miners that Ecclestone and Turner recommend (one of them, Apex Silver Mines (amex: SIL - news - people ), is on the American Stock Exchange) are at the early stages of development, and anything can go wrong. None is profitable. Canadian miners aren't new to the region: Giant Barrick Gold (nyse: ABX - news - people ) has operated in Chile and Argentina since 1994.

In price/book terms they may appear expensive--around 7.8 versus the 3 average for the Amex Gold Bugs Index. But note that the book doesn't reflect the full value of reserves because most of the companies are in the early phases of exploration. Buying Toronto-listed stocks is easy to do for Americans. An online trade at Charles Schwab (nasdaq: SCHW - news - people ) costs only $10 to $13 plus 1 or 2 cents a share. The point, Ecclestone believes, is the Canadian miners have much more growth potential than the incumbent Latin companies.

One of Ecclestone's favorites is Minera Andes (otcbb: MNEAF.OB - news - people ), which has a 49% stake in the San José mine in the southern Argentinean province of Santa Cruz. The remaining 51% is held by Hochschild Mining, a Peruvian group that's listed on the London Stock Exchange. A feasibility study of the mine found 15.2 million ounces of proved and probable silver reserves and 288,000 ounces of gold reserves. Mining began in July, and the company expects to reach commercial scale in six months, with annual production goals of 3.1 million ounces of silver and 61,000 ounces of gold.

Minera Andes, with a market capitalization of $316 million, lost $10.4 million in the 12 months through June 30 and has yet to book any revenues. Ecclestone expects Minera Andes to turn profitable within a year.

In Peru the Hallgarten analysts are fans of Northern Peru Copper, whose test bores show a sizable reserve of 7.3 billion pounds of copper and a mine life of 20 years. The mine also contains silver, gold and molybdenum (used in steel alloys)--a common combination found in the Peruvian Andes.

Two gambles with this company are 1) whether it can raise the $1 billion needed to develop the mine, and 2) whether the expansion of the area's electrical grid, now at capacity, will occur by the 2010 target date.

Northern Peru Copper had no revenues and lost $3.2 million in the year ended June 30. With a market cap of $329 million the company trades at a cheap 4 cents per pound of probable copper reserves. Turner says it's very difficult to provide hard-and-fast earnings estimates for Northern Peru in these early days. For a ballpark figure, he estimates that with copper at $3 a pound, annual copper revenue for Northern Peru could reach $1 billion. Silver, gold and molybdenum might bring in an additional $360 million a year.

In Ecuador Turner and Ecclestone recommend Aurelian Resources, a Canadian gold, silver and base metals exploration company that controls 235,000 acres of mining concessions. In its Fruta del Norte site a drill core showed a rich 32 troy ounces of gold per ton of rock. In early October the company published a resource estimate of 13.7 million ounces of gold and 22.4 million ounces of silver. Commercialization of the mine is still a few years away.

Aurelian's stock, with a recent market cap of $1.2 billion, has been batted about in the past six months by political concerns. In May media reports quoted Gustavo Larrea, a government minister and a confidant of President Rafael Correa, as saying that miners in Ecuador would be hit with a strict tax hike that would take away 70% to 80% of revenues. It seemed the media misinterpreted Larrea's remarks, Hallgarten's Turner says, and that the threat was confined to oil companies. Still, in November the energy and mining minister said mining royalties will be imposed on a case-by-case basis. So the chance that the government will siphon off proceeds still looms.

One other reason Ecclestone and Turner like these Canadian miners: They could be takeover targets for Chinese companies looking to lock in a supply of resources. Ecclestone points to Aluminum Corp. of China (nyse: ACH - news - people )'s $792 million buyout of Peru Copper (amex: CUP - news - people ), a Vancouver firm also in the exploration stage and Toronto-traded. The deal fetched a 21% premium to Peru Copper's 20-day average trading price. "Chinese companies want to corner the market on these resources," says Ecclestone.