KWR Market Viewpoint

Hugo Chavez, The Investor’s Friend
By Mark Turner

“We simply attempt to be fearful when others are greedy and to be greedy only when others are fearful.” (Warren Buffett)

PERU (KWR) -– January 9, 2007 -- When Hugo Chavez made his speech to welcome his new cabinet on 8th January, not much was reported to the citizens of industrialized countries. The only news that reached most news wires was that he was about the nationalize the Venezuelan telephone company CANTV (NYSE ticker:VNT) along with the electricity suppliers. The ensuing sell-off, starting just over an hour before the close of the New York Stock Exchange, took 15% off the market price of VNT in minutes on high volumes before the stock was halted. The next day, VNT dropped as low as $9.46 when cleared for trading, and finished the day down 27.5% at $12.20.

All this doesn’t sound very investor-friendly, thus the title chosen for this article seems a little strange at first glance. But once the polemic, rhetoric, disinformation and plain simple lies told by both business reporters and by Venezuela’s president are stripped away, it becomes obvious to the level-headed investor that Chavez and his detractors provide some gilt-edged opportunities to make profits in the stock market.

This latest episode has thrown up VNT, KRY, GRZ and TX as likely targets for the nimble investor. Let us first look at VNT, the veritable eye of the storm. In his speech, Chavez said (in translation), “We must nationalize all that has been privatized.” He then specifically mentioned CANTV, saying, “Let’s nationalize it!”. CANTV, which trades under the ticker VNT on the NYSE, was taken private in 1991 under ex-president Andres Perez. It is currently run by a consortium that includes Verizon (28% of VNT) and Telefonica de España (6%), as well as other minority shareholders.

Headlines on Tuesday were of the robber–baron type. Most commentators assumed that by nationalization, Chavez was simply going to expropriate the assets of VNT and presumably surround its head office with armed soldiers so that the capitalist pig board members couldn’t get to their desks anymore. This, however, is not likely, and allows us to see the opportunity given to the investor that doesn’t swallow the hype surrounding the issue. Any nationalization of VNT would almost certainly involve compensation to the existing investors. Chavez has more than enough money to buy back VNT thanks to the enormous oil revenues currently swelling the state coffers. The argument for expropriation is flimsy to say the very least. Expropriation of assets would certainly cause retaliation from injured parties, and Venezuela has far too much international exposure to imagine itself as living in a socialist vacuum. At the present time, it is not in Chavez’s interests to block sales of oil to the US, which consumes 60% of Venezuelan production. It is also worth remembering that 28% of VNT stock is held by Venezuelan citizens and it is highly doubtful that Chavez would leave them holding worthless share certificates. The stock is popular amongst Venezuelans, as it is considered as somewhat a “jewel in the crown” of local shares having risen by close to 100% in the past year. It also has a good reputation for paying juicy dividends (U$1.01 on 4th December 2006) and allowing locals to invest in dollars, thus avoiding the high inflation rates suffered by the national Bolivar currency.

Chavez has been made out as a crackpot, a fool and a dictator by the western news services. We believe that this picture is biased largely by political interests and does not take into account the reality, particularly the financial reality, behind this undoubtedly controversial figure. He aims his public speeches towards his party faithful, and rhetoric of the sort seen on Monday is hardly new to dedicated Chavez-watchers. However, his “social revolution” has not turned its back on the ways of 21st century business, and his pragmatic side comes forward when doing deals with capital-driven states and companies. He drove a hard bargain with oil companies, but evidence suggests it has been a win-win situation, as the oil companies are still happy to do business inside Venezuela. The huge revenues accrued by the Venezuelan state is attractive to all arms of the banking world, and anecdotal reports from Caracas say there has never been a better time to set up financial shop in the capital. Chavez is no fool; nobody who gets re-elected in Latin America can be called naive about the ways of the real world.

Potential investors should ask themselves a couple of simple business questions. Does Chavez want to sever relations with Spain? With the USA? Does he want to throw away his market for oil and cut revenues by half? His well-publicized “Bolivarian revolution” will go forward, but there is little chance of him simply stealing property from the rest of the world. Why antagonize his own clientele? The bluff and bombast from the speech podium is certainly not aimed at the business world and should be taken with a large pinch of salt when cold, hard cash is the issue.

So while one can expect VNT to return to state control, it is likely that Chavez will pay a reasonable price for each and every share currently held by the private sector. As VNT traded as high as U$20 just before his speech and is now trading at a fear’n’greed-discounted level of around $12, the price that will be settled upon will certainly be between those two points. VNT did make recent upward moves on speculation that Carlos Slim’s America Movil was about to make a move for the entity, and thus may have been overbought. On calm reflection we would expect a final settlement price of around $16 to $18, which could mean up to 50% profits for those who take advantage of this window of opportunity.

An even stranger drop was taken by Crystallex Interantional (KRY), a precious metals miner currently ramping up operations at their ‘Las Cristinas’ gold project in Venezuela. Despite previous assurances from the company, analysts and even the Venezuelan government that the present terms of the contract signed between KRY and Venezuela will be honoured in full by both parties, the stock lost 10% in the late day trading on Monday and a further 9% on Tuesday on 5x average volume. KRY issued a press release, totally ignored by the entire financial community, that calmly stated the facts on Monday evening. Having closed at U$3.80 on Friday, we feel the nigh 20% drop experienced by this stock to its current U$3.13 (Tuesday 9th January closing price) is unwarranted and therefore consider this another opportunity to make a difference to one’s portfolio value in a relatively short space of time.

Much the same can be said about Gold Reserve Incorporated (GRZ) which is exposed to Venezuela via its ‘Brisas’ gold and copper project in Venezuela. Closing at U$4.40 on Friday, it lost 6% late Monday and a further 8% in Tuesday’s panic attack, again on much elevated volumes. The same arguments put forward for KRY apply to GRZ, as they also enjoy a clearly defined contractual relationship with the Venezuelan government and a good working relationship. The nerves of the uninformed have presented another opportunity to the informed. We recommend taking a long position in this stock at its present price of U$3.81.

It would seem that those investors following Venezuelan steelmaker Ternium S.A. (ticker TX), are made of wilier stuff. The stock turned down slightly late Monday, closing at U$27.45. Monday started with a big sell-off, the stock going as low as U$23 in early trades. But it quickly bounced back to finish the day at $26.36 on 3x average volumes. Clearly seen by steel bulls as a buying opportunity, the apparent political risk has been largely overcome by these more informed investors.

To conclude, the radical move by the Chavez government is real and in motion. His 2006 re-election has given him the mandate to move forward with his grand plans for a social revolution with less fear for a repeat of the coup d’etat he suffered in 2001. However, those companies with exposure to Venezuela have been priced down by panic sellers and sensationalist reporting. We therefore see this present time as an excellent opportunity to take positions in financially excellent companies trading at a short-term discount which will be resolved over time.

Mark Turner is Latin America equities analyst for Hallgarten and Company.

While the information and opinions contained within have been compiled from sources believed to be reliable, KWR does not represent that it is accurate or complete and it should be relied on as such. Accordingly, nothing in this article shall be construed as offering a guarantee of the accuracy or completeness of the information contained herein, or as an offer or solicitation with respect to the purchase or sale of any security. All opinions and estimates are subject to change without notice. KWR staff, consultants and contributors to the KWR International Advisor may at any time have a long or short position in any security or option mentioned.



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