In an announcement that went, in my opinion, underreported but has potentially huge ramifications for the natural resources sector in Argentina was that the Paris Club of creditor nations and Argentina have come to an agreement for repaying nearly $10 billion in debts which are currently in arrears. Why this is significant for the natural resources sector in that country is that, the agreement essentially puts Argentina's default history in its rear-view mirror and will open the country up to international financing sources. This will allow them to both increase the inflow in international investment into the country as well as to increase infrastructure spending, allowing them to expedite the development of their huge shale resources.
The deal would see roughly $9.7 billion of currently overdue debt repaid by Argentina to the Club over the next five years. The country has decreasing foreign reserves as well as an economy that is on life support, therefore greater access to new foreign capital markets will draw in more FDI, including into the massive Vaca Muerta shale play.
In 2001-2002, the Latin American country defaulted on roughly $100 billion of foreign debt which has eliminated their access to economic funding for the past 13 years(Argentine bond yields have been in the double digits, although have been becoming more attractive as of late).
As the country regains its economic composure, the companies that are operating in the country and that will be most positively affected by this increase in financial firepower are the mining and oil and gas companies which require long-term clarity in order to make huge up front capital expenditures.
Due to the size and power of the oil companies, they are typically an outlier and can operate anywhere around the world and the countries which host them ensure they can operate. However, mining has a more segmented market place with more small players which don't wield the same type of power that the oil companies do. As a result they are always at risk of political and social instability.
With the risk profile of Argentina reducing as the country becomes a more credit worthy nation, look for more mining companies to re-enter the space as investors are more willing to spend money there.
Junior metals companies with significant exposure and leverage to an improving foreign investment environment in Argentina include:
- Lumina Copper - Market cap of $345 million (who's Taca Taca project is one the largest undeveloped copper projects in the world with the capability of producing 244Ktpa for 28 years. The company was on the cusp of selling in 2012 for what was believed to be around $1 billion).
- Goldrock Mines - Market cap of $33 million (the Paul Matysek run gold company and developer of the Lindoro gold project is expected to produce 100Koz of gold per year in a low cost heap leach operation. Note, Mr. Matysek was involved in one of the last M&A deals seen in Argentina when he sold his Lithium One for $112 million to Galaxy Resources).
- Mirasol Resources - Market cap of $50 million (prospect generator who sold one of their Argentine projects to major silver miner, Coeur for $70 million in 2012. Now they are advancing a number of exploration projects there. The company has $35 million in cash/stock and includes Haywood Securities' Chairman, John Tognetti as one of their largest shareholders).