Escape to South America Uncovers Opportunities

The Dow is up 200. Down 700. Up 400. Have we hit bottom? Or is it 1929 all over again? Some say, “Grab a parachute.” The markets are as volatile as ever and uncertainty lies in the United States.

To be honest, it can be hard to think straight in the midst of so much hysteria.

The Dow has had a rough year, but emerging markets have been hit far harder. Once-hot South American markets have taken an even worse beating.

The markets are certainly following the old adage, “When the U.S. sneezes the rest of the world catches a cold.”

The world has changed a lot though and we have to ask ourselves, “Is the adage still true?”

There’s only one way to find out.

When I boarded an American Airlines plane bound for South America a couple of days ago, I closed my eyes and relished the relative silence of 300 people filling out immigration forms and fussing with their iPods.

I must’ve drifted off, because when I looked at my watch 80 minutes later we were still on the ground. A moment later the stewardess informed us that there was an electrical malfunction and we all had to get off the plane and book another flight.

I had plenty of time to reflect. Yes, things are bad. Uncertainty is a burden. Very few investors have survived this turmoil without losing a chunk of their portfolio.

But is it the end of the world as we know it?

When I finally landed in Santiago, 36-hours late, you certainly would not think so from the streets of Chile. The city is bustling with life. Markets of artisans sell silver jewellery and leather goods. Brand new BMWs and Mercedes speed along the streets.

My first meeting was with a leading Chilean geologist. We ate prawns and drank “Pisco Sours”, the national Chilean drink made of fermented grape juice, egg whites, sugar and lime. It packs a punch. Outside the window everything seemed clean and orderly and upbeat.

If there is a global recession, no-one bothered to tell the Chileans.

As you may have guessed, I’ve come to Chile to research copper. The country is loaded with it. Copper is to Chile, as crazy alcoholic husbands are to Elizabeth Taylor.

Copper Exporters

Approximately 20% of the world’s copper comes from Chile, and they are by far the biggest exporter.

The state-owned production giant “Codelco” dominates the local economy. The company foot the billion dollar budget of the Chilean military last year. That’s only about 10% of the company’s profits. Codelco also funds the schools and the hospitals.

In Santiago I met the former President of Codelco, Juan Villarzu, for dinner.

Villarzu is a brilliant technocratic administrator with degrees in business and economics from the Universities of Chile and Chicago. In 1994 Chilean President Ricardo Lagos asked Villarzu to run Codelco. Villarzu accepted and slashed production costs from 65 cents to 40 cents a pound while increasing productivity by 80%. The company is now valued at around $35 billion.

Copper Usage

Villarzu explained to me that there is a massive opportunity in Chile for “mid-tier” copper companies to develop deposits overlooked by Codelco.

Copper is a working class metal. It doesn’t glitter like gold. But it gets things done. It is used in Transport, Electrical, Construction and Engineering. To put it bluntly, things that carry electricity require copper. Turns out that is a large category of “things.” Global copper sales are around $110 billion dollars a year.

A new car is outfitted with 3 miles of copper wire totalling about 43 lbs. An average new home contains 400 lbs of copper. Alternative energy sources, like wind and solar – all require massive amounts of copper to produce and transmit the generated electricity.

The whole world was betting that the slowdown in the U.S. economy would cause the spot price of copper to plummet, but the price of copper is still about $3 a pound, approximately 350% higher than it was five years ago.

Copper Plant - Chile

As Villarzu explained to me, copper is a truly global product. A 25% reduction in U.S. housing starts will only cause a 3% drop in global copper consumption.

The next day I flew 1,000 miles north to Chile’s famous Antofagasta Coastal Copper Mining Belt.

Antofagasta is a desert. Not a cutesy Californian-style desert with flowering Cacti and glades of palm trees. It is the driest place on earth. No rain. No plants. No animals. No bugs. No rivers. No people. It’s a miners dream. A vast flat uninhabited tract of land impregnated with copper. I had asked Villarzu if it was possible for smaller mines to compete with the efficiency of a goliath like Codelco.

He assured me that it was. But I was sceptical until – out there in the desert – I ran into a tiny mine run by a Chilean family – with just a handful of employees.

It turns out these guys do very well just blasting out enough rock for a single truck load every day. Codelco’s El Teniente mine produces about 3,000 times more ore. But this little mine generates them about $240,000 a month in sales. Most of their product gets piled onto ships headed for China. Not bad for a Mom and Pop operation.

If Chile and the world copper markets have anything to say about it, the world is not collapsing. After all, copper is still up more than 200% from its 20-year average price. America is in a world of hurt. But throughout the turmoil, many companies will thrive, and investors will be rewarded for sticking with them.

And don’t think you have to buy metal in a foreign country to be a winner. Remember the plane that broke down on the runway? That’s happening more and more. American Airlines (AMR), like most domestic carriers, is operating with an aging gas-guzzling fleet.

Fuel savings alone may justify American Airlines spending $20 billion on Boeing’s new passenger aircraft. But Boeing (BA) sold out through 2013. It’s a huge backlog. The Chinese have ordered thousands of new planes. Right now, there’s a lot of negative noise. It’s impossible to ignore. But if you turn the volume down, you’ll hear other noises. Other stories. Other opportunities. God bless Google. It just informed me that a Boeing 747 is weighed down with 9,000 pounds of copper.

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