Brazilian Companies Should Invest in Argentina Now

Federico is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Financial Times' recent article about Argento–Brazilian relationships is right about everything. From the article:

“While Argentina’s economy is much smaller than Brazil’s, it is an important market for Brazilian manufactured exports, many of which are less competitive outside the region. Argentina, meanwhile, needs Brazil for its market and because it literally has few other friends”.

That said, the relationship is getting more complex even as I write this article, and some of the main Brazilian companies are abandoning their investments in Argentina. I think they should do the opposite. Let's take a look at what is going on and why I think they should stay regardless the current outlook.

Argentina's outlook

Argentina's poor GDP growth during 2012 (private estimates put it around 1.4%) and an inflation rate running up to 25% have induced Argentinean authorities to put in practice unorthodox and ineffective economic policies. Policies like harsh import restrictions and multiple exchange rates are damaging the economic outlook, and Argentina's relationship to the world, even further above its bilateral relationship with Brazil, which is Argentina's main trading partner.

As this relationship gets increasingly difficult, two of the most relevant Brazilian companies are fleeing the country. These companies are the mining champion Vale (NYSE: VALE), and oil giant Petrobras (NYSE: PBR). Let's take a further look at what might be the long term results for the companies involved.

Fleeing the country: Is it the right decision? 

Just a few weeks ago, Vale took the “unilateral” decision to dump a $6 billion potash project in the province of Mendoza (one of the richest regions within Argentina). The reasons are more financial than political: Inflation has been running up much faster than the depreciation of the Argentinean Peso, making Argentina increasingly expensive. This made an export-led project, such as the one Vale was aiming to complete in Mendoza, just uneconomical.

Potash prices didn’t help either.  The mineral lost 25% of its value in less than a year. As a result of Vale's decision not to pursue the project, Authorities will surely strip the company from its concession, and Vale will lose the possibility of exploiting one of the most attractive potash sources in the world. Argentina has the resources to become one of the world’s top suppliers of potash - a key agricultural fertilizer – and I am sure the country will find partners interested in getting a valuable mining asset that can be exploited for decades to come.

Let's wait and see; but if I was a shareholder of Vale, I would not be happy with management's decision. After all, Vale is expected to have a $14.7 billion EBIT in 2013, which is more than enough to withstand some short term losses in the name of a long term, strategic world class asset.

Petrobras is doing pretty much the same thing as Vale. The company acquired its Argentine oil/gas assets from the Perez Companc family over a decade ago. The company Petrobras bought, now called Petrobras Argentina (NYSE: PZE) is an integrated energy company with very relevant upstream and downstream assets within the country. The company has recently announced that it wishes to sell most of its assets and only keep a portion of its exploratory areas within the Vaca Muerta formation, which is said to be one of the biggest and most valuable shale areas in the world.

I think Petrobras is making a terrible long term decision. If Petrobras decides to sell its whole downstream and some upstream areas, it will probably end up losing concessions within world class areas. This will damage its long term earning potential. I would not be happy if I was a Petrobras shareholder either.

Keeping the eye on the long term

It seems that some Brazilian managers are not keeping the eye on the long term. Argentina should be a long term interest- not because of its small internal market (Argentina's population is just 40 million) -but because of its ample natural resources. Despite its resource potential, Argentina concentrates just 3.75% of all Brazilian investments abroad.

Companies like Vale and Petrobras should be investing now, when nobody else in the world is doing it. They would be able to lock in much better terms and conditions on their investments, and they would be doing so at great prices. After all, governments don't last forever. And, above all, when they pursue inconsistent policies. I am myself invested in Argentina and I think all companies focused on natural resources should do the same. Buy now, while its still cheap!

Federico Zaldua has no position in any stocks mentioned. The Motley Fool recommends Petroleo Brasileiro S.A. (ADR). Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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