Lima has the best market segment

The Peruvian stock market really took off some time ago, largely unnoticed by the broad investor community. Since the beginning of this year, the leading share index has again doubled which means that during the last four years it increased by more than 500 percent. The German "Dax" cannot keep up and the "Dow Jones" is also limping behind, not to mention the Nikkei from Japan. Actually this enormous upward trend was predictable. The South American country benefits greatly by the international hunger for crude materials and Peru is more than blessed by its immense natural resources.

The Andean republic is in many areas a global market leader. There is not another country on this earth that produces more silver and tin. Peru is also the third largest provider of zinc and ranked fourth and fifth in copper and gold. 50 percent of its equity trading applies to mining companies whose businesses are flourishing. An end to this boom is not in sight for the short term, even though the stock market with a current average price-earnings ratio of 27 based on extended profits, and a 4.4 percent dividend yield seems only conditionally favorable.

In the good books of rating agencies

A summary of Germany’s Commerzbank shows what was recently earned through natural resources. For example, the price of zinc increased by 165 percent compared to the same month of last year, and copper rose by almost 110 percent. The price for silver climbed by over 50 percent, gold by 49 percent and the rally for tin also continues. The current tin price is actually not far away from its 52-week high of 9.750 dollars. A price correction in May and June was well compensated by the tin market. Since July prices are steeply rising again. The overall supply situation can be described as very tense.

It was a godsend for Peru when tin production in the United States ceased to a large extend in the year 2000. The enormous revenue surpluses also benefited the state budget. The burden of debt could be noticeably reduced; liabilities towards the so-called "Paris Club" – an informal group of official creditors whose role is to find coordinated and sustainable solutions to the payment difficulties experienced by debtor nations – could be paid off in advance. Since then Peru is in the good books of rating agencies, which in return attracts foreign investors. Economy experts estimate the 2006 inflation rate at a little more than 2 percent and in 2007 it shouldn’t be more than 2.2 percent.

The annual growth rate of the gross domestic product (GDP) constituted a little over 5 percent in 2004, an outstanding 6.7 percent in 2005, and predictions for 2006 are telling a still very good 5 percent. The unemployment rate amounts to roughly 7.5 percent. There’s no other country in South America that can present such great numbers.

Volatile Bargain

Those who consider entering the Peruvian stock market do not have many options. Only a limited quantity of stocks is offered in Germany and other international financial markets. One of them is the "Compania (Cia) de Minas Buenaventura" whose ADRs (substituting original stocks) can be bought on the market under ISIN US2044481040 or WKN 900844.

The company is the sixth largest gold producer in the world, operates several plants for silver, zinc and other metals, owns a lemon plantation, has a share of Peru’s power and energy distribution, and offers engineer services.

Buenaventura significantly increased its revenue and profits during the last few years. In the second quarter of 2006, revenue increased by 90 percent to 170 million dollars. Its net income climbed by 80 percent. With an estimated price-earnings ratio of 7, the company can almost be considered a bargain. However, the stock exchange still doesn’t mirror these numbers. In 2006 the Buenaventura stock price is down by 17 percent, on the other hand the stock, experiencing large fluctuations, rose by 100 percent.

One of the stock’s problems is the lack of liquidity. Interested investors have to confront a higher risk. Those who are not constantly following the market are well advised by investing in funds, for example the "Gold Equity Fund" or the "Merrill Lynch World Mining Fund C2". These funds have invested in Compania de Minas Buenaventura as one of their top holdings. However, they already have performed well in the past. A little more security and an equal income return are promised by fund products whose management favors nonferrous metals such as copper, next to gold and silver. Even they cannot avoid Peruvian mining company shares.

(Ronald Tietjen is a freelance economic journalist in Hamburg and Frankfurt/Main, Germany.)

– related articles –

– Buenaventura Announces Third Quarter 2006 Results (LIP, Oct. 30, 2006)