Argentina seizure rattles investors

Argentina’s renationaliztion of 51% of oil company YPF (YPF-N) from the Spanish firm Repsol has spooked some mining investors in the country, though analysts say there is little chance of further nationalization.

Lumina Copper (LCC-V) and Extorre Gold Mines (XG-T, XG-X), both potential takeover targets and both holding all their eggs in the country, have been hit particularly hard by the news. Lumina, which had defied the broader resource markets for months and kept climbing on strong drill results from its Taca Taca copper project, was down $3.54, or 21.7% over the four days after the April 16 YPF announcement, to close at $12.75. Extorre, which has been on a downward slide since late January from almost $10, dropped $1.25, or 22.6%, to $4.28 over the four days.

Major producers with exposure in the country, of which there are quite a few, have seen far less movement, while the effect on other junior explorers has been mixed.  

Extorre issued a statement trying to dispel some of the concerns over the asset seizure, noting that potential financiers have indicated that the recent events should not materially affect raising money for its Cerro Moro project. The company also notes the differences in strategic importance between the hydrocarbon industry and mining. The YPF seizure relates to it once being state-owned and only privatized (in 1993), and there seem to be no signs of further nationalization plans.

Raymond James mining analyst Adam Low, who covers Lumina, is also of the opinion that the YPF seizure is a one-off and there is little threat that Lumina’s project would be seized. He notes Argentina is already a net exporter of copper and doesn’t have a copper smelter, negating the strategic advantage of seizing copper assets.

But while the threat of asset seizure is small, Low noted that the move could affect the company’s perceived prospects, even if the worries are misplaced.

“Some people are concerned that perhaps it delays the possibility of the company being an acquisition target, and clearly that’s what Lumina is, that’s why people do play the stock,” Low says by phone. “But by the same token, I don’t believe that the sale of the company was immediately imminent. They’ve had great exploration results out of the drill program they’ve been running there at Taca Taca. I think they want to build a bit more value and growth into the resource estimate before executing a sale of the company.”

Low says that despite the sell-off many investors are taking a “logical and rational view” of the situation and will continue to support the company, and he is keeping his price target at $21.50.

“There is a contingent that obviously says, ‘Argentina’s too much risk for me, I want out, I’m done.’ And we’ve certainly seen the pressure on the stock price over the last few days from that contingent. But there is a very large part of the investor base in this stock that continues to see the value in it.”

Low says that he’s spoken with his colleagues at Raymond James’ Latin American bureau, based in Buenos Aires, who also think the issue is specific to YPF, and that Lumina has been done in by market sentiment with little validity.

Daniel Earle, an analyst at TD Securities who covers Extorre, notes that in speaking with mining and legal contacts on the ground, “the unanimous answer is no. There are no implications for the mining sector.”

“While the optics of renationalization are clearly bad for Argentina,” Earle continues, “we are not aware of any indications that the government is considering taking action in the mining sector, and we don’t see the political sense in doing so: Argentina is not facing a shortage of gold or silver, after all.”