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Chasing Bruce
Chasing Bruce
Articles (4)  | Author's Website |

Uncertainty in Argentina Equals Opportunity?

April 25, 2012 | About:

Last week, the government of Argentina announced they were appropriating the assets of YPF (YPF), the Argentine oil company, which was mostly owned by Spanish company Repsol (REP). Repsol had bought the company from the Argentine government in 1999, and since that time has been victim to the whims of Argentina. Argentine President Christina Fernandez de Kirchner has justified the move by noting that every country has a right to its own resources and claiming that YPF was mismanaged by Repsol.

The world is now concerned that Argentina will not stop with YPF, and other publicly traded Argentinian companies are at risk of nationalization. As a result, other Argentinian companies have sold off hard in recent weeks.

However, despite these very real risks, market disruptions by outside forces often lead to opportunities as sellers sell their positions as quickly as possible.

As such, I decided to take a look at Cresud (NASDAQ:CRESY). I first learned about CRESY when reviewing Mohnish Pabrai’s past investments. CRESY is essentially an agricultural land company, with most of their holdings in Argentina. However, they also own land in neighboring countries, and a controlling interest in Argentinian property developer IRSA Inversiones Representaciones (IRS).

In an ideal situation CRESY will trade for less than the value of its non-Argentinian assets. If that were the case, down side risk in an investment in CRESY would be limited to the psychological overreaction of the market if the government of Argentina were to appropriate the Argentinian assets.

CRESY’s balance sheet is a spider web, but after a quick review it looks like CRESY owns the following outside of Argentina:


Additionally, CRESY owns 63.22% of IRS, and IRS owns the following assets outside of Argentina.


Now, I have to admit I am not exactly sure how the mechanics of this would work if Argentina were to seize all of CRESY’s Argentine assets. I assume that the non-Argentine assets would be distributed to shareholders in something akin to a spin-off, but I really have no idea and would appreciate any thoughts in the comments section.

However, it seems like right now the value of CRESY’s non-Argentine holdings is about 76% of the market cap of CRESY. In the interest of conservatism, this is just hard assets, with no weight ascribed to earnings power, and these are assets that can earn and appreciate.

At this point given my lack of knowledge of how non-Argentine assets would be treated in an appropriation this isn’t enough to make me want to catch the falling knife, but it is certainly on my radar. The down side would be limited even in the case of appropriation, and in theory, the down side could even be hedged out by shorting ARGT. Longer term, I believe the upside on the agricultural land (assuming no seizure) would be substantial over time.

The fact of the matter is that the global population continues to grow, increasing demand for food, and there are only so many parts of the world that can meet this demand. North America and Western Europe are close to max capacity. Australia, Africa, and inner Asia are deserts. South America is one of the few regions of the world that has arable land and ample water supplies virtually guaranteeing that it will become the world’s bread basket.

Of course, in the shorter term, the risk that Argentina is run into the ground by anti business policies and rampant inflation are very real.

As for the likelihood of CRESY’s Argentinian assets being nationalized, in general terms, I think it is unlikely. However, left wing populism has a long history in Argentina, and YPF was not the first company to be nationalized. For example, in 2009, Aerolineas Argentina – also Spanish controlled – was appropriated.

A nationalist tide is rising in Argentina as also demonstrated by Kirchner’s recent vocal stance on the Falkland Islands (although I tend to agree with her here). However, appropriation of a foreign-owned physical resource company (oil, copper, coal, etc.) just seems way easier to justify than that of agricultural land. That being said, the risk still exists.

The Movimiento Campesino de Cordoba (MCC), is a vocal part of Argentina’s National Indigenous Campesino Movement (MNCI) that is highly critical of the changes that have taken place in Argentinian agriculture as it has become more modern.

According to activist journalist Marie Trigona, “[In Argentina] traditional agriculture provides 35 job posts for every 100 hectares cultivated, while also guaranteeing food diversity, production for local markets and sustainable use of resources such as land and water.” The modern agricultural system is focused on mass production of cash crops for export – mostly soy and corn. In fact, since the '70s the amount of land dedicated to growing soy has increased from 10,000 hectares to over 14 million hectares. Critics fault this shift for a rise in hunger and malnutrition amongst the population. Much of this soy is exported overseas and used to feed livestock. Under this model, only one job is created for every 500 hectacres cultivated. A hungry and unemployed population is not a trade I want to be on the other side of…. but if the Argentine assets are free and I am only paying for the non-Argentine assets, that is a different story all together. Going long CRESY and hedging out the Argentine risk while hoping for a spin-off of non-Argentine assets could be an interesting special situation.


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