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Chilean Peso Falls: What Will Happen to These Chilean ADRs?

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The Chilean peso dropped 1.5% last Friday after the country's central bank released minutes highlighting slowing growth. Local currency corrected by 5.5% already this year, driven by weakness in copper prices and general uncertainty in the emerging markets. Chile is the largest exporter of copper in the world, and the price evolution of this commodity impacts the outlook of this economy.

Let's take a look at three Chilean ADRs in three different sectors to have an idea of where the country is heading.

Benefits in the short term
First, here's Sociedad Quimica y Minera de Chile (NYSE: SQM  ) , a producer of specialty plant nutrients and chemicals commodities. It operates as a low-cost producer with top market share in specialty fertilizers, lithium, and iodine.

This company took a hit after a major disruption in potash prices related to the breakout of Uralkali's marketing relationship with its former partner Belaruskali in late July 2013. Fortunately, some of the recent price uncertainty in the potash market has been cleared following Uralkali's new potash contract with China for deliveries in the first half of 2014 at $305 per metric ton (a 24% price cut compared to the company's last contract). Because Chinese potash prices often serve as a basis for global prices, demand should return to normal levels this year and help Sociedad Quimica's stock price.

Considering that the company exports pretty much all of its production, a drop in Chile's currency is goods news. In this scenario, Sociedad Quimica manages to get hard currency for its exports, while its costs are mostly denominated in Chilean pesos.

Solid fundamentals
Second, let's look at Compania Cervecerias Unidas (NYSE: CCU  ) , a beer producer that enjoys roughly 80% of the beer market in Chile and 23% in Argentina.

The company's biggest assets -- strong brands and a vast distribution network -- are solid in Chile. Its "Cristal" brand is widely recognized as Chile's beer, and Cervecerias Unidas is the only brewer in Chile with a nationwide distribution network. This network serves a variety of beverages as well, helping cash flow.

The key here is that Cervecerias Unidas successfully raised capital by issuing 51 million shares (about 15% of its market capitalization) to expand organically and perform acquisitions. The company's intentions for this capital are still unknown but could include activities such as entering the non-beer beverage market in Argentina, entering the Chilean snack market, or expanding into nearby countries. Considering that the emerging markets are making a correction, there could be risks of overpaying for acquisitions.

An energy giant
Finally, let's take a look at Empresa Nacional de Electricidad (NYSE: EOC  ) , better known as Endesa Chile. It is an electricity generator and distributor, with 60% of its generation base being hydro.

Fundamentals are good for Endesa Chile: Its large hydroelectric base gives it a cost edge over its thermal-generation competitors. The base also provides strong growth, solid free cash flow, and low-cost generation. In addition, the company is the primary electricity-producer in Peru, but it makes 50% of its income in Chile. It also makes another third of its income in Colombia.

You have to consider that profitability for this company relies heavily on climate conditions, however. Since the company has contracts with regulated distributors, low hydrological conditions can force the company to purchase higher-cost energy in spot markets to meet its commitments. Endesa Chile is also highly exposed to Latin America's infrastructure and energy demands, which could weaken during 2014.

Nonetheless, setbacks from low hydrological conditions caused by La Nina are vanishing, and better climates may be on the way.

Bottom line
Cervecerias Unidas will continue to dominate the Chilean market. Nonetheless, alterations in purchasing power due to currency movements and inflation will inevitably affect consumption levels. Watch the company's sales and the economy's GDP growth.

In the short and medium term, the drop of the Chilean peso, along with the stabilization of the potash market, will only make Sociedad Quimica more profitable. Long-term drivers rely on future commodity prices and global demand strength, which could correct throughout this year.

Endesa Chile could be considered for portfolios seeking infrastructure exposure in emerging markets. The big disruptor for price in this stock is climate -- which, as you know, is very hard to predict.

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Louie Grint

I am a curious economist who likes to investigate what is behind asset price movements across the globe. My articles range from industry analysis of various sectors to understanding global macro events that could trigger volatility in the markets.

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