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

The Chilean peso is dropping. What's the outlook for Sociedad Quimica y Minera de Chile, Endesa Chile, and Compania Cervecerias Unidas?

Feb 5, 2014 at 4:14PM

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.

Louie Grint has no position in any stocks mentioned. The Motley Fool recommends Compania Cervecerias Unidas 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.

1 Key Step to Get Rich

Our mission at The Motley Fool is to help the world invest better. Whether that’s helping people overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we can help.

Feb 1, 2016 at 4:54PM

To be perfectly clear, this is not a get-rich action that my Foolish colleagues and I came up with. But we wouldn't argue with the approach.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich" rated The Motley Fool as the #1 place online to get smarter about investing.

"The Motley Fool aims to build a strong investment community, which it does by providing a variety of resources: the website, books, a newspaper column, a radio [show], and [newsletters]," wrote (the clearly insightful and talented) money reporter Kathleen Elkins. "This site has something for every type of investor, from basic lessons for beginners to investing commentary on mutual funds, stock sectors, and value for the more advanced."

Our mission at The Motley Fool is to help the world invest better, so it's nice to receive that kind of recognition. It lets us know we're doing our job.

Whether that's helping the entirely uninitiated overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we want to provide our readers with a boost to the next step on their journey to financial independence.

Articles and beyond

As Business Insider wrote, there are a number of resources available from the Fool for investors of all levels and styles.

In addition to the dozens of free articles we publish every day on our website, I want to highlight two must-see spots in your tour of

For the beginning investor

Investing can seem like a Big Deal to those who have yet to buy their first stock. Many investment professionals try to infuse the conversation with jargon in order to deter individual investors from tackling it on their own (and to justify their often sky-high fees).

But the individual investor can beat the market. The real secret to investing is that it doesn't take tons of money, endless hours, or super-secret formulas that only experts possess.

That's why we created a best-selling guide that walks investors-to-be through everything they need to know to get started. And because we're so dedicated to our mission, we've made that available for free.

If you're just starting out (or want to help out someone who is), go to, drop in your email address, and you'll be able to instantly access the quick-read guide ... for free.

For the listener

Whether it's on the stationary exercise bike or during my daily commute, I spend a lot of time going nowhere. But I've found a way to make that time benefit me.

The Motley Fool offers five podcasts that I refer to as "binge-worthy financial information."

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. It's also featured on several dozen radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable ... and I don't say that simply because the hosts all sit within a Nerf-gun shot of my desk. Rule Breaker Investing and Answers contain timeless advice, so you might want to go back to the beginning with those. The other three take their cues from the market, so you'll want to listen to the most recent first. All are available at

But wait, there's more

The book and the podcasts – both free ... both awesome – also come with an ongoing benefit. If you download the book, or if you enter your email address in the magical box at the podcasts page, you'll get ongoing market coverage sent straight to your inbox.

Investor Insights is valuable and enjoyable coverage of everything from macroeconomic events to investing strategies to our analyst's travels around the world to find the next big thing. Also free.

Get the book. Listen to a podcast. Sign up for Investor Insights. I'm not saying that any of those things will make you rich ... but Business Insider seems to think so.

Compare Brokers