Win us with honest trifles

Peru politics

The following from IKN280, dated September 21st 2014. The context: According to exit polls this evening, Luque has beaten Aduviri into second place and may even have enough votes to win in a single round, without the need for a run-off.

Or in other words: IKN 1, JP Morgan 0

Read on, kind visitor to IKN…


IKN280, September 21st 2014

Bear Creek (BCM.v): The game changes
I’ve been looking more carefully at the situation in Puno’s political scene as a result of the selling last week (even before that late Friday dump, the $2.20 or abouts prices were enough to getrme interested again) as well as casting around my contacts in the zone for opinions and thoughts on how they see the election unfolding.

The upshot: I think there’s now a potential long trade here. So help me, higher powers.

First a little memory nudge via this chart (not shown here on blog), which shows how BCM has given us a very volatile ride in 2014, even by the standards of this whacked out market. The lows were under $1.50 in April and May, but come July and August the stock traded at and over $3.50. During that time we managed to snag a reasonable little 25% win on a small, near-term trade (marked on the chart) but failed miserably to capitalize on the big move by selling out too early. The final scene is this month of September, which has seen BCM drop very hard and thanks to the outright panic selling of late Friday closed at $1.88.

[Sidebar: BCM wasn’t the only silver stock to suffer late Friday, for example Fortuna Silver (FVI.to) was dumped late down to CAD$4.44. This is part of my uncertainty that’s voiced further down in this note as I really don’t know how these stocks, including BCM, will open and trade on Monday and the days to come]

So that’s the potted history, now for the reasons why there may be a trade here and that starts with the state of play in voter intention polls for the Puno regional elections. This has been the object of a couple of recent notes in The IKN Weekly (see IKN278 and IKN279 last week) because we’ve tracked the rise in the polls of Walter Aduviri, the man behind the Santa Ana protests of three years ago that royally screwed that BCM owned project.

We left things last week in IKN279 with me half-kicking myself that JP Morgan had picked up on the scent of the rise of Aduviri too. Here’s a section from last week by way of reminder:

To my dismay and personal regret, I read on Monday (21) that JP Morgan had published a client alert on the Peru regional elections and had pinpointed Walter Aduviri’s rise as one of the main problem points of the country. To quote the report (translated),

“The frontrunner candidate for the regional presidency of Puno is Walter Aduviri, ex-member of the Gregorio Santos team in Cajamarca, which implies an even more difficult scenario for mining projects in the [Puno] region”.

I strongly suspect that the JP Morgan call of “Aduviri Favourite” on Monday is the reason behind the share price action in Bear Creek Mining (BCM.v) last week.

IKN280 back and what we saw I the price collapse of BCM in the days since those words confirms to me that the Aduviri situation is the reason for the sudden weakness. For sure exacerbated by the heavy plunge in silver, but people are running away from BCM bigtime and the price has been cut in half in the two weeks since JPM warned its lists. But I think JPM is calling this one badly and Aduviri is by no means favourite for the the vote come October 5th. Here’s why:

First we consider the latest opinion polls out of local Puno survey companies. There are two, (22) both taken during the first week in September, with the De Fondo survey company (23) putting Juan Luque Mamani of the reasonably moderate PICO (stands for Integration and Cooperation Project for the Development of Puno) party on 19.0%, with Walter Aduviri on 17.0%. Then in third place Lucio Rojas on 10.7% and fourth Alberto Quintanilla on 6.1%, then come the also-rans. De Fondo interviewed 1,200 people and call their margin of error at 3.5%. The second survey company is CIMEC Kipu, who put Juan Luque Mamani on 16.5% and Walter Aduviri on 14.3% with another chunky gap to 3rd and beyond. In other words, the front two are clearly ahead of the field, but neither looks likely to break through the 30% barrier needed for a first round win and that means we’re odds on to get a second round run off between Luque and Aduviri in November (there’s no fixed date for any run-off yet, aside from the month).

So Aduviri isn’t leading the field in Puno. Not only that, but this radical and outspoken figure is in second place to a relatively moderate candidate in Juan Luque Mamani, ex-rector of a local university (the UANCV, where as it happens one of my sisters in law works as a languages professor). Luque has been a lower figure in Puno politics previously and is allied with an ex-mayor of the city, so he has the profile and likely the consolidation power to be able to beat off Aduviri in an eventual round two run-off. The other aspect to consider is tribal (for want of a better word) as Aduviri is an Aymara and is heavily identified with the Aymara people to the South of Puno, rather than the predominately Quechua descended people in the Northern part of the region. Although there’s very little if any animosity between Quechua and Aymara these days, there still exists an undercurrent of wariness and from what I have picked up, the Quechua regions (which comprise perhaps half of the total population) think an eventual regional president Aduviri would favour development and growth for the Aymara South over Quechua North Puno. The more moderate Luque would suit them better.

Therefore the most likely scenario today is the following:

Luque and Aduviri win through to a second round run-off, with neither candidate reaching 30% of the total vote
Luque wins in the second round.
Bear Creek Mining (BCM.v) rallies on the news.

That’s the easy bit, the difficult bit is deciding when BCM might rally and just as importantly, from what level. First the entry price questions and after the heavy drop of Friday afternoon literally anything could happen when the markets open tomorrow Monday. BCM might go down further, it might snap back to the $2.20 level, it may stay under $2. I honestly don’t have a clue. As for when we might get a rebound on a relief of political concerns, that’s another one to guess about and as shown a couple of weeks ago (with mea culpa last week) I’m not so good at timing these things.

All the above means that I think there may be a trade, if silver holds up and if BCM gives a decent entry window, but it’s going to be a tough one to call and I don’t know whether there definitely is a trade. But there is a trade here somewhere, because the selling now looks overcooked. If I had to guess (and I suppose I do), the scene is likely to stay volatile until October 6th minimum and as anything could happen between now and then I’m pretty sure to stay out on the sidelines, watching. However come October 6th and the election results, if my likely scenario becomes fact and it’s Luque vs Aduviri in the November run-off, I may take a long position in BCM in the expectation that Luque moves ahead and becomes clear favourite quickly. All this of course is also highly dependent on the price of silver and any new trade exposed to the metal has a lot of caveat to think over. But given a fair wind on the metals price, a return the $2.50 and above on a Luque win and Aduviri loss would be an easy target to make. That’s nearly 33% higher than Friday’s close and that’s not a bad short-term target win.

I’m going to watch BCM next week. My forecasts on its price moves due to political newsflow have been bad recently, which I might just be identifying the reason why we’re now seeing the very bottom and it rebounds sharply without me on board as from tomorrow. But it’s way too volatile for my blood and I’d prefer to see 1) a more settled price (higher or lower) plus 2) reduced volume and 3) a date much closer to the October 5th election (preferably just after it with results in hand) before making a move.

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