Reporte del Financial Times sobre Mendoza


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Financial Times publica el día 13 de noviembre un larguísimo reporte sobre Mendoza y las oportunidades de negocios.

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Reporte del Financial Times sobre Mendoza

  1. 1. FT SPECIAL REPORT Latin America’s Regions Doing Business in Mendoza Wednesday November 13 2013 | @ftreports A region with barrels of potential The resource-rich Argentine province has a bright future, writes John Paul Rathbone Tourists taste the good life Skiing, climbing and polo are all on offer before dinner O n the world stage, Argentina is perhaps best known for three things, all beginning with the letter “M”: Lionel Messi, the world’s best footballer; mismanagement – Argentina is unique in its radical reversal from the advanced economic development it apparently achieved in the early 20th century; and Malbec, the Bordeaux grape that is celebrated as Argentina’s most distinctive wine varietal. This report – the first in a series on Latin America’s regions – is about a fourth “M”: the region of Mendoza. Abutting the Andes, this desert state is a microcosm of Argentina’s potential, although in this case “potential” is an overused word: Mendoza has already realised much of its promise. There is its wine, of course, because Mendoza forms the centre of Argentina’s centuries-long wine tradition that has been upgraded with Zen-like attention to oenological detail to earn its vineyards, such as Bodega Catena Zapata and Mendel Wines, a global profile. No self-respecting Argentine – or for that matter European or Californian – millionaire with more than a passing interest in wine does not also want to own at least a few hectares in the wine lands of the Uco valley. But it is not only wine and its largest exporting companies, such as Peñaflor, the eighth largest wine company in the world, that gives Mendoza a certain cosmopolitan air. Page 2 Plan for tunnel through Andes Ambitious rail project could transform region Page 3 Oil chief seeks shale funding Miguel Galuccio is working to attract new investors There is Impsa, a turbine manufacturer that has the technology to take on global competitors. With deep roots in the state, the family-owned company, now in its fourth generation, has annual sales of more than $1bn and is a genuine “multilatina” – a Latin American company with a presence across the region. There is also Roberto Zaldívar, one of the world’s leading ophthalmologists, who practises out of his Mendocino clinic; Grupo Uno, Argentina’s second biggest media company; and large mineral and energy deposits, from uranium, potash and copper, to gas and oil. “Mendoza produces a fifth of Argentina’s oil,” says Miguel Galuccio, chief executive of YPF, the national oil company. With the development of the vast Vaca Muerta shale gas formation set to push ahead over the next few years, it will soon account for even more. Sun-kissed state that has clasped the joys of winemaking to its heart Expert view JANCIS ROBINSON I have been to most of the world’s wine regions but I have never been to a place where wine is so deeply embedded as in Mendoza. Bordeaux and Porto run it close, but both have other important commercial activities. The neat grid of treelined streets of Mendoza’s capital, also called Mendoza, seems designed to spirit you as quickly as possible to one of the numerous vineyards outside the city. Walk through the brilliant white 19th-century Spanish colonial façade of the Park Hyatt, Mendoza’s most prominent hotel, overlooking Plaza Independencia, and you are assailed by invitations to sample a glass of wine in a bar, join a tour of the vineyards or buy a bottle or two. There is something about the quality of light – a brilliance typically filtered by the leaves overhead – that echoes what the local producers believe defines their wines. At 750m elevation, the city of Mendoza is already relatively high. But it is the altitude of the vineyards and the quality of the ultraviolet light there that gives distinction to them and their produce. Mendoza is on roughly the same latitude as Tunis, which is normally too close to the equator for good quality wine production, but altitude Inside » counterbalances this. Mendoza’s vineyards used to be concentrated on the fertile plains around the city, making vast quantities of slightly rustic reds and pinks and some decidedly heavy, often oxidised, white wines. Rainfall here is low – barely eight inches, or 200mm, a year – but the melted snows of the Andes have (so far) provided supplies of irrigation water – sufficient to plump up the grapes nicely. So high were yields traditionally – often several hundred hectolitres per hectare, when the usual limit for France’s better wines is about 50 hl/ha – that Argentina was at one time the fourth most important wine producer in the world. Americans have planted the vine so enthusiastically that the US has overtaken Argentina in terms of total volume produced, helped by the fact that Argentina, not much of a wine exporter in the 1980s, had a national vine pull scheme. But, in the past 25 years or so, the Argentine wine industry has woken up, become much less insular, and started to export in great quantity. The crucial ingredient in the mix was a redrafting of the Mendoza wine map. Since the late 1980s, vineyards have been planted at much higher altitudes, where cooler nights slow the ripening process and prolong the growing season, meaning that the resultant grapes have time to build up subtlety as well as sugar while retaining refreshing acidity. The belief is that the clarity of light here plays a part in building up the phenolics so important to fine red wines. Many of the best new vineyards have been planted in the Uco valley at altitudes of up to 1,700m. In Europe, 500m is regarded as the maximum altitude at which grapes can be persuaded to ripen. Tupungato and Tunuyán are the most important The resultant grapes have time to build up subtlety as well as sugar departments for fine wine production in the Uco valley, with La Consulta district cool enough to have encouraged growers to plant white wine grapes as well as the finicky Pinot Noir that ripens so early it needs a particularly cool climate. But Malbec is by far the dominant grape variety of Mendoza province. Indeed, Mendoza Malbec has played by far the biggest part in Argentina’s successful transformation into a successful wine exporter. It produces rich, powerful wines, typically packaged in overweight bottles that satisfy marketeers if not ecologists, and conform to what has been the stereotype of a successful red wine. Mendoza Malbec was such a hit in the US market that producers in Cahors in southwest France, home of the grape variety, started calling their grape Malbec instead of using their traditional names Cot and Auxerrois. But the winds of change have recently been blowing through the vineyards of Mendoza, with many producers deliberately making finer, more scented reds from their signature grape variety by, among other things, picking grapes earlier and reducing the number of new oak barrels. There has been no shortage of outside investment in Mendoza wine. Prominent incomers include Michel Rolland, the world’s most famous consultant winemaker who owns the Clos de los Siete winery; Diane and Hervé Joyaux Fabre of Fabre Montmayou; California’s Cuvaison; Cava giant Codorniu; and José-Manuel Ortega, a Spanish former banker whose wife also runs one of many exciting restaurants in the wine country outside the city of Mendoza. Argentina, with its waves of immigration from France, Spain, Italy and Germany, has long benefited from its particularly diverse range of cultural influences and all of these are reflected in the increasingly wide variety of wines coming out of Mendoza. Rather unexpectedly, Mendoza turns out to be the source of some particularly fine, distinctive Chardonnay, a grape that seems to thrive in the relatively long hours of Mendoza sunshine. Torrontés, the Argentine speciality white grape, also thrives there, as does Pinot Gris and even Friulano, as well as, from the highest vineyards, Sauvignon Blanc. Mendoza is no longer a onegrape wonder, even if hail remains the bane of every vine grower’s spring and summer. Light fantastic: Mendoza’s wines echo the unique characteristics of the region All in good time: wine casks ageing at Mendoza’s Bodega Catena Zapata Most distinctive of all, however, is the state’s work ethic – which Charles Darwin missed when he visited and wrote that “the happy doom of the Mendocinos is to eat, sleep and be idle”. But Darwin visited almost 180 years ago, and in the summer, when temperatures can top 40 degrees and a siesta is almost obligatory. Mendoza’s celebrated work ethic derives partly from its proximity to Chile – Santiago, the capital, is only Continued on Page 3 Page 5 Former banker indulges taste for liquid assets O. Fournier owner has no regrets Page 6
  2. 2. FINANCIAL TIMES WEDNESDAY NOVEMBER 13 2013 ★ 2 Doing Business in Mendoza Mining potential not yet realised Tumbling prices leave potash mine in limbo Minerals A law meant to protect farmers is blocking development, says Benedict Mander Development The loss of a big investor has put a potentially valuable export industry in doubt, writes John Paul Rathbone T he vast mineral wealth deep underneath the Andean chain has attracted outside attention ever since the days of the Spanish empire. Yet, unlike in neighbouring countries, most of Argentina’s rich mineral resources have remained largely undeveloped. This is in marked contrast with the flourishing mining industry across the border in Chile, which shares the same geology. Nowhere has Argentina’s mineral potential been more neglected than Mendoza, whose prospects as a mining centre hit a serious obstacle when a provincial law, enacted in 2007, attempted to put a brake on projects that locals feared would threaten the scarce water supplies of their arid province. Many say that Mendoza went too far. Concerns for the agricultural industry, which is irrigated with water whose source high in the Andes is where most mining projects are located, resulted in a ban on the use of chemicals such as cyanide, mercury and sulphuric acid. This made many mining projects unviable. “What’s the most effective way of curing a headache? The guillotine,” says Raúl Rodríguez, a lawyer acting for a number of mining companies seeking concessions in the region. “Mendoza has applied the guillotine to its problems. It’s a solution, yes, but not a very intelligent one.” Despite the huge potential – local experts value Mendoza’s mineral deposits at about $350bn – big mining projects are on hold while how best to control the industry is debated. “There is neither political nor social consensus. We can’t advance without consensus,” says Francisco Pérez, governor of Mendoza. “There’s a lot of hypocrisy,” he adds, pointing out that some farmers lend their support to anti-mining groups while at the same time taking little care of the region’s scarce water resources themselves. Indeed, only 4 per cent of Mendoza province is cultivated, yet agriculture Chemical ban: a project on the scale of the El Teniente copper mine in neighbouring Chile would be impossible in Mendoza uses 96 per cent of its fresh water supplies while accounting for just 8 per cent of its gross domestic product, says Mario Chabert, president of Mendoza’s mining chamber. By contrast, in the mining-friendly province of San Juan to the north, where Canada’s Barrick Gold has operations, mining uses 1 per cent of its water but accounts for 77 per cent of exports, he says. According to Mr Chabert, mining would not necessarily compete with agriculture for water, as the bulk of Mendoza’s prospective mining projects are in the south, where there is no agriculture. Moreover, he argues that mining and agriculture have coexisted comfortably in Chile for years, citing the example of the Cachapoal valley, which has a flourishing wine industry irrigated with water that comes from the same sources as the water used at El Teniente, the biggest underground copper mine in the world located in the mountains above. Local environmentalists recognise the importance of mining. The main problem is that they doubt that institutions in Mendoza are capable of controlling and monitoring powerful multinational mining corporations effectively. Eduardo Sosa, president of Oikos Red Ambiental, a group that monitors and promotes environmental issues in Mendoza, says there is a “dangerous proximity” between mining companies and the cash-starved regional government, whose interests are not always aligned with local communities. ‘There is neither political nor social consensus. We can’t advance without consensus’ Although Mendoza’s mining law “can certainly be improved on and adapted to the needs of the mining sector”, Mr Sosa believes it is essential for there to be “trust, transparency and effective public participation” in mining projects. “Almost all the problems with mining projects are related to poor environmental impact studies or poor communication with local communi- ties,” Mr Sosa says. “That is the seed of all conflict.” Until the people of Mendoza decide on the answer, companies such as U308 Corp, a Canadian uranium miner, will be obliged to stay away from the province. U308 owns a concession in Mendoza that it was forced to abandon after the introduction of the 2007 law. Hugo Bastías, vice-president at U308 Corp, points out that, although Argentina imports about 250 tonnes of uranium a year, there is enough uranium in Mendoza alone to satisfy national demand for the next 100 years. Mr Chabert says it is “criminal” not to develop Mendoza’s mineral resources, the bulk of which are copper. He says that, within five years, simply by activating seven mines that have already been developed, mining could generate annual export revenues of $1.2bn, in addition to Mendoza’s current export revenues of $1.7bn “Everyone asks the government of Mendoza for money, and their answer is always that we don’t have the resources. Well, we do: they are in the mountains, and they belong to everyone,” he says. It was a sign of how bad things had become. In May, Luiz Inácio Lula da Silva, Brazil’s charismatic former president who is famed for his negotiation skills, travelled to Argentina to discuss the future of a $6bn investment that Vale, the partly stateowned Brazilian mining group, had planned in Mendoza. Vale had suspended the Rio Colorado potash project two months before, citing Argentine exchange controls and rampant inflation that made the project commercially unviable, and had almost doubled its costs to $11bn. So when Mr Lula da Silva was pictured in a traditional Andean poncho, discussing the project with Francisco Pérez, Mendoza’s governor, Vale’s private investors feared he may reverse his position and broke into a sweat. “We were trying to make the venture viable and he seemed open to the idea,” Mr Pérez said of the meeting. The Rio Colorado venture was set to be one of the biggest capital investments in Argentina, turning Brazil’s neighbour into a top supplier of potash – the potassium compound that Brazilian farms need for fertiliser. However, after spending $2.5bn completing more than 40 per cent of the project, which includes a port terminal and 790km of railway, Vale suspended operations in March. For Argentina, it was a tremendous blow. As well as employing 6,000 workers, the venture would have provided a significant amount of exportable potash, which would have helped protect Argentina’s trade surplus. Production was set to start in 2014 at an estimated 4.3m tonnes of potassium a year – all of it destined for Brazil. “The rule of law is a two-way track when it comes to investment. The state has to do its part, but so do the companies,” fumed Julio de Vido, Argentine planning minister, after Vale announced it was suspending development. “If there is a failure to fulfil the terms, as there is flagrantly in this case . . . it violates the concession the province awarded to Vale.” But under the concession’s terms, the Brazilian group had to pay a small fee every year and make a minimum capital investment within the first five years, all of which it did. “Vale over-complied,” says Raúl Rodríguez, a mining specialist at Barraza, Rodriguez, Diaz & Gregorio, a Mendoza law firm. “With the annual fee paid, the concession is fixed and safe.” Vale then put the project up for sale in April after agreeing to pay an extra two and a half months in wages to laid-off workers. The Brazilian group is now contemplating other potash projects elsewhere amid big changes in the market. An end to output restrictions this summer by Uralkali, a Russian producer, and Belaruskali, its Belarus state-owned partner, has led potash prices to tumble. This has made acquisitions or expanded production at existing sites more economic for Vale than expensive foreign greenfield projects, such as Rio Colorado. Vale is now contemplating projects elsewhere amid big changes in the market None of this has made Mr Pérez’s job easier, as he has scrambled to find new partners for the site that Techint, the Italo-Argentine conglomerate, is currently caretaking for Vale. “We are in various conversations,” says Mr Pérez, who has met potential Chinese, Indian, Russian and Qatari investors. “The new idea is to scale back the original project, but I am just a facilitator.” Although the odds on such a deal appear to be long, all is not bleak. Forecasts say that, by 2020, Brazilian consumption of potash will have risen to 13m tonnes annually, from 8m tonnes now. So a potentially huge market remains. However, that rising demand is not going to be met from Argentina for now – or at least not until a fresh investor comes along that is willing to buy out the project from Vale. Meanwhile, Rio Colorado is for sale and Argentina is a few billion dollars and 6,000 jobs poorer than it might otherwise have been. Fact file Population (2010) 1.74m Cristo Redentor pass GDP growth 2012 Mendoza (valued in 1993 pesos) Tupungato Santiago Uco valley Tunuyán 2.2% La Paz Rio Tunuyán CHILE Inflation rate 10.5% Estimated value of Mendoza’s mineral deposits San Rafael General Alvear $350bn Number of visitors to Mendoza (2012) MENDOZA 2.7m Main grapegrowing areas Share of Argentina’s total wine output (2012) ARGENTINA Buenos Aires 69% ARGENTINA ATLANTIC OCEAN Santiago Highest altitude at which grapes are grown 1,700m Sources: Argentinian government, Mendoza provincial government, Great Wine Capitals, Contributors John Paul Rathbone Latin America editor Jancis Robinson Financial Times columnist and author, with Hugh Johnson, of The World Atlas of Wine, 7th Edition (Mitchell Beazley, 2013) Benedict Mander Argentina correspondent » Ian Mount Author of The Vineyard at the End of the World: Maverick Winemakers and the Rebirth of Malbec (W.W. Norton, 2012) Camila Bretón FT contributor Rachel Savage Researcher Robert Orr Commissioning editor Andy Mears Picture editor Steven Bird Designer Barbara Lawson, Kate Bevan Sub­editors For information regarding FT commercial platforms please contact or your usual representative. All editorial content in this special report is produced by the FT. Our advertisers have no influence over or prior sight of the articles or online material.
  3. 3. FINANCIAL TIMES WEDNESDAY NOVEMBER 13 2013 ★ 3 Doing Business in Mendoza Consortium pursues grand plan of tunnel through Andes Infrastructure An ambitious project could transform the region, says John Paul Rathbone W hen does a tunnel qualify as a pipe dream? Perhaps when it is to be 120km long, privately built and financed, and drilled through snow-capped mountains between two countries that nurture a longstanding animosity. Not that Eduardo Eurnekian sees one of the South American continent’s biggest engineering projects this way. Linking Argentina and Chile via a train tunnel under the Andes may be a difficult, and perhaps even visionary, undertaking. But it is not impossible. “The engineering is not the hardest part,” says the president of Corporación América, the Argentine holding company leading the project. “The hardest part is the financing.” If Mr Eurnekian’s plans come to fruition, engineers will, by 2015, be blasting rock in the first phase of a $3.5bn plan that aims to remove a barrier for Atlantic economies that are ever more dependent on Asian trade. “Economic integration is already happening in South America. It’s inevitable,” Mr Eurnekian says of the project. “The US built its first transcontinental railway in the 1860s. Why not South America now?” The tunnel will join an increasing number of infrastructure links planned to cross the South American continent – projects that mirror the shift in the region’s trade patterns from the Atlantic towards the Pacific. The only significant Andean pass in the southern half of the continent is a high spiralling road with hairpin bends so tight they are referred to as the “snail”. Furthermore, the Cristo Redentor pass, which links Mendoza with Santiago in Chile, is blocked by snow for 40 days a year, often leaving trucks stranded in sub-zero temperatures. Mr Eurnekian’s consortium – which includes Mitsubishi of Japan, Chile’s Truck stop: snowfall often halts traffic on the Cristo Redentor pass through the Andes, adding to the expense of moving goods between Argentina and Chile Grupo Empresas Navieras and Geodata of France – aims to remove that bottleneck. If they pull it off, the tunnel, which will take ten years to build, will link train and trucking hubs on either side of the Andes, cutting shipping times between Argentina and Chile and saving transport costs. Brazilian goods seeking Pacific ports will benefit too. Much of the processed soya, wine and meat that Argentina exports to China, as well as imported Asian goods, are shipped around the treacherous Cape Horn, adding nearly 3,000 nautical miles and another week to the trip. ‘The engineering is not the hardest part. The hardest part is the financing’ Resource-rich region with barrels of potential Continued from Page 1 360km away, while Buenos Aires is 1,200km distant. But most of it comes from the area’s desert roots – Mendoza’s original name, cuyo, means “sandy land”. The area’s first known inhabitants, the Huarpes, cultivated corn, beans, squash and quinoa using a system of irrigation that carefully rationed run-off from Andean snow melt. This system was built on and expanded by the Incas, and then by the Spanish conquistadores. Although the irrigation system, which remains today, allowed farmers to cultivate more land than they otherwise could, its most important and lasting contribution is cultural. To function, it requires a degree of co-operation, responsibility and adherence to rules that Mendocinos boast are less present elsewhere in the country. It is no accident that Mendoza is the only Argentine state never to default on its debt, or that local politics – a model of convivencia – lacks the malice and vitriol of Buenos Aires. “Argentina is about bonanza, Chile is about effort. And Mendoza? It is about the desert,” says José Octavio Bordón, a former Mendoza governor and Argentine presidential candidate who was also ambassador to the US. He adds: “Everything grown or produced in Mendoza is solely because of the effort of man. You can’t just throw seeds on to the soil and expect them to grow. Here, you must work.” This attitude can be seen in Francisco Pérez, the state governor, a member of President Cristina Fernández’s ruling Victory Front party and a man with the energetic air of a workaholic executive. “Look at this,” Mr Pérez says jumping out of his office chair. He strides past photographs of Evita Perón into a back room and flicks a switch; a detailed analysis of state finances, hospital beds and schools soon lights up a giant plasma screen. “All this is in real time,” he adds. “No other state has comparable systems. It helps me formulate better public policy.” Foreign companies that have set up here have noticed Mendoza’s businessfriendly attitude and attractive macroeconomic conditions. Its annual economic output is $16bn, it has low unemployment, a shrinking budget deficit and less dependence on national revenues to fund state expenses than many peers. Wine lands: Mendoza grapes are grown at altitude Incomers include Danone, the French food and drink group, to bottle spring water; Saint-Gobain to make glass; Knauf, the German building company, to quarry stone and gypsum; and Globe Speciality Metals of the US, which makes speciality wire. Companies are also drawn to the state’s eight universities and its strategic location, next to the switchback Cristo Redentor road, the busiest mountain pass between Argentina and Chile. There is also the prospect of a 120km train tunnel being built to link the two countries (see above). If that project gets built, rail-borne Chilean trade to the Atlantic, and Brazilian ‘Argentina is about bonanza, Chile is about effort. And Mendoza? It is about the desert’ and Argentine cargo to the Pacific, would soar and make Mendoza a hub for the wider region. “Mendoza is going to be one of the geopolitical centres of the world,” enthuses Mr Pérez – which might seem unlikely until you visit the area, hear the accents of visiting Brazilian and Chilean tourists, and imagine the nearby world streaming through. Although it could prove a pipe dream, Mr Pérez plans to travel to Qatar to solicit investment for the rail tunnel project. In the meantime, the state cannot escape Argentina’s broader problems. That became painfully clear in March after Vale, the Brazilian mining company, cancelled a planned $6bn potash project in the state because Argentine currency controls and high inflation had made the project commercially unviable. Dreamstime Sofia Pescarmona, a member of Impsa’s founding family and a manager of the turbine maker, echoes those concerns. She says that Impsa is proud of its Mendoza roots but they come at a cost – especially when allied with the near-pariah status that Argentina, as a sovereign state, suffers in international markets. Standing by a huge precision-engineered propeller that will soon be mounted on a wind turbine in Asia, she says: “Financing is one of the main things that makes us less competitive that our peers . . . Staying in Mendoza is, for us, as much an emotional decision as a rational one.” Wine exporters, similarly, bemoan the loss of competitiveness that has come from the country’s high inflation. But such disadvantages could disappear quickly, should Argentina start to move into recovery – a possibility that may increase as Ms Fernández heads into the last two years of her presidency. The prospect of that change is already piquing greater international business interest. “I’ve had more enquiries in the past few months than I have had in years,” says a regional consultant and financier. “People are seeking to get in now, or at least thinking about it.” Still, there is no assurance that change will come, or that the wait will be an easy one, as the country grapples with falling foreign reserves, currency restrictions, high inflation and a legal battle with holdout creditors that keeps it all but shut out of international markets. In the meantime, there is always Malbec, which can ease, if not cure, wider Argentine ills. Watching the sun set behind the snow-capped Andes with a glass of wine in hand, there are certainly worse ways to wait and contemplate more prosperous times that may not be so far away. According to the rail project’s feasibility study, a tunnel could push down shipping costs between Cordoba, Argentina, and Manzanillo, Mexico, the closest big port with direct rail links to the eastern US, from $210 to $177 per ton of cargo. Mendoza, which has strong infrastructure links with the rest of Argentina and Brazil, could then become a regional hub. “The tunnel has the potential to transform Mendoza into the geopolitical centre of Mercosur,” says Francisco Pérez, governor of Mendoza state, although, like many of the plan’s supporters, he tends, in his enthusiasm, to overlook the shortcomings of the Mercosur trade grouping of Brazil, Argentina, Uruguay, Paraguay and Venezuela. Nonetheless, the consortium takes the long view and has spent $25m on feasibility studies. The Chilean and Argentine governments have also declared the project to be of “national interest” and created a committee that will eventually invite bids. Although the project has progressed in fits and starts since serious planning began five years ago, its pace is expected to pick up after Chile’s upcoming presidential election, which Michelle Bachelet, the socialist former president, is expected to win. The 57km Gotthard Base Tunnel beneath the Swiss Alps will be the world’s longest rail tunnel when it is completed in 2016. What differentiates this South American project, apart from being twice as long, is that it will be built by the private sector – and financed by private businesses too. Raising that finance is no easy task, especially as Argentina is all but shut out of international markets – although Chile can raise funds at much the same cost as France. The consortium says it has proposed the project be built and operated using the kinds of government guarantees that are common for road concessions in Chile and Peru, thus potentially increasing its appeal to investors. Nonetheless, critics say the project, which has only come this far after active lobbying in Santiago and Buenos Aires and has not conducted environmental impact studies either, may be more bother than it is worth. “Instead of spending all that money, why not just widen the road and cover its most vulnerable parts with snow roofs,” asks Leonardo Andreu, head of the state’s chamber of commerce. “It would be quicker and cheaper.” The octogenarian Mr Eurnekian acknowledges that the project will take a long time to complete, even if it does manage to secured the necessary finance. “Will I see it completed before I die? Perhaps not. But that doesn’t mean it won’t happen.”
  4. 4. FINANCIAL TIMES WEDNESDAY NOVEMBER 13 2013 ★ 4 Doing Business in Mendoza Tourists get taste of the good life Outdoor pursuits Skiing, climbing and polo are all on offer before dinner, says Camila Bretón L ove brought Torey Novak to Mendoza. The US national met his girlfriend at university four years ago and decided to move to Argentina. Now he speaks fluent Spanish with a Mendocino accent, and runs a tourist attraction that capitalises on a sideline to Mendoza’s better-known culinary and oenological attractions: olive oil. “We’ve planted an Italian variety of olive tree that grows better here than anywhere else in the world,” he says of the premium oil served as part of a broader tourist offering at Bodegas Zuccardi, a winery which, like so many in Mendoza, offers its visitors a mix of drink sampling, food and, of course, olive oil. Diversification into the kind of attractions that visitors might more often associate with, say, Italy, is characteristic of Mendoza’s end-ofthe-world cosmopolitanism. It also shows how local businesses are seeking to broaden the state’s appeal beyond its world-famous wines. “Most people come here because of the wine, especially Malbec. But then they arrive and are struck by the Andes and its rugged scenery,” says Pedro Rosell, founder of Discover the Andes, a tour company that offers visitors private excursions into the snow-capped mountains that line the state’s western border. As one saying goes, Punta del Este for its beaches in the summer, Mendoza for its polo and wine in the winter. To those core attractions should also be added skiing, rock climbing and white water rafting. “Over the past 10 years, the number of tourists coming here has doubled,” says Cecilia Gatta, head of planning and innovation at Mendoza’s tourism ministry. “Last year, we had 2.7m visitors; in 2003, we had 1.2m. To meet that increase requires better infrastructure.” To some extent, Mendoza is already fairly well-endowed with tourist infrastructure. A province with 1m inhabitants, which in some ways still has the air of a small village where a summer siesta remains almost obligatory, Mendoza has 130 wineries that are open to the public, a plethora of restaurants and budget hotels, and six five-star establishments. Indeed, the bigger challenge for Hit with the tourists: polo lessons are one of the attractions of the region potential investors is less a want of physical infrastructure than a desperate need for better institutional infrastructure, especially when it comes to national economic policy. “Today the biggest investment risks are the country’s broader economic policies,” says David English, another North American who came to Mendoza out of love – this time for the state’s climate, people and the business opportunity of helping other foreigners who felt the same way as he did to set up small vineyards and hotels. “Inflation and the constant changing of the tax rules . . . can make buying properties a difficult and confusing process,” he adds. Rodrigo López, managing partner at NB Travel, a Mendoza-based travel agency, points to the same problem, which makes “us less competitive against Chile, which has many of the same attractions and is only four hours away”. High inflation and lack of competitiveness are a common bugbear cited by all Argentine businesses, which frequently bemoan the erratic state of national economic policymaking. Indeed, such factors might help explain why the majority of Mendoza’s visitors are Argentines for whom there can still be good value in travelling within the country, especially as low interest rates and high inflation mean there are few opportunities to save their pesos – so better to spend them instead. About 75 per cent of Mendoza’s visitors are Argentine nationals, while the largest other groups are Chileans, at 12 per cent, and Brazilians, at 3 per cent. All told, in 2012, the sector brought in 6.8bn pesos, about $680m at black market exchange rates or $1.15bn at the official rate. But it could bring in more still if there were direct flights from São Paulo that would bring in additional Brazilian tourists, who still enjoy the spending power of the highly valued real. Aerolíneas Argentinas, the stateowned airline, did have plans for a direct flight to Mendoza’s small airport, which caters for 140 flights a week. In the end, a compromise was reached, with a cheaper onward flight from Buenos Aires organised for Brazilians flying from São Paulo. “It’s not quite what we hoped for, but it was better than nothing,” says Francisco Pérez, the state governor, who lobbied hard for the route. Despite such drawbacks, and the bigger macroeconomic obstacles, the tourists keep coming – to drink, eat well, bask in desert sunshine, watch one of the eight polo tournaments that take place each year, or even learn to play themselves. “First we take visitors to the Club de Campo, where a professional teaches them polo. Then we take them for a premium wine tasting at the Bodegas Escorihuela Gascón, followed by lunch,” says Gabriel Casals, a director of tour organiser Wines & Polo. With that kind of mix, it is no wonder that some visitors end up buying a few hectares of vines for themselves. Winemaking made easy for DIY vintners Viticulture Choose your grape variety, come up with a name and leave the rest to the experts, advises Benedict Mander Carlos Kawal has a broad grin on his face as he poses for a photograph with his family in front of the small vineyard he has just acquired. The magnificent peaks of the Andes mountains rising steeply behind provide the perfect backdrop for the commemorative shot. Then everybody sets about planting the first vines under the scorching midday sun of the Uco valley and, although the work is hardly strenuous, after little more than 10 minutes of toil, everyone decides it is time for lunch. Fortunately, someone else will plant the rest of the vines. That is exactly why Mr Kawal, an economist and former treasury secretary of Brazil, has signed up to Vines of Mendoza, an innovative project through which enthusiasts can buy a few acres of land, plant the vines of their choice and make their own wine. The hard work – the maintenance of the vineyard, the harvest, the fermentation process, bottling and labelling, and the tedious logistics of exporting the final product to a chosen location – will all be done by Vines of Mendoza staff. The fun parts – choosing what kind of grape you want to grow, devising your own name and label for the wine, and of course drinking it – you can do yourself. Mr Kawal, who spent most of the previous afternoon assiduously tasting various blends of wine, is one of more than 120 investors from countries that also include the US, Canada, Australia and the UK who have bought lots of between 3-10 acres at the 1,500-acre estate run by Vines of Mendoza. After its first private vineyards were planted in 2007, the debut harvest came in 2010. Last year, no fewer than 230 wines using 18 varieties of grape were made. “As far as I know, it’s the first project of its kind in the world,” says Michael Evans, a former internet entrepreneur who co-founded the project. A US citizen, Mr Evans first came to Mendoza in 2004, fresh from working on John Kerry’s presidential campaign. Glimpsing something of California’s Napa Valley of the 1970s, Mr Evans devised the plan that allows winelovers to make their own wine without any of the hassles that managing a vineyard entails – not to mention the huge upfront costs of building a winery. Indeed, there’s an old joke in the wine business: “How do you make a small fortune from a vineyard? Start with a large fortune.” Mr Evans’ idea has caught on. The nearby O. Fournier winery, which produces some of Argentina’s most celebrated wines, embarked on a similar project last year, with more than a third of its 84 plots sold or reserved. That is in spite of some more skittish investors being turned off by Argentina’s notoriously unstable business climate. José Manuel Ortega, owner of O. Fournier, says two prospective buyers changed ‘We’re not aiming for the Messis or Madonnas of this world. We don’t want any paparazzi here’ their minds after the expropriation of the stake in YPF, the Argentine oil and gas group, owned by Spain’s Repsol. Another was discouraged by a negative experience with Aerolíneas Argentinas, the local airline. At O. Fournier, those that take the plunge are charged about $150,000 per hectare, the harvest from which can produce about 3,000 bottles of medium-quality wine a year – although the precise amount depends entirely on the quality of wine that each separate owner prefers. Buyers include one of the richest families in Brazil, oil executives and wealthy bankers, including a number of senior executives at JPMorgan, the US bank. “But no footballers or pop stars. We’re not aiming for the Messis or Madonnas of this world. We don’t want any paparazzi here,” says Mr Ortega. “It’s a place where people can recharge their batteries and have peace of mind. That’s priceless for rich people.” Kendall-Jackson experience offers vital lesson for investors Business environment Success requires a willingness to do things the Argentine way, says Ian Mount Jess Jackson, a San Francisco lawyer, changed the face of US winemaking when he founded the Kendall-Jackson company in California in 1982. By the time he died in 2011, the man behind the slightly sweet Kendall-Jackson Vintner’s Reserve Chardonnay was a billionaire producing more than 5m cases a year. Yet, in spite of considerable investment, Jackson was never able to repeat his success in Argentina. In 1996, he bought 1,100 acres in Mendoza’s Uco valley, later adding 1,750 acres and a winery, led by Randy Ullom, who ran his Chile operations. But, in 2003, after a series of business missteps and Argentina’s debt default, which caused the peso to lose almost three-quarters of its value, Jackson sold his Argentine business to a Buenos Aires couple for $2.5m – a $5.5m loss on his investment, according to Wine Spectator magazine. Jackson was not the only foreigner to enter the Argentine wine business only to discover that it could be a minefield of handshake deals, erratic government policy and economic collapse. “The growth and excitement that Argentina has produced continues to attract people. But Argentina is not an easy-to-dealwith country,” says José Manuel Ortega, the Spaniard who runs Mendoza’s O. Fournier winery. About $1.5bn was invested in the Argentine wine industry in the 1990s, about two-thirds of which came from foreign winemakers. This led to a surge in exports from $128m in 2002 to $920m in 2012, according to the Instituto Nacional de Vitivinicultura, the Argentine wine agency. But high inflation and Missteps: in Argentina, Jess Jackson was unable to replicate the success of his US business import restrictions in the past two years illustrate that doing business in Argentina can be difficult. For foreign investors, it is a reminder that success requires creativity and a willingness to do things the Argentine way. It was a shortage of that willingness that hurt Kendall-Jackson. From the start, KendallJackson had problems getting enough water to its land, which was outside Mendoza’s traditional vineyard zone, as well as difficulties importing the US plants it wanted. “There was a way we wanted things done: how to make wine, how to grow grapes, how to do the financial records,” Mr Ullom says. “We’re very strict and have some very focused plans. It’s our way or the highway.” In the end, the rigid Kendall-Jackson chose the latter path. Foreigners in Mendoza have since learned from Kendall-Jackson’s experience. But overseas investors are again facing tough times. Inflation has been about 25 per cent a year since 2010 and the national government has instituted import controls to stem the outflow of central bank reserves. For Mendoza winemakers, this means higher costs, scarce supplies and squeezed margins. The cost of making wine has doubled in the past four years, says Valeria Mutis, an analyst at Rabobank. “The biggest problem the industry is facing is a loss of competitiveness,” Ms Mutis says. According to Caucasia Wine Thinking, a market analysis company, in the first nine months of 2013, Argentina exported 220.3m litres of wine for $640.6m, down 19.8 per cent and 5.5 per cent respectively on the same period of 2012. The entry level has been especially hard hit: exports of bottled wine under $18/case have fallen by 37 per cent. In response, vintners have become more creative. Argentina’s government ‘There are a lot of rules that change day to day, so you have to be flexible’ encourages exports by refunding various taxes to exporters, but it does so slowly. To cut the wait, Pato Reich, the Chilean chief executive of Renacer, his family’s Mendoza winery, sells wine to local companies that need to export in order to get permission to import other goods (a government requirement). They export for Mr Reich and handle the refund delay. “There are a lot of rules that change day to day, so you have to be flexible,” he says. Mr Reich has also learned to plan. After he was unable to import label paper, making it impossible to ship exports worth about $400,000 a month, Mr Reich began to stock 10 months’ supply of corks, paper and bottles, up from a three months’ supply before. The problem, he says, is that it ties up $200,000 of working capital. Foreign owners also have to learn that business in Argentina runs on friendship. After applications to import oak barrels were repeatedly rejected, Mr Ortega from the O. Fournier winery explained his problems to Marcelo Barg, agroindustry minister for Mendoza, at a winery dinner. The barrels were promptly approved, just in time for the 2013 harvest. “You have to go and plead,” Mr Ortega says. There have been some encouraging signs of late. Carlos Clément, a Mendoza shipping agent, says all but one of his barrel import requests have been approved. And Argentina is allowing the official peso exchange rate to devalue, thus easing inflation’s bite on exporters. In the end, foreign wine investors have to learn the lesson of Kendall-Jackson, and understand that Argentina is cheaper because life is more difficult there. As they say: you can’t have your cake and eat it too.
  5. 5. FINANCIAL TIMES WEDNESDAY NOVEMBER 13 2013 ★ 5 Doing Business in Mendoza Oil chief wins plaudits as YPF seeks funding for shale project Resources Miguel Galuccio is working hard to attract investors, reports Benedict Mander M iguel Galuccio is showing the strain. He took over as chief executive of YPF a year ago, just after the Argentine government had nationalised the 51 per cent stake in the Argentine national oil company owned by Repsol of Spain. It was an unenviable task, even for such a respected engineer. Argentina is, in many ways, a hostile environment for business, given its exchange controls, high inflation and cumbersome bureaucracy. Yet since Mr Galuccio took over at YPF 18 months ago, the company’s share price has doubled, investment has risen from $2bn in 2012 to $5bn this year and exploration activity has increased threefold. Mr Galuccio has also managed to turn round falling production in both oil and gas – YPF has suffered a drop in hydrocarbon output of 7 per cent on average over the past decade. In addition, he led a $150m bond issue in New York in September, despite Argentina’s ongoing battle with creditors, who have often sought to impound sovereign Argentine assets abroad. No wonder, then, that the 45-yearold is looking wan – it probably does not help that he is just off an overnight flight from Europe, where he was courting investors to develop Argentina’s vast shale reserves. “I’m very pleased with YPF’s results,” he says, adding – about the company, although he could just as well be talking about himself – “we have to be careful not to overdo it. “The key is to grow profitably without destroying value,” he says, playing the role of shareholder valueconscious chief executive rather than government placeman. Central to Mr Galuccio’s strategy is the plan to tap the immense Vaca Muerta shale reserves, much of which lie in Mendoza, alongside the state’s sizeable conventional oil resources. Mendoza’s conventional reserves account for about a fifth of YPF’s oil production, and it is home to one of the country’s most important refineries. “It is the only province in Argentina that is completely [energy] integrated,” says Mr Galuccio. Although he concedes that it could take several years before development starts in Mendoza’s portion of Vaca Muerta, as opposed to the share in the neighbouring state of Neuquén, the province remains a vital cog in the workings of YPF. One of the biggest challenges, however, is securing funding. Hence the importance of September’s bond issue. “It was something small to test the waters,” says Mr Galuccio of the $150m sum. YPF was able to raise the money at less than 8 per cent, compared with double-digit rates on the country’s sovereign debt. YPF has also been raising debt locally at even lower interest rates. About half of YPF’s debt is in local currency, compared with as much as 90 per cent in foreign currency before the nationalisation. However, perhaps Mr Galuccio’s most significant achievement has been to secure a $1.2bn deal with Chevron to explore and develop a concession in Vaca Muerta. It was trumpeted as proof that a large international company with shale gas experience trusts Argentina. YPF hopes the deal will encourage other companies to follow suit. Dow, the US chemicals company, has since signed a smaller deal. Respected: Miguel Galuccio, YPF chief executive, is seeking foreign investors to finance the Vaca Muerta shale project AP ‘Things are working out. Everything we said would happen is happening’ “Things are working out,” says Mr Galuccio. “Everything we said would happen is happening.” Nevertheless, YPF faces big challenges, most obviously in the form of the government’s continuing dispute with Repsol, which is demanding $10.5bn in compensation for its expropriated assets. Antonio Brufau, the Spanish company’s executive chairman, rejected Argentina’s proposal this year that, as compensation, Repsol would be granted a 47 per cent stake – estimated to be worth $3.5bn – in a joint venture to develop Vaca Muerta. The Argentine government would also provide Repsol with a bond worth $1.5bn, but this would have to be reinvested in Argentina, along with a commitment to invest more to develop the asset. Mr Galuccio has found himself caught in the crossfire. “Not everyone understands that this is a conflict between two shareholders – the state of Argentina and Repsol. I am the chief executive,” he says, underlining that his duty is to defend the value of the company for its shareholders. “It cannot be that one shareholder, Repsol, should try to take YPF hostage,” he adds. There seem to be two options: a negotiated solution, or a court settlement. “It would be better to reach an agreement,” says Mr Galuccio, who goes on to discuss a possible role for Pemex, Mexico’s state oil company, in negotiating a concord. “We have very close relations with Pemex,” he says. Mr Galuccio knows Emilio Lozoya, Pemex chief executive, from his time in Mexico with Schlumberger, the oil services company. Analysts have also pointed out that Repsol needs the support of Pemex if it is to expand its business in Mexico. Pemex, which owns 9.37 per cent of Repsol’s shares, has already tried to broker the deal that Repsol refused. However, Mr Galuccio holds out hope that it could yet play a role in resolving the conflict. In addition to the difficulties caused by the Repsol saga, problems in the broader economy, from basic macroeconomic imbalances to government strictures on repatriating profits, will also make it hard for YPF to continue to attract the investment it needs to develop the shale reserves. That may go some way to explaining why a much-touted deal with Bridas, the Sino-Argentine energy company, has so far failed to materialise. It is hoped that a potential deal with Bridas could be of the same magnitude as the Chevron agreement. Says Mr Galuccio: “The Chinese could be very important for us. I think it can happen”. Exploration begins at ‘Dead Cow’ formation The arid semi­desert scrub that covers most of Mendoza conceals one of the great unexploited riches not just in the province, or even the country – but in the world. The gigantic shale formation at Vaca Muerta, which in Spanish means Dead Cow, is one of the most talked­ about prospects of the global oil and gas industry, with the potential to attract investors to the region for years to come. According to the US Energy Information Administration, Vaca Muerta is home to the fourth­largest shale oil reserves and second­largest shale gas reserves in the world. While preliminary wells are being drilled in the neighbouring province of Neuquén, after Chevron, the US oil and gas group, signed a deal to invest an initial $1.2bn, Mendoza’s portion of the formation – which accounts for as much as a third of the total – has hardly been touched. This is expected to change over the coming decade if a range of geological, technical and financial challenges can be overcome – principally the need to secure the billions of dollars that are needed. But with Argentina shut out from capital markets since its 2001 default, YPF, the state energy company, has to rely on attracting foreign investors into joint ventures. Aside from the Chevron deal, and smaller investments from Dow of the US and Germany’s Wintershall – interest has been limited. Hopes of a sizeable investment from Bridas, the Sino­Argentine company half­owned by China National Offshore Oil Corporation, has yet to materialise. Other commonly raised issues include high inflation, export tax, limitations on importing goods and services, restrictions on the right to remit profits abroad in dollars, high labour costs and insufficient skilled labour, according to Jose Valera, co­head of oil and gas at Mayer Brown, a Houston law firm. Alejandro Bulgheroni, the investor whose family owns the other half of Bridas, says cutting operational costs is central to allowing Vaca Muerta to compete with similar projects around the world. For example, the cost of a shale well in the US is about $3m, compared with $7m­$8m in Argentina. “Large investments and several years of work are needed for the current good expectations to become reality,” Mr Bulgheroni recently told an energy conference in Buenos Aires. Benedict Mander
  6. 6. FINANCIAL TIMES WEDNESDAY NOVEMBER 13 2013 ★ 6 Doing Business in Mendoza Former banker indulges his taste for liquid assets Vintner O. Fournier owner has no regrets over his career choice – even if he will never get to taste his best vintages, writes Benedict Mander More at From university to winery ●Q&A Nicolás Catena’s former life as a professor of economics gives him a unique advantage in continuing his family’s prestigious winery. The head of Bodega Catena Zapata reveals the secret to making a great vintage and explains how his previous career has influenced his approach. F ourteen years ago, José Manuel Ortega received a telephone call that would change his life forever. “It was the typical call that could so easily have gone unanswered,” recalls the former Goldman Sachs banker, who at the time was managing a $200m private equity fund in Latin America for Spain’s Banco Santander. The caller alerted Mr Ortega to a bankrupt tomato farm in the Uco valley, about a 90 minutes drive south of the provincial capital of Mendoza, suspecting that he “might find it interesting”. And indeed he did. When the Spaniard arrived at the 263-hectare property in the shadow of the soaring Andes mountains, he thought it was paradise. “It didn’t make sense not to buy it. We got it for the price of the transformer and a few wells – the land itself was basically thrown in for nothing. Today, it’s worth about 20 times what we paid for it,” says Mr Ortega, his eyes widening. So began the story of the O. Fournier winery, one of the pioneers of the Uco valley, along with other leading bodegas such as the 2,000-hectare Salentein estate and Clos de los Siete, the winery of Michel Rolland, the French oenologist. As well as its wines, O. Fournier is also famous for the futuristic design of its winery, which has been likened to the landing pad for an alien ship or the perfect lair for a James Bond villain. “It would have been cheaper to hire Brazilian models to hold umbrellas for the workers,” quips the dry-witted Mr Ortega of the distinctive overhanging roof under which farm labourers unload grapes by hand into vats, protected from Mendoza’s scorching desert sun. Nose for success: José Manuel Ortega’s attention to detail is such that his is one of the few wineries in the world that uses three different fermentation techniques Despite getting the land relatively cheap, setting up the winery was an expensive project. Mr Ortega took out five loans and mortgaged his house to fund the €22m project – of which about €4m came from his own pocket. “When you start making a winery, it’s a money pit. You just put more and more in,” he says. “I began with 5 per cent liquidity and I’ve ended up with 14 per cent alcohol,” he jokes. Although Mr Ortega bought the land in 2000, and set about planting it right away, construction of the ambitious project – designed by local architects Eliana Bórmida and Mario Yanzón – did not begin until 2002. ‘Former colleagues at Goldman may be richer than me but they are all jealous of what I have here’ At the time, Argentina was in the middle of a financial crisis, and O. Fournier was the biggest construction project – perhaps the only major one – in Mendoza that year. No expense was spared or detail ignored. “Either you do it correctly or not at all,” says Mr Ortega, stressing the numerous details that go into making his wine special. “Each one in itself may not be such a big deal, but if you do them all, it will make a difference,” he explains. For example, O. Fournier is one of the few wineries in the world to use three different fermentation techniques. It has not been easy. The business climate in Argentina has become increasingly challenging under the government of Cristina Fernández, the populist president. Price and currency controls have made life especially complicated – Mr Ortega complains that he was not able to import French oak for his barrels for more than six months. With costs rising and profits squeezed in his wine business, Mr Ortega has diversified the project into tourism, with a top-end restaurant on the property, and plans to start building a luxury hotel. He is also selling off small plots of land to investors, who will be given the opportunity to make their own blends of wine at his winery. And although he has sacrificed the lifestyle of a high-flying banker – he no longer gets his suits tailor-made in London’s exclusive Savile Row but buys them in Shanghai when on trips to promote his wine – Mr Ortega has no regrets. “When I meet up with my former colleagues at Goldman, they may all be richer than me but they are all jealous of what I have here,” he says. “I didn’t get into the wine business to make money. I got into it to do something unique. I’m more interested in legacy.” He admits he will never get to taste his vineyard’s finest wines – it will take decades for the still-young vines to mature. “That,” he adds, “is a pleasure I will leave for my children.”