FT SPECIAL REPORT

Latin America’s Regions Doing Business in Mendoza

Wednesday November 13 2013 www.ft.com/reports | @ftreports

A region with barrels of potential Inside »

The resource­rich Argentine province has a bright future, writes Tourists taste John Paul Rathbone the good life Skiing, climbing n the world stage, Argen- tina is perhaps best known and polo are all on for three things, all begin- offer before dinner ning with the letter “M”: Lionel Messi, the world’s Page 2 Obest footballer; mismanagement – Argentina is unique in its radical reversal from the advanced economic Plan for tunnel development it apparently achieved in the early 20th century; and Malbec, through Andes the Bordeaux grape that is celebrated Ambitious rail as Argentina’s most distinctive wine varietal. project could This report – the first in a series on transform region Latin America’s regions – is about a fourth “M”: the region of Mendoza. Page 3 Abutting the Andes, this desert state is a microcosm of Argentina’s poten- tial, although in this case “potential” Oil chief seeks is an overused word: Mendoza has already realised much of its promise. shale funding There is its wine, of course, because Miguel Galuccio is Mendoza forms the centre of Argen- tina’s centuries-long wine tradition working to attract that has been upgraded with Zen-like new investors attention to oenological detail to earn its vineyards, such as Bodega Catena There is Impsa, a turbine manufac- second biggest media company; and All in good time: wine casks ageing Most distinctive of all, however, is Page 5 Zapata and Mendel Wines, a global turer that has the technology to take large mineral and energy deposits, at Mendoza’s Bodega Catena Zapata the state’s work ethic – which Charles profile. No self-respecting Argentine – on global competitors. With deep from uranium, potash and copper, to Darwin missed when he visited and or for that matter European or Cali- roots in the state, the family-owned gas and oil. wrote that “the happy doom of the Former banker fornian – millionaire with more than a company, now in its fourth genera- “Mendoza produces a fifth of Argen- Mendocinos is to eat, sleep and be passing interest in wine does not also tion, has annual sales of more than tina’s oil,” says Miguel Galuccio, chief idle”. But Darwin visited almost 180 indulges taste want to own at least a few hectares in $1bn and is a genuine “multilatina” – executive of YPF, the national oil years ago, and in the summer, when for liquid assets the wine lands of the Uco valley. a Latin American company with a company. temperatures can top 40 degrees and a But it is not only wine and its larg- presence across the region. With the development of the vast siesta is almost obligatory. O. Fournier owner est exporting companies, such as There is also Roberto Zaldívar, one Vaca Muerta shale gas formation set Mendoza’s celebrated work ethic has no regrets Peñaflor, the eighth largest wine com- of the world’s leading ophthalmolo- to push ahead over the next few derives partly from its proximity to pany in the world, that gives Mendoza gists, who practises out of his Mendo- years, it will soon account for even Chile – Santiago, the capital, is only Page 6 a certain cosmopolitan air. cino clinic; Grupo Uno, Argentina’s more. Continued on Page 3 Sun­kissed state that has clasped the joys of winemaking to its heart

counterbalances this. grapes earlier and reducing Mendoza’s vineyards the number of new oak used to be concentrated on The resultant barrels. the fertile plains around grapes have There has been no the city, making vast shortage of outside quantities of slightly rustic time to build up investment in Mendoza reds and pinks and some wine. decidedly heavy, often subtlety as Prominent incomers oxidised, white wines. well as sugar include Michel Rolland, the Rainfall here is low – world’s most famous barely eight inches, or consultant winemaker who 200mm, a year – but the departments for fine wine owns the Clos de los Siete melted snows of the Andes production in the Uco winery; Diane and Hervé have (so far) provided valley, with La Consulta Joyaux Fabre of Fabre supplies of irrigation water district cool enough to Montmayou; California’s – sufficient to plump up have encouraged growers Cuvaison; Cava giant the grapes nicely. to plant white wine grapes Codorniu; and José-Manuel So high were yields as well as the finicky Ortega, a Spanish former Expert view traditionally – often several Pinot Noir that ripens banker whose wife also JANCISROBINSON hundred hectolitres per so early it needs a runs one of many exciting hectare, when the usual particularly cool climate. restaurants in the wine I have been to most of the limit for France’s better But Malbec is by far the country outside the city of world’s wine regions but wines is about 50 hl/ha – dominant grape variety of Mendoza. I have never been to a that Argentina was at one Mendoza province. Indeed, Argentina, with its waves place where wine is so time the fourth most Mendoza Malbec has of immigration from deeply embedded as in important wine producer in played by far the biggest France, Spain, Italy and Mendoza. the world. part in Argentina’s Germany, has long Bordeaux and Porto run Americans have planted successful transformation benefited from its it close, but both have the vine so enthusiastically into a successful wine particularly diverse range other important that the US has overtaken exporter. of cultural influences and commercial activities. Argentina in terms of total It produces rich, all of these are reflected The neat grid of tree- volume produced, helped powerful wines, in the increasingly lined streets of Mendoza’s by the fact that Argentina, typically packaged in wide variety of wines capital, also called not much of a wine overweight bottles coming out of Mendoza. Mendoza, seems designed exporter in the 1980s, had that satisfy Rather unexpectedly, to spirit you as quickly as a national vine pull marketeers if not Mendoza turns out to possible to one of the scheme. ecologists, and be the source of some numerous vineyards But, in the past 25 years conform to what has particularly fine, outside the city. or so, the Argentine wine been the stereotype of distinctive Walk through the industry has woken up, a successful red wine. Chardonnay, a grape brilliant white 19th-century become much less insular, Mendoza Malbec that seems to thrive in Spanish colonial façade of and started to export in was such a hit in the relatively long the Park Hyatt, Mendoza’s great quantity. the US market hours of Mendoza most prominent hotel, The crucial ingredient that producers in sunshine. overlooking Plaza in the mix was a redrafting Cahors in Torrontés, the Independencia, and you are of the Mendoza wine map. southwest Argentine assailed by invitations to Since the late 1980s, France, home speciality white sample a glass of wine in vineyards have been of the grape grape, also a bar, join a tour of the planted at much higher variety, started thrives there, as vineyards or buy a bottle altitudes, where cooler calling their does Pinot Gris or two. nights slow the ripening grape Malbec and even There is something about process and prolong the instead of Friulano, as the quality of light – growing season, meaning using their well as, from a brilliance typically that the resultant grapes traditional the highest filtered by the leaves have time to build up names Cot and vineyards, overhead – that echoes subtlety as well as sugar Auxerrois. Sauvignon what the local producers while retaining refreshing But the Blanc. believe defines their wines. acidity. winds of Mendoza is no At 750m elevation, the The belief is that the change have longer a one- city of Mendoza is already clarity of light here plays a recently been grape wonder, relatively high. But it is part in building up the blowing even if hail the altitude of the phenolics so important to through the remains the vineyards and the quality fine red wines. vineyards of bane of every of the ultraviolet light Many of the best new Mendoza, with vine grower’s there that gives vineyards have been many producers spring and distinction to them and planted in the Uco valley deliberately summer. their produce. at altitudes of up to making finer, Mendoza is on roughly 1,700m. In Europe, 500m is more scented the same latitude as Tunis, regarded as the maximum reds from their Light fantastic: which is normally too altitude at which grapes signature grape Mendoza’s wines close to the equator for can be persuaded to ripen. variety by, echo the unique good quality wine Tupungato and Tunuyán among other characteristics of production, but altitude are the most important things, picking the region 2 ★ FINANCIAL TIMES WEDNESDAY NOVEMBER 13 2013 Doing Business in Mendoza Mining potential not yet realised Tumbling prices leave potash mine in limbo

Minerals A law But under the concession’s terms, Development the Brazilian group had to pay a meant to protect small fee every year and make a mini- The loss of a big investor has mum capital investment within the farmers is blocking put a potentially valuable first five years, all of which it did. “Vale over-complied,” says Raúl development, says export industry in doubt, Rodríguez, a mining specialist at Bar- writes John Paul Rathbone raza, Rodriguez, Diaz & Gregorio, a Benedict Mander Mendoza law firm. “With the annual fee paid, the concession is fixed and It was a sign of how bad things had safe.” he vast mineral wealth deep become. In May, Luiz Inácio Lula da Vale then put the project up for underneath the Andean Silva, Brazil’s charismatic former sale in April after agreeing to pay an chain has attracted outside president who is famed for his negoti- extra two and a half months in wages attention ever since the days ation skills, travelled to Argentina to to laid-off workers. The Brazilian of the Spanish empire. discuss the future of a $6bn invest- group is now contemplating other TYet, unlike in neighbouring coun- ment that Vale, the partly state- potash projects elsewhere amid big tries, most of Argentina’s rich mineral owned Brazilian mining group, had changes in the market. resources have remained largely planned in Mendoza. An end to output restrictions this undeveloped. This is in marked con- Vale had suspended the Rio Colo- summer by Uralkali, a Russian pro- trast with the flourishing mining rado potash project two months ducer, and Belaruskali, its Belarus industry across the border in Chile, before, citing Argentine exchange con- state-owned partner, has led potash which shares the same geology. trols and rampant inflation that made prices to tumble. Nowhere has Argentina’s mineral the project commercially unviable, This has made acquisitions or potential been more neglected than and had almost doubled its costs to expanded production at existing sites Mendoza, whose prospects as a min- $11bn. more economic for Vale than expen- ing centre hit a serious obstacle when So when Mr Lula da Silva was pic- sive foreign greenfield projects, such a provincial law, enacted in 2007, tured in a traditional Andean poncho, as Rio Colorado. attempted to put a brake on projects discussing the project with Francisco that locals feared would threaten the Pérez, Mendoza’s governor, Vale’s pri- scarce water supplies of their arid Chemical ban: a project on the scale of the El Teniente copper mine in neighbouring Chile would be impossible in Mendoza vate investors feared he may reverse province. his position and broke into a sweat. Vale is now contemplating Many say that Mendoza went too “We were trying to make the ven- projects elsewhere amid far. Concerns for the agricultural uses 96 per cent of its fresh water multinational mining corporations ties,” Mr Sosa says. “That is the seed ture viable and he seemed open to the industry, which is irrigated with supplies while accounting for just 8 effectively. of all conflict.” idea,” Mr Pérez said of the meeting. big changes in the market water whose source high in the Andes per cent of its gross domestic product, Eduardo Sosa, president of Oikos Until the people of Mendoza decide The Rio Colorado venture was set to is where most mining projects are says Mario Chabert, president of Men- Red Ambiental, a group that monitors on the answer, companies such as be one of the biggest capital invest- located, resulted in a ban on the use doza’s mining chamber. and promotes environmental issues U308 Corp, a Canadian uranium ments in Argentina, turning Brazil’s None of this has made Mr Pérez’s of chemicals such as cyanide, mercury By contrast, in the mining-friendly in Mendoza, says there is a “danger- miner, will be obliged to stay away neighbour into a top supplier of pot- job easier, as he has scrambled to find and sulphuric acid. This made many province of San Juan to the north, ous proximity” between mining from the province. U308 owns a con- ash – the potassium compound that new partners for the site that mining projects unviable. where Canada’s Barrick Gold has companies and the cash-starved cession in Mendoza that it was forced Brazilian farms need for fertiliser. Techint, the Italo-Argentine conglom- “What’s the most effective way of operations, mining uses 1 per cent of regional government, whose interests to abandon after the introduction of However, after spending $2.5bn com- erate, is currently caretaking for curing a headache? The guillotine,” its water but accounts for 77 per cent are not always aligned with local the 2007 law. pleting more than 40 per cent of the Vale. says Raúl Rodríguez, a lawyer acting of exports, he says. communities. Hugo Bastías, vice-president at U308 project, which includes a port termi- “We are in various conversations,” for a number of mining companies According to Mr Chabert, mining Corp, points out that, although Argen- nal and 790km of railway, Vale sus- says Mr Pérez, who has met potential seeking concessions in the region. would not necessarily compete with tina imports about 250 tonnes of ura- pended operations in March. Chinese, Indian, Russian and Qatari “Mendoza has applied the guillotine to agriculture for water, as the bulk of nium a year, there is enough uranium For Argentina, it was a tremendous investors. “The new idea is to scale its problems. It’s a solution, yes, but Mendoza’s prospective mining ‘There is neither political in Mendoza alone to satisfy national blow. As well as employing 6,000 back the original project, but I am not a very intelligent one.” projects are in the south, where there nor social consensus. demand for the next 100 years. workers, the venture would have pro- just a facilitator.” Despite the huge potential – local is no agriculture. Mr Chabert says it is “criminal” not vided a significant amount of exporta- Although the odds on such a deal experts value Mendoza’s mineral Moreover, he argues that mining We can’t advance to develop Mendoza’s mineral ble potash, which would have helped appear to be long, all is not bleak. deposits at about $350bn – big mining and agriculture have coexisted com- resources, the bulk of which are protect Argentina’s trade surplus. Pro- Forecasts say that, by 2020, Brazilian projects are on hold while how best to fortably in Chile for years, citing the without consensus’ copper. He says that, within five duction was set to start in 2014 at an consumption of potash will have risen control the industry is debated. example of the Cachapoal valley, years, simply by activating seven estimated 4.3m tonnes of potassium a to 13m tonnes annually, from 8m “There is neither political nor social which has a flourishing wine industry Although Mendoza’s mining law mines that have already been devel- year – all of it destined for Brazil. tonnes now. So a potentially huge consensus. We can’t advance without irrigated with water that comes from “can certainly be improved on and oped, mining could generate annual “The rule of law is a two-way track market remains. consensus,” says Francisco Pérez, gov- the same sources as the water used at adapted to the needs of the mining export revenues of $1.2bn, in addition when it comes to investment. The However, that rising demand is not ernor of Mendoza. “There’s a lot of El Teniente, the biggest underground sector”, Mr Sosa believes it is essen- to Mendoza’s current export revenues state has to do its part, but so do the going to be met from Argentina for hypocrisy,” he adds, pointing out that copper mine in the world located in tial for there to be “trust, transpar- of $1.7bn companies,” fumed Julio de Vido, now – or at least not until a fresh some farmers lend their support to the mountains above. ency and effective public participa- “Everyone asks the government of Argentine planning minister, after investor comes along that is willing anti-mining groups while at the same Local environmentalists recognise tion” in mining projects. Mendoza for money, and their answer Vale announced it was suspending to buy out the project from Vale. time taking little care of the region’s the importance of mining. The main “Almost all the problems with min- is always that we don’t have the development. “If there is a failure to Meanwhile, Rio Colorado is for sale scarce water resources themselves. problem is that they doubt that ing projects are related to poor envi- resources. Well, we do: they are in the fulfil the terms, as there is flagrantly and Argentina is a few billion dollars Indeed, only 4 per cent of Mendoza institutions in Mendoza are capable of ronmental impact studies or poor mountains, and they belong to every- in this case . . . it violates the conces- and 6,000 jobs poorer than it might province is cultivated, yet agriculture controlling and monitoring powerful communication with local communi- one,” he says. sion the province awarded to Vale.” otherwise have been.

Fact file Population (2010) 1.74m

Cristo Redentor pass GDP growth Mendoza 2012 (valued in 1993 pesos) 2.2% Tupungato La Paz Santiago Uco valley Tunuyán Rio Tunuyán Inflation rate 10.5% CHILE

Estimated value San of Mendoza’s Rafael mineral deposits $350bn General Alvear

Number of visitors MENDOZA to Mendoza (2012) Main grape- growing areas 2.7m

Share of Argentina’s ARGENTINA total wine output (2012) ARGENTINA Buenos ATLANTIC 69% Aires OCEAN Santiago

Highest altitude at which grapes are grown 1,700m

Sources: Argentinian government, Mendoza provincial government, Great Wine Capitals, Mendozaeventos.com

Contributors »

John Paul Rathbone Ian Mount Robert Orr For information regarding Latin America editor Author of The Vineyard at Commissioning editor FT commercial platforms the End of the World: please contact Jancis Robinson Maverick Winemakers and Andy Mears [email protected] or Financial Times columnist the Rebirth of Malbec Picture editor your usual representative. and author, with Hugh (W.W. Norton, 2012) Johnson, of The World Steven Bird All editorial content in this Atlas of Wine, 7th Edition Camila Bretón Designer special report is produced by (Mitchell Beazley, 2013) FT contributor the FT. Our advertisers have Barbara Lawson, no influence over or prior Benedict Mander Rachel Savage Kate Bevan sight of the articles or online Argentina correspondent Researcher Sub­editors material. 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 Truck stop: snowfall often halts tra c on the Cristo Redentor pass through the Andes, adding to the expense of moving goods between Argentina and Chile

hen doesatunnel qual- are ever more dependent on Asian Grupo Empresas Navieras and Geo- According to the rail project’s feasi- declared the project to be of “national project be built and operated using ify asapipe dream? Per- trade. “Economic integration is data of France – aims to remove that bility study,atunnel could push interest” and createdacommittee the kinds of government guarantees haps when it is to be already happening in South America. bottleneck. down shipping costs between Cor- that will eventually invite bids. that are common for road concessions 52.6km long, privately It’s inevitable,” Mr Eurnekian says of If they pull it off, the tunnel, which doba, Argentina, and Manzanillo, Although the project has progressed in Chile and Peru, thus potentially built and nanced, and the project. “The US built its rst will take ten ye ars to build, Mexico, the closest big port with in ts and starts since serious plan- increasing its appeal to investors. drWilled through snow-capped moun- transcontinental railway in the 1860s. will link train and trucking hubs on direct rail links to the eastern US, ning began ve years ago, its pace is Nonetheless, critics say the project, tains between two countries that nur- Why not South America now?” either side of the Andes, cutting ship- from $210 to $177 per ton of cargo. expected to pick up after Chile’s which has only come this far after ture a longstanding animosity. The tunnel will join an increasing ping times between Argentina and Mendoza, which has strong infra- upcoming presidential election, which active lobbying in Santiago and Bue- Not that Eduardo Eurnekian sees number onfrastructure links Chile and saving transport costs. structure links with the rest of Argen- Michelle Bachelet, the socialist former nos Aires and has not conducted envi- one of the South American continent’s planned to cross the South American Brazilian goods seeking Pacic ports tina and Brazil, could then become a president, is expected to win. ronmental impact studies either, may biggest engineering projects this way. continent – projects that mirror the will benet too. Much of the processed regional hub. The 57km Gotthard Base Tunnel be more bother than it is worth. Linking Argentina and Chile via a shift in the region’s trade patterns soya, wine and meat that Argentina “The tunnel has the potential to beneath the Swiss Alps will be the “Instead of spending all that money, train tunnel under the Andes may be from the Atlantic towards the Pacic. exports to China, as well as imported transform Mendoza into the geopoliti- world’s longest rail tunnel when it is why not just widen the road and cover a difcult, and perhaps even vision- The only signicant Andean pass in Asian goods, are shipped around the cal centre of Mercosur,” says Fran- completed in 2016. What differentiates its most vulnerable parts with snow ary, undertaking. But it is not impos- the southern half of the continent is a treacherous Cape Horn, adding nearly cisco Pérez, governor of Mendoza this South American project, apart roofs,” asks Leonardo Andreu, head of sible. “The engineering is not the high spiralling road with hairpin 3,000 nautical miles and another week state, although, like many of the from being twice as long, is that it the state’s chamber of commerce. “It hardest part,” says the president of bends so tight they are referred to as to the trip. plan’s supporters, he tends, in his will be built by the private sector – would be quicker and cheaper.” Corporación América, the Argentine the “snail”. enthusiasm, to overlook the shortcom- and nanced by private businesses The octogenarian Mr Eurnekian holding company leading the project. Furthermore, the Cristo Redentor ings of the Mercosur trade grouping of too. acknowledges that the project will “The hardest part is the nancing.” pass, which links Mendoza with San- Brazil, Argentina, Uruguay, Paraguay Raising that nance is no easy task, take a long time to complete, even it If Mr Eurnekian’s plans come to tiago in Chile, is blocked by snow for ‘The engineering is not the and Venezuela. especially as Argentina is all but shut does manage to secured the neces- fruition, engineers will, by 2015, be 40 daysayear, often leaving trucks hardest part. The hardest Nonetheless, the consortium takes out onternational markets – sary nance. blasting rock in the rst phase of a stranded in sub-zero temperatures. the long view and has spent $25m on although Chile can raise funds at “WillIsee it completed beforeIdie? $3.5bn plan that aims to remove a Mr Eurnekian’s consortium–which part is the financing’ feasibility studies. The Chilean and much the same cost as France. The Perhaps not. But that doesn’t mean it barrier for Atlantic economies that includes Mitsubishi of Japan, Chile’s Argentine governments have also consortium says it has proposed the won’t happen.”

Resource-rich region with barrels of potential

Continued from Page 1 360km away, while Buenos Aires is 1,200km distant. But most ot comes from the area’s desert roots – Mendoza’s original name, cuyo, means “sandy land”. The area’s rst known inhabitants, the Huarpes, cultivated corn, beans, squash and quinoa using a system orrigation 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 Wine lands: Mendoza grapes are grown at altitude Dreamstime system, which remains today, allowed farmers to cultivate more land than Incomers include Danone, Soa Pescarmona,amem- they otherwise could, its the French food and drink ber of Impsa’s founding most important and lasting group, to bottle spring family andamanager of the contribution is cultural. water; Saint-Gobain to turbine maker, echoes those To function, it requires a make glass; Knauf, the Ger- concerns. She says that degree of co-operation, man building company, to Impsa is proud ots Men- responsibility and adher- quarry stone and gypsum; doza roots but they come at ence to rules that Mendoci- and Globe Speciality Metals a cost – especially when nos boast are less present of the US, which makes spe- allied with the near-pariah elsewhere in the country. ciality wire. status that Argentina, as a It is no accident that Men- Companies are also sovereign state, suffers in doza is the only Argentine drawn to the state’s eight international markets. state never to default on its universities and its strate- Standing by a huge preci- debt, or that local politics – gic location, next to the sion-engineered propeller a model of convivencia – switchback Cristo Redentor that will soon be mounted lacks the malice and vitriol road, the busiest mountain onawind turbine in Asia, of Buenos Aires. pass between Argentina she says: “Financing is one “Argentina is about and Chile. There is also the of the main things that bonanza, Chile is about prospect ofa120km train makes us less competitive effort. And Mendoza? It is tunnel being built to link that our peers...Staying in about the desert,” says José the two countries (see Mendoza is, for us, as much Octavio Bordón,aformer above). an emotional decision as a Mendoza governor and If that project gets built, rational one.” Argentine presidential can- rail-borne Chilean trade to Wine exporters, similarly, didate who was also ambas- the Atlantic, and Brazilian bemoan the loss of competi- sador to the US. tiveness that has come from He adds: “Everything the country’s high inšation. grown or produced in Men- But such disadvantages doza is solely because of the ‘Argentina is about could disappear quickly, effort of man. You can’t just bonanza, Chile is should Argentina start to throw seeds on to the soil move into recovery –apos- and expect them to grow. about e ort. And sibility that may increase Here, you must work.” as Ms Fernández heads into This attitude can be seen Mendoza? It is the last two years of her in Francisco Pérez, the about the desert’ presidency. state governor,amember of The prospect of that President Cristina Fernán- change is already piquing dez’s ruling Victory Front and Argentine cargo to the greater international busi- party and a man with the Pacic, would soar and ness interest. “I’ve had energetic air ofaworka- make Mendozaahub for more enquiries in the past holic executive. the wider region. few months than I have had “Look at this,” Mr Pérez “Mendoza is going to be in years,” saysaregional says jumping out of his one of the geopolitical cen- consultant and nancier. ofce chair. He strides past tres of the world,” enthuses “People are seeking to get photographs of Evita Perón Mr Pérez–which might in now, or at least thinking intoaback room and šicks seem unlikely until you about it.” a switch;adetailed analysis visit the area, hear the Still, there is no assur- of state nances, hospital accents of visiting Brazilian ance that change will come, beds and schools soon and Chilean tourists, and or that the wait will be an lights up a giant plasma imagine the nearby world easy one, as the country screen. streaming through. grapples with falling for- “All this is in real time,” Although it could prove a eign reserves, currency he adds. “No other state has pipe dream, Mr Pérez plans restrictions, high inšation comparable systems. It to travel to Qatar to solicit and a legal battle with hold- helps me formulate better investment for the rail tun- out creditors that keeps it public policy.” nel project. all but shut out onterna- Foreign companies that In the meantime, the tional markets. have set up here have state cannot escape Argen- In the meantime, there is noticed Mendoza’s business- tina’s broader problems. always Malbec, which can friendly attitude and attrac- That became painfully clear ease, if not cure, wider tive macroeconomic condi- in March after Vale, the Argentine ills. Watching tions. Its annual economic Brazilian mining company, the sun set behind the output is $16bn, it has low cancelled a planned $6bn snow-capped Andes with a unemployment,ashrinking potash project in the state glass of wine in hand, there budget decit and less because Argentine currency are certainly worse ways to dependence on national controls and high inšation wait and contemplate more revenues to fund state had made the project com- prosperous times that may expenses than many peers. mercially unviable. not be so far away. 4 ★ FINANCIAL TIMES WEDNESDAY NOVEMBER 13 2013 Doing Business in Mendoza Tourists get taste of the good life Winemaking made easy for DIY vintners

A US citizen, Mr Evans first came Outdoor pursuits Skiing, climbing and polo are all on offer before dinner, says Camila Bretón Viticulture to Mendoza in 2004, fresh from work- ing on John Kerry’s presidential cam- Choose your grape variety, paign. Glimpsing something of Cali- ove brought Torey Novak to against Chile, which has many of the come up with a name and fornia’s Napa Valley of the 1970s, Mr Mendoza. The US national same attractions and is only four Evans devised the plan that allows met his girlfriend at univer- hours away”. leave the rest to the experts, winelovers to make their own wine sity four years ago and High inflation and lack of without any of the hassles that man- decided to move to Argen- competitiveness are a common advises Benedict Mander aging a vineyard entails – not to Ltina. Now he speaks fluent Spanish bugbear cited by all Argentine mention the huge upfront costs of with a Mendocino accent, and runs a businesses, which frequently bemoan Carlos Kawal has a broad grin on his building a winery. tourist attraction that capitalises on a the erratic state of national economic face as he poses for a photograph Indeed, there’s an old joke in the sideline to Mendoza’s better-known policymaking. with his family in front of the small wine business: “How do you make a culinary and oenological attractions: Indeed, such factors might help vineyard he has just acquired. The small fortune from a vineyard? Start olive oil. explain why the majority of Men- magnificent peaks of the Andes with a large fortune.” “We’ve planted an Italian variety of doza’s visitors are Argentines for mountains rising steeply behind pro- Mr Evans’ idea has caught on. The olive tree that grows better here than whom there can still be good value in vide the perfect backdrop for the nearby O. Fournier winery, which anywhere else in the world,” he says travelling within the country, espe- commemorative shot. produces some of Argentina’s most of the premium oil served as part of a cially as low interest rates and high Then everybody sets about planting celebrated wines, embarked on a broader tourist offering at Bodegas inflation mean there are few opportu- the first vines under the scorching similar project last year, with more Zuccardi, a winery which, like so nities to save their pesos – so better midday sun of the Uco valley and, than a third of its 84 plots sold or many in Mendoza, offers its visitors a to spend them instead. although the work is hardly strenu- reserved. mix of drink sampling, food and, of About 75 per cent of Mendoza’s visi- ous, after little more than 10 minutes That is in spite of some more course, olive oil. tors are Argentine nationals, while of toil, everyone decides it is time for skittish investors being turned off by Diversification into the kind of the largest other groups are Chileans, lunch. Argentina’s notoriously unstable attractions that visitors might more at 12 per cent, and Brazilians, at 3 per Fortunately, someone else will business climate. José Manuel often associate with, say, Italy, is cent. All told, in 2012, the sector plant the rest of the vines. That is Ortega, owner of O. Fournier, characteristic of Mendoza’s end-of- brought in 6.8bn pesos, about $680m exactly why Mr Kawal, an economist says two prospective buyers changed the-world cosmopolitanism. It also at black market exchange rates or and former treasury secretary of shows how local businesses are seek- $1.15bn at the official rate. Brazil, has signed up to Vines of ing to broaden the state’s appeal But it could bring in more still if Mendoza, an innovative project beyond its world-famous wines. there were direct flights from São through which enthusiasts can buy a ‘We’re not aiming for the “Most people come here because of Paulo that would bring in additional few acres of land, plant the vines of Messis or Madonnas of the wine, especially Malbec. But then Brazilian tourists, who still enjoy the their choice and make their own they arrive and are struck by the spending power of the highly valued wine. this world. We don’t want Andes and its rugged scenery,” says real. Aerolíneas Argentinas, the state- The hard work – the maintenance Pedro Rosell, founder of Discover the owned airline, did have plans for a of the vineyard, the harvest, the fer- any paparazzi here’ Andes, a tour company that offers direct flight to Mendoza’s small air- mentation process, bottling and label- visitors private excursions into the port, which caters for 140 flights a ling, and the tedious logistics of their minds after the expropriation snow-capped mountains that line the week. In the end, a compromise was exporting the final product to a cho- of the stake in YPF, the Argentine oil state’s western border. reached, with a cheaper onward flight sen location – will all be done by and gas group, owned by Spain’s As one saying goes, Punta del Este from Buenos Aires organised for Bra- Vines of Mendoza staff. Repsol. Another was discouraged for its beaches in the summer, Men- zilians flying from São Paulo. The fun parts – choosing what kind by a negative experience with doza for its polo and wine in the win- “It’s not quite what we hoped for, of grape you want to grow, devising Aerolíneas Argentinas, the local air- ter. To those core attractions should but it was better than nothing,” says your own name and label for the line. also be added skiing, rock climbing Francisco Pérez, the state governor, wine, and of course drinking it – you At O. Fournier, those that take the and white water rafting. who lobbied hard for the route. can do yourself. plunge are charged about $150,000 “Over the past 10 years, the number Despite such drawbacks, and the Mr Kawal, who spent most of the per hectare, the harvest from which of tourists coming here has doubled,” bigger macroeconomic obstacles, the previous afternoon assiduously tast- can produce about 3,000 bottles of says Cecilia Gatta, head of planning tourists keep coming – to drink, eat ing various blends of wine, is one medium-quality wine a year – and innovation at Mendoza’s tourism well, bask in desert sunshine, watch of more than 120 investors from although the precise amount depends ministry. “Last year, we had 2.7m vis- one of the eight polo tournaments countries that also include the US, entirely on the quality of wine that itors; in 2003, we had 1.2m. To meet Hit with the tourists: polo lessons are one of the attractions of the region that take place each year, or even Canada, Australia and the UK who each separate owner prefers. that increase requires better infra- learn to play themselves. have bought lots of between 3-10 Buyers include one of the richest structure.” “First we take visitors to the Club acres at the 1,500-acre estate run by families in Brazil, oil executives and To some extent, Mendoza is already potential investors is less a want of business opportunity of helping other de Campo, where a professional Vines of Mendoza. wealthy bankers, including a number fairly well-endowed with tourist infra- physical infrastructure than a desper- foreigners who felt the same way teaches them polo. Then we take After its first private vineyards of senior executives at JPMorgan, the structure. A province with 1m inhab- ate need for better institutional infra- as he did to set up small vineyards them for a premium wine tasting at were planted in 2007, the debut har- US bank. itants, which in some ways still has structure, especially when it comes to and hotels. “Inflation and the con- the Bodegas Escorihuela Gascón, vest came in 2010. Last year, no fewer “But no footballers or pop stars. the air of a small village where a national economic policy. stant changing of the tax rules . . . can followed by lunch,” says Gabriel than 230 wines using 18 varieties of We’re not aiming for the Messis or summer siesta remains almost obliga- “Today the biggest investment risks make buying properties a difficult Casals, a director of tour organiser grape were made. Madonnas of this world. We don’t tory, Mendoza has 130 wineries that are the country’s broader economic and confusing process,” he adds. Wines & Polo. “As far as I know, it’s the first want any paparazzi here,” says Mr are open to the public, a plethora of policies,” says David English, another Rodrigo López, managing partner at With that kind of mix, it is no project of its kind in the world,” says Ortega. “It’s a place where people can restaurants and budget hotels, and North American who came to NB Travel, a Mendoza-based travel wonder that some visitors end up Michael Evans, a former internet recharge their batteries and have six five-star establishments. Mendoza out of love – this time for agency, points to the same problem, buying a few hectares of vines for entrepreneur who co-founded the peace of mind. That’s priceless for Indeed, the bigger challenge for the state’s climate, people and the which makes “us less competitive themselves. project. rich people.”

Kendall­Jackson 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 Fran- cisco lawyer, changed the face of US winemaking when he founded the Kend- all-Jackson company in Cal- ifornia in 1982. By the time he died in 2011, the man behind the slightly sweet Kendall-Jackson Vintner’s Reserve Chardonnay was a Missteps: in Argentina, Jess Jackson was unable to replicate the success of his US business billionaire producing more than 5m cases a year. Yet, in spite of considera- import restrictions in the “The biggest problem the Mr Reich has also learned ble investment, Jackson past two years illustrate industry is facing is a loss to plan. After he was unable was never able to repeat his that doing business in of competitiveness,” Ms to import label paper, mak- success in Argentina. Argentina can be difficult. Mutis says. ing it impossible to ship In 1996, he bought 1,100 For foreign investors, it is a According to Caucasia exports worth about acres in Mendoza’s Uco val- reminder that success Wine Thinking, a market $400,000 a month, Mr Reich ley, later adding 1,750 acres requires creativity and a analysis company, in the began to stock 10 months’ and a winery, led by Randy willingness to do things the first nine months of 2013, supply of corks, paper and Ullom, who ran his Chile Argentine way. Argentina exported 220.3m bottles, up from a three operations. It was a shortage of that litres of wine for $640.6m, months’ supply before. The But, in 2003, after a series willingness that hurt Kend- down 19.8 per cent and problem, he says, is that it of business missteps and all-Jackson. 5.5 per cent respectively on ties up $200,000 of working Argentina’s debt default, From the start, Kendall- the same period of 2012. The capital. which caused the peso to Jackson had problems get- entry level has been espe- Foreign owners also have lose almost three-quarters ting enough water to its cially hard hit: exports of to learn that business in of its value, Jackson sold land, which was outside bottled wine under $18/case Argentina runs on friend- his Argentine business to a Mendoza’s traditional vine- have fallen by 37 per cent. ship. After applications to Buenos Aires couple for yard zone, as well as diffi- In response, vintners import oak barrels were $2.5m – a $5.5m loss on his culties importing the US have become more creative. repeatedly rejected, Mr investment, according to plants it wanted. Argentina’s government Ortega from the O. Fournier Wine Spectator magazine. “There was a way we winery explained his prob- Jackson was not the only wanted things done: how to lems to Marcelo Barg, agro- foreigner to enter the make wine, how to grow industry minister for Men- Argentine wine business grapes, how to do the finan- ‘There are a lot doza, at a winery dinner. only to discover that it cial records,” Mr Ullom of rules that The barrels were could be a minefield of says. “We’re very strict and promptly approved, just in handshake deals, erratic have some very focused change day time for the 2013 harvest. government policy and eco- plans. It’s our way or the “You have to go and plead,” nomic collapse. highway.” In the end, the to day, so you Mr Ortega says. “The growth and excite- rigid Kendall-Jackson chose have to be flexible’ There have been some ment that Argentina has the latter path. encouraging signs of late. produced continues to Foreigners in Mendoza Carlos Clément, a Mendoza attract people. But Argen- have since learned from Ken- encourages exports by shipping agent, says all but tina is not an easy-to-deal- dall-Jackson’s experience. refunding various taxes to one of his barrel import with country,” says José But overseas investors are exporters, but it does so requests have been Manuel Ortega, the Span- again facing tough times. slowly. To cut the wait, approved. iard who runs Mendoza’s Inflation has been about 25 Pato Reich, the Chilean And Argentina is allow- O. Fournier winery. per cent a year since 2010 chief executive of Renacer, ing the official peso About $1.5bn was and the national government his family’s Mendoza win- exchange rate to devalue, invested in the Argentine has instituted import con- ery, sells wine to local com- thus easing inflation’s bite wine industry in the 1990s, trols to stem the outflow of panies that need to export on exporters. about two-thirds of which central bank reserves. in order to get permission In the end, foreign wine came from foreign wine- For Mendoza winemakers, to import other goods (a investors have to learn the makers. This led to a surge this means higher costs, government requirement). lesson of Kendall-Jackson, in exports from $128m in scarce supplies and They export for Mr Reich and understand that Argen- 2002 to $920m in 2012, squeezed margins. The cost and handle the refund tina is cheaper because life according to the Instituto of making wine has doubled delay. “There are a lot of is more difficult there. Nacional de Vitivinicultura, in the past four years, says rules that change day to As they say: you can’t the Argentine wine agency. Valeria Mutis, an analyst at day, so you have to be flexi- have your cake and eat it But high inflation and Rabobank. ble,” he says. too. FINANCIAL TIMES WEDNESDAY NOVEMBER 13 2013 ★ 5 Doing Business in Mendoza

“Things are working out,” says Mr Galuccio. “Everything we said would happen is happening.” Exploration begins at Oil chief wins Nevertheless, YPF faces big chal- ‘Dead Cow’ formation lenges, most obviously in the form of the government’s continuing dispute with Repsol, which is demanding The arid semi­desert scrub that $10.5bn in compensation for its expro- covers most of Mendoza conceals one priated assets. of the great unexploited riches not plaudits as YPF Antonio Brufau, the Spanish com- just in the province, or even the pany’s executive chairman, rejected country – but in the world. Argentina’s proposal this year that, The gigantic shale formation at as compensation, Repsol would be Vaca Muerta, which in Spanish means granted a 47 per cent stake – esti- Dead Cow, is one of the most talked­ seeks funding mated to be worth $3.5bn – in a joint about prospects of the global oil and venture to develop Vaca Muerta. The gas industry, with the potential to Argentine government would also attract investors to the region for provide Repsol with a bond worth years to come. $1.5bn, but this would have to be rein- According to the US Energy for shale project vested in Argentina, along with a Information Administration, Vaca commitment to invest more to Muerta is home to the fourth­largest develop the asset. shale oil reserves and second­largest Mr Galuccio has found himself shale gas reserves in the world. caught in the crossfire. “Not everyone While preliminary wells are being understands that this is a conflict drilled in the neighbouring province of between two shareholders – the state Neuquén, after Chevron, the US oil of Argentina and Repsol. I am the and gas group, signed a deal to invest chief executive,” he says, underlining an initial $1.2bn, Mendoza’s portion of that his duty is to defend the value of the formation – which accounts for as the company for its shareholders. much as a third of the total – has “It cannot be that one shareholder, hardly been touched. Resources Miguel Galuccio is working hard Repsol, should try to take YPF hos- This is expected to change over tage,” he adds. the coming decade if a range of to attract investors, reports Benedict Mander There seem to be two options: a geological, technical and financial negotiated solution, or a court settle- challenges can be overcome – ment. “It would be better to reach an principally the need to secure the agreement,” says Mr Galuccio, who billions of dollars that are needed. iguel Galuccio is show- “I’m very pleased with YPF’s goes on to discuss a possible role for But with Argentina shut out from ing the strain. He took results,” he says, adding – about the Pemex, Mexico’s state oil company, in capital markets since its 2001 default, over as chief executive of company, although he could just as negotiating a concord. YPF, the state energy company, has YPF a year ago, just well be talking about himself – “we “We have very close relations with to rely on attracting foreign investors after the Argentine gov- have to be careful not to overdo it. Pemex,” he says. into joint ventures. Mernment had nationalised the 51 per “The key is to grow profitably with- Mr Galuccio knows Emilio Lozoya, Aside from the Chevron deal, and cent stake in the Argentine national out destroying value,” he says, play- Pemex chief executive, from his time smaller investments from Dow of the oil company owned by Repsol of ing the role of shareholder value- in Mexico with Schlumberger, the oil US and Germany’s Wintershall – Spain. It was an unenviable task, conscious chief executive rather than services company. Analysts have also interest has been limited. Hopes of a even for such a respected engineer. government placeman. pointed out that Repsol needs the sizeable investment from Bridas, the Argentina is, in many ways, a hos- Central to Mr Galuccio’s strategy is support of Pemex if it is to expand its Sino­Argentine company half­owned tile environment for business, given the plan to tap the immense Vaca business in Mexico. by China National Offshore Oil its exchange controls, high inflation Muerta shale reserves, much of which Pemex, which owns 9.37 per cent of Corporation, has yet to materialise. and cumbersome bureaucracy. lie in Mendoza, alongside the state’s Repsol’s shares, has already tried to Other commonly raised issues Yet since Mr Galuccio took over at sizeable conventional oil resources. broker the deal that Repsol refused. include high inflation, export tax, YPF 18 months ago, the company’s Mendoza’s conventional reserves However, Mr Galuccio holds out hope limitations on importing goods and share price has doubled, investment account for about a fifth of YPF’s oil that it could yet play a role in resolv- services, restrictions on the right to has risen from $2bn in 2012 to $5bn production, and it is home to one of double-digit rates on the country’s Respected: Miguel Galuccio, YPF ing the conflict. remit profits abroad in dollars, high this year and exploration activity has the country’s most important refiner- sovereign debt. chief executive, is seeking In addition to the difficulties caused labour costs and insufficient skilled increased threefold. ies. “It is the only province in Argen- YPF has also been raising debt foreign investors to finance the by the Repsol saga, problems in the labour, according to Jose Valera, Mr Galuccio has also managed to tina that is completely [energy] inte- locally at even lower interest rates. Vaca Muerta shale project AP broader economy, from basic macro- co­head of oil and gas at Mayer turn round falling production in both grated,” says Mr Galuccio. About half of YPF’s debt is in local economic imbalances to government Brown, a Houston law firm. oil and gas – YPF has suffered a drop Although he concedes that it could currency, compared with as much as strictures on repatriating profits, will Alejandro Bulgheroni, the investor in hydrocarbon output of 7 per cent take several years before develop- 90 per cent in foreign currency before also make it hard for YPF to continue whose family owns the other half of on average over the past decade. ment starts in Mendoza’s portion of the nationalisation. to attract the investment it needs to Bridas, says cutting operational costs In addition, he led a $150m bond Vaca Muerta, as opposed to the share However, perhaps Mr Galuccio’s develop the shale reserves. is central to allowing Vaca Muerta to issue in New York in September, in the neighbouring state of Neuquén, most significant achievement has That may go some way to explain- compete with similar projects around despite Argentina’s ongoing battle the province remains a vital cog in been to secure a $1.2bn deal with ing why a much-touted deal with the world. For example, the cost of a with creditors, who have often sought the workings of YPF. Chevron to explore and develop a Bridas, the Sino-Argentine energy shale well in the US is about $3m, to impound sovereign Argentine One of the biggest challenges, how- concession in Vaca Muerta. company, has so far failed to materi- compared with $7m­$8m in Argentina. assets abroad. ever, is securing funding. Hence the It was trumpeted as proof that a alise. It is hoped that a potential “Large investments and several No wonder, then, that the 45-year- importance of September’s bond large international company with deal with Bridas could be of the years of work are needed for the old is looking wan – it probably does issue. “It was something small to test shale gas experience trusts Argen- ‘Things are working out. same magnitude as the Chevron current good expectations to become not help that he is just off an over- the waters,” says Mr Galuccio of the tina. YPF hopes the deal will encour- Everything we said would agreement. reality,” Mr Bulgheroni recently told an night flight from Europe, where he $150m sum. age other companies to follow suit. Says Mr Galuccio: “The Chinese energy conference in Buenos Aires. was courting investors to develop YPF was able to raise the money at Dow, the US chemicals company, has happen is happening’ could be very important for us. I Benedict Mander Argentina’s vast shale reserves. less than 8 per cent, compared with since signed a smaller deal. think it can happen”. 6 ★ FINANCIAL TIMES WEDNESDAY NOVEMBER 13 2013 Doing Business in Mendoza Former banker indulges his taste for liquid assets

Vintner O. Fournier More at FT.com owner has no regrets From university to winery ●Q&A Nicolás Catena’s former life over his career choice – as a professor of economics gives him a unique advantage in continuing even if he will never his family’s prestigious winery. The head of Bodega Catena Zapata get to taste his best reveals the secret to making a great vintage and explains how his previous vintages, writes career has influenced his approach. Benedict Mander www.ft.com/mendoza

ourteen years ago, José Manuel Ortega received a go into making his wine special. telephone call that would “Each one in itself may not be change his life forever. such a big deal, but if you do them “It was the typical call that all, it will make a difference,” he Fcould so easily have gone unan- explains. For example, O. Fournier is swered,” recalls the former Goldman one of the few wineries in the world Sachs banker, who at the time was to use three different fermentation managing a $200m private equity fund techniques. in Latin America for Spain’s Banco It has not been easy. The business Santander. climate in Argentina has become The caller alerted Mr Ortega to increasingly challenging under the a bankrupt tomato farm in the Uco government of Cristina Fernández, valley, about a 90 minutes drive south the populist president. of the provincial capital of Mendoza, Price and currency controls have suspecting that he “might find it made life especially complicated – Mr interesting”. Ortega complains that he was not able And indeed he did. When the Span- to import French oak for his barrels iard arrived at the 263-hectare prop- for more than six months. erty in the shadow of the soaring With costs rising and profits Andes mountains, he thought it was squeezed in his wine business, Mr paradise. Ortega has diversified the project into “It didn’t make sense not to buy it. tourism, with a top-end restaurant on We got it for the price of the trans- the property, and plans to start build- former and a few wells – the land ing a luxury hotel. itself was basically thrown in for He is also selling off small plots of nothing. Today, it’s worth about 20 land to investors, who will be given times what we paid for it,” says Mr the opportunity to make their own Ortega, his eyes widening. blends of wine at his winery. So began the story of the O. And although he has sacrificed the Fournier winery, one of the pioneers lifestyle of a high-flying banker – he of the Uco valley, along with other no longer gets his suits tailor-made in leading bodegas such as the 2,000-hec- London’s exclusive Savile Row but tare Salentein estate and Clos de los buys them in Shanghai when on trips Siete, the winery of Michel Rolland, to promote his wine – Mr Ortega has the French oenologist. no regrets. As well as its wines, O. Fournier is “When I meet up with my former also famous for the futuristic design colleagues at Goldman, they may all of its winery, which has been likened 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 be richer than me but they are all to the landing pad for an alien ship jealous of what I have here,” he says. or the perfect lair for a James Bond “I didn’t get into the wine business to villain. Despite getting the land relatively “I began with 5 per cent liquidity At the time, Argentina was in the make money. I got into it to do some- “It would have been cheaper to hire cheap, setting up the winery was an and I’ve ended up with 14 per cent middle of a financial crisis, and thing unique. I’m more interested in Brazilian models to hold umbrellas for expensive project. Mr Ortega took out alcohol,” he jokes. ‘Former colleagues at O. Fournier was the biggest construc- legacy.” the workers,” quips the dry-witted Mr five loans and mortgaged his house to Although Mr Ortega bought the tion project – perhaps the only major He admits he will never get to taste Ortega of the distinctive overhanging fund the €22m project – of which land in 2000, and set about planting it Goldman may be richer one – in Mendoza that year. his vineyard’s finest wines – it will roof under which farm labourers about €4m came from his own pocket. right away, construction of the than me but they are all No expense was spared or detail take decades for the still-young vines unload grapes by hand into vats, pro- “When you start making a winery, ambitious project – designed by local ignored. “Either you do it correctly to mature. tected from Mendoza’s scorching it’s a money pit. You just put more architects Eliana Bórmida and Mario jealous of what I have here’ or not at all,” says Mr Ortega, “That,” he adds, “is a pleasure I will desert sun. and more in,” he says. Yanzón – did not begin until 2002. stressing the numerous details that leave for my children.”