its 2007 upward

Investment Idea: Diversified Miners in 2007 - BHP and RIO

We been calling it into the New Year, and will reiterate it again…

BHP and RIO are looking like good places to be in 2007, and a switch out of the higher risk pure plays and into the safer diversified miners may well take place in 2007! Both remain favoured picks for the longer term play! ABN AMRO has a range of warrants to suit your investment needs…

We remain positive on the performance of the major diversified miners and believe they will benefit from continuing strength in the bulk commodity prices and recognition of the enormous cashflows that they continue to generate.

BHP and RIO have horribly underperformed many of the pure play miners since the correction in May as shown in the chart below. Unlike their purer play brethren that have benefited from the rebound in commodity prices, BHP and RIO have suffered from negative macro views (particularly out of the US as the negative housing data has triggered a number of the players to get out of mining). The divergence in performance is not justified in our opinion.

Relative mining performance since May12 2006



The charts below show the performance of the base metal prices relative to our forecasts. The drop that we have seen in copper is well within the range that we have been expecting.



The recent iron ore price rise announcement of 9.5% increase reminds us of the benefit of the bulks in the portfolio. BHP and RIO will both be getting 9.5% more for their ore for 12 months from April 2007. The bulks represent about 30% of BHP's earnings in 2007 (around 18% is derived from the Petroleum division) and ~52% of Rio 's earnings. The falls in the base metal prices and the firm bulk price we believe are in the market. The continued significant cashflows generated by the majors is still yet to be full valued by the market in our opinion and we continue to believe the "bumpy ride up" will be the case into next year.

ABN AMRO Warrants over BHP and RIO