robin widdup interview

Thursday November 17, 4:34 PM
INTERVIEW: Metals Cycle Different; Few New Mines - Lion

By Ray Brindal
Of DOW JONES NEWSWIRES

CANBERRA (Dow Jones)--The prices of copper, gold and other metals could remain strong for a long time, given the relative absence of new large-scale mine production coming on stream, Robin Widdup, managing director of Australian investor Lion Selection Group Ltd. (LSG.AU), said Thursday.


Indeed, he sees a number of factors supporting current high prices for gold, copper, zinc and some other metals, including the powerful ongoing growth of the economies of China and other developing nations, including India and Brazil.

The price of copper, the metals complex bellwether, has risen threefold over the past four years, with three-month metal now quoted around US$4,135 a metric ton on the London Metal Exchange. Gold, of which Australia is the third-largest producer, is quoted above US$480 a troy ounce in the spot market, nearly double from US$257 in April 2001.

Speaking in broad terms, Widdup contends the current metals price cycle is characterized, unlike in the past, by relatively low spending on exploration and therefore little success in discovering new resources and a lack of new mines coming on stream.

He produced figures showing global nonferrous metals exploration spending fell sharply to US$1.9 billion in 2002 from US$5.2 billion in 1997, though it has risen in recent years, and is back to an estimated US$5.2 billion this year.

At the same time, old mines are going out of business as resources are being exhausted, while operating and capital costs are rising quickly, ensuring marginal projects aren't coming into production, he said.

As a result, the natural price stabilizer of increased supply hasn't yet emerged to weigh on prices, if it does at all, he said.

"We're in a very unusual time," Widdup told Dow Jones Newswires, adding that he finds himself leaning toward the "supercycle" theory.

"It's possible you could see copper and gold and all the other metals continuing to remain strong from here," he said, noting everyone is trying to pick the top of the price cycle.

China To Fuel Long Strong Price Cycle - Widdup

Lion Selection holds investments with a market value totaling A$164 million in 12 resource projects in Australia, Africa, Indonesia and the Philippines, typically taking a sizable stake at an early stage, then selling after production begins at a handsome return to turn back into more investments.

The company posted a net profit of A$32.2 million last fiscal year ended June 30, 2005, up from A$1.7 million previously, mostly reflecting the impact of selling its stake in MPI Mines Ltd. It made new or follow-on investments totaling A$32.3 million last fiscal year.

Widdup said much of the booming metals cycle depends on China, given its massive increase in metals consumption over the past decade, although he notes strong growth in other new economies such as India and Brazil.

"If China keeps on going, there's no way you're going to see most commodities be able to keep up," he said.

Developed economies can really do whatever they like, but they aren't building infrastructure and housing at the rate developing economies are, he said.

The intensity of metals use in a developing economy like China and India is 10 times more metal per person than in a developed economy, he said.

The difference with this metals cycle is that there have been relatively few, if any, major discoveries, he said.

The last major Australian gold discovery was the Thunderbox mine 10 years ago, reflecting the low levels of exploration spending.

Australia's Share Of Global Gold Exploration Falling - Council

Indeed, industry lobby the Australian Gold Council said Australia is attracting a declining share of global exploration spending, now luring just 12%, down from 18% four years ago and trending lower.

Michael O'Neill, the council's chief executive, said the global industry clearly doesn't regard Australia as competitive, and that there is a market failure in attracting investment for exploration.

Widdup agreed the tight global stock levels for some metals, such as copper, leaves the market prone to an externality such as a mine wall collapse.

In late 2003, Freeport-McMoRan Copper & Gold Inc. (FCX) had to sharply curtail production at its world-scale Grasberg mine in West Papua, Indonesia, after landslides cut off the mine's higher-grade ore. Only now is production returning to normal.

Widdup believes major mining companies, in part reflecting the impact of consolidation into larger units in recent years, will be careful about bringing on new mines because they are happy with what is happening with prices.

Looking at Lion's portfolio, he is particularly pleased with Lion Selection's 21.5% stake in Indophil Resources NL, which owns 95% of the world-class Tampakan copper/gold project in the southern Philippines that it is developing.

Tampakan is currently undergoing a prefeasibility study.

Swiss-based miner Xstrata PLC (XTA.LN) has an option to acquire 62.5% of Tampakan any time up to Dec. 31, 2007.

Widdup said Tampakan looks like it has the capacity to be a large copper mine for 50 years or more at a production rate of 140,000-200,000 tons/year, and be economically viable in the long term at 90 U.S. cents/pound, less than half the current spot price.

"It's an absolute beauty to have," Widdup said, adding he is pleased to have Xstrata on board, with its global scale and "finance to make it happen."

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