mining the 'heart of darkness' Mining the 'heart of...

mining the 'heart of darkness' Mining the 'heart of darkness'
Andrew Trounson
October 21, 2005
YOU get the feeling that the lead manager of Merrill Lynch's London-based World Mining Fund, Evy Hambro, would be a fan of Joseph Conrad.

The Polish-born English novelist's characters were forever delving into the "heart of darkness" that was 19th century Africa, South America, Asia and Russia. And Hambro wants to be right there with them.

The resources expert is rubbing his hands together at the prospect of the world's largest miners finally making the leap into the developing world, where the big mineral deposits of the future will be found. The pay-offs will be huge, he says.

"Once some of these companies start to look at these areas of the world, there will be a massive value uplift," Hambro says.

He believes the scramble for assets in new frontiers such as Africa, China, Russia and Mongolia will herald a new era in the ongoing consolidation of the mining sector that has spawned the behemoths: BHP Billiton and its rivals Rio Tinto and Anglo American.









With the world's mining industry struggling to find and develop the new projects needed to fuel China's and the developing world's industrialisation, Hambro says the majors need to be "brave" and not be put off by fears over investment risks.

"This reluctance to go in straight away has created a great opportunity for equity investors to pick up stakes in these companies relatively cheaply," he says.

Hambro expects the global miners to start buying out companies with exposures in the developing world, and directly snapping up projects.

He is part of a natural resources team at Merrill that has almost $US12 billion ($15.9 billion) under management. He is also the investment manager of locally listed mining investment vehicle, Global Mining Investment.

A firm believer in the "supercycle" for commodity prices, he says investors are yet to wake up to reality. He notes that 50 per cent of GMI's portfolio is in global miners trading on earnings multiples of less than 10 times.

"We are only just starting to see signs of this belief in the fact that we might have a stronger period of commodity prices for a considerably longer period of time than the cycle would normally deliver."

While he doesn't expect metal prices to rise much higher, he says they will be higher than expected over the next one to two years.

While ongoing economic growth in China is the key risk to the bullish outlook, he sees little prospect of a significant pullback in China's demand. A more relevant potential hiccup would arise if investors get "too greedy" and are persuaded by "mining promoters" to fund unproductive projects that would create oversupply.

Hambro is most bullish on the prospects for iron ore, copper and gold, which he tips to be on the cusp of breaking through $US500oz.

Touching on uranium, he says the fundamentals are perhaps the strongest of any commodity, given the prospect of governments embracing nuclear power.

But he warns that valuations on uranium equities are inflated, given the many producers who are locked into long-term prices well below spot prices.

Hambro says he is bearish on palladium, and wary of aluminium, the price of which is weighed on by high stocks.