Hambro sees nothing but blue skies

This year is shaping up as another bumper period of record earnings, profits and dividends for the big international mining companies.

And according to Evy Hambro – fund manager for the Merrill Lynch International Investment Fund World Mining Fund, the world’s largest mutual fund – there is nothing on the horizon that says 2006 won’t be the same, or better.

“The resources sector has never been healthier and shows few signs of waning. The outlook remains one of record earnings across the sector,” Mr Hambro told WA Business News from Sydney.

Market fears of a slowdown in China’s rapid development were unfounded as the country steamed on to become the largest raw materials consumer in the world, according to Mr Hambro.

“The Chinese economy is only going to get stronger,” he said.

Other emerging economies, including India, Russia and the other former Soviet bloc countries, combined with a supply side strangled by lack of investment in the previous decade and long lead times for new production, would keep metal prices generally high.

A string of revenue, profit and dividend records were broken last year by the big international mining companies and “results for the first half of calendar 2005 are even better”.

Since June 2004, diversified miners BHP Billiton, Rio Tinto, Anglo American and Xstrata have returned more than $9.3 billion to shareholders through dividends and share buybacks.

“My view is that there is more to come,” Mr Hambro said. “The interesting thing is that commodity prices don’t need to go higher for that to happen. However, base metal prices have held onto strong performances, with current levels already fairly high and could easily go higher.” Some metals, such as copper, have hit multi-decade highs, while unforeseen demand growth in key consuming nations has far outstripped forecasts.

A survey of three major mining houses showed analysts had dramatically underestimated iron ore prices during the past three years.

They predicted a less than 4 per cent rise in 2004 iron ore prices, when the reality was a 25 per cent increase and for this year, predictions of a 15 per cent rise have been eclipsed by a jump of more than 70 per cent.

In the gold market, total demand in the first half of this year increased 21 per cent. The jewellery sector took a record $51 billion worth in the June 2005 year, 20 per cent going to India, where second quarter 2005 demand was up 41 per cent.

China’s jewellery demand grew 11 per cent in the 2005 second quarter and that country now consumes 3 per cent of the world’s gold.

This impressive demand for gold followed a 2004 during which production fell 4 per cent, the largest annual decline since the 1940s, brought on by exploration budgets that have been slashed by 76 per cent since 1998.

While gold supply is predicted to hover around 3,000 tonnes per annum (tpa) between now and 2009, demand is forecast to rise from the current 3,200tpa to over 3,500tpa in 2009.

Mr Hambro said analysts were still underestimating the strength of the base metals market.

“The industrialisation and urbanisation of a previously mostly rural China is expanding to an increasingly consumer-orientated economy and is having a huge effect on the commodities market. Further, it shows no sign of slowing down.”

Mr Hambro said a shakeout of speculative developers earlier this year had lead to some lowering of growth rates, but there had since been a return to high growth rates in construction and steel consumption.

China’s gross domestic product grew 9.5 per cent in the second quarter of this year, well ahead of annualised projections of between 7 per cent and 7.5 per cent, with industrial production up 16 per cent in August.

Chinese stainless steel consumption is expected to grow at an average 9 per cent a year for the next decade, a big number for Australian nickel producers as stainless steel accounts for about 67 per cent of the world’s nickel production.

Mr Hambro said India, with its huge population base, was going through a similar demographic change to that in China, but was much better served in terms of natural resources.

He also predicted more consoli-dation among mining companies, many cashed up, sitting on strong balance sheets, with debts at all-time lows and cash flows at all-time highs.

Rising capital expenses for such things as machinery, labour and raw materials were steering management away from building new operations, opting instead to increase production in a high commodity price environment via acquisition.

Examples include Inco’s current $15 billion bid for Falconbridge to create one of the world’s biggest nickel/ copper producers, BHP Billiton’s $9 billion acquisition of WMC Resources in August, Goldcorp’s $2.6 billion acquisition of fellow US company Wheaton River in February and Swiss-based Xstrata’s $5 billion takeover of Australian MIM in 2003.

“I believe there are more such mergers/takeover to come,” Mr Hambro said.

In addition to his role as lead fund manager for the Merrill Lynch International Investment Fund World Mining Fund, Mr Hambro is investment manager for Australian listed investment company Global Mining Investments. He is also a member of the Merrill Lynch Investment Managers Natural Resource Team, which has more than $16 billion of assets under management.