Merrills Hambro Tops Mining Funds on `Small-Caps

Wednesday, August 2nd 2006

For Evy Hambro, who manages the world’s biggest mining fund at Merrill Lynch & Co., small is profitable.

Hambro steered the $6.6 billion fund to the best performance this year among 270 peers tracked by Standard & Poor’s by increasing investments in small and mid-sized companies. Shares of Hambro’s top performers, Perilya Ltd. of Australia and Zijin Mining Group Co., which runs China’s biggest gold mine, have more than doubled.

“These companies have a higher sensitivity to commodity prices compared with the larger miners,” said London-based Hambro, 34, who last year visited mines in Australia, China and South Africa. “Our exposure to small and mid-cap companies made a big difference to our performance.”

Growing demand from China, the largest consumer of metals, combined with underinvestment in production, has spurred the longest rally in commodity markets since the 1950s. Copper, the red metal used for wiring, coins and pipes, is the best performer this year, surging 74 percent. The Morgan Stanley Capital International World Metals & Mining Index of 67 companies is up 20 percent.

Merrill’s World Mining Fund returned 25 percent through July 28. The Luxembourg-registered fund beat its own benchmark, the HSBC World Global Mining Index, which advanced 23.4 percent.

Hambro said shares of small- and mid-sized companies, those with a market value of less than $10 billion, account for about 20 percent of his fund after he “gradually built up” his holdings last year.

His father is Peter Hambro, executive chairman and co- founder of Peter Hambro Mining Plc, a London-based company that digs for gold in eastern Russia.

Greater Benefit

Smaller miners that don’t buy financial contracts to lock in prices for future production have benefited more from this year’s record metals prices, Hambro said. Phelps Dodge Corp., the world’s third-largest copper producer, last week reported a 31 percent drop in profit as a failed hedging strategy meant the company missed out on the rally.

Hambro also held shares of Jiangxi-based Jiangxi Copper Co., China’s biggest copper producer, which have more than doubled this year. Hamilton, Bermuda-based Aquarius Platinum Ltd., which mines for platinum and palladium in South Africa and Zimbabwe, has gained 98 percent.

Both surpassed the 22 percent advance in BHP Billiton Plc, the world’s biggest mining company, and the 7.4 percent gain in Rio Tinto Group, the second-largest miner by market value. Hambro owns shares in both companies.

Hambro, whose fund takes positions in as many as 70 companies, also owns Melbourne-based Oxiana Ltd., which explores in Thailand, China and Australia. The company’s shares have risen 72 percent this year.

`Very Risky’

Not everyone agrees that this is the time to put money in commodities. The Reuters/Jefferies CRB index of 19 commodities is down 4.9 percent from its May 11 record on concern that rising global interest rates will slow economic growth, curbing demand for raw materials. India, the world’s biggest gold consuming nation, on July 25 raised its benchmark interest rate to a four-year high.

“It’s a dangerous time to invest in commodity stocks at the moment given the uncertainty in the markets,” said James Lau, a director at London-based financial advisers Wightman Fletcher McCabe Ltd. “Shares of smaller companies tend to rise at a fast rate when markets are bullish and fall just as quickly when markets turn the other way.”

Hambro didn’t heed analysts who last year forecast metals prices would fall in 2006. A Bloomberg survey in December estimated copper would average $3,681 a ton this year and aluminum $1,900. Prices have so far averaged $6,218 a ton and $2,559 a ton, respectively.

Room to Run?

“Most people thought that commodities would move into a surplus in the second half of 2005,” Hambro said. “We expected deficits for this year and 2007 too. The exuberance in the markets was much stronger than we anticipated.”

Copper reached an all-time high of $8,800 a metric ton in May in London, while zinc climbed to $3,825 a ton, its highest ever. Nickel, used to rust-proof stainless steel, rose to its highest in 19 years and gold surged to a 26-year high. Prices for iron ore, the main ingredient in steel, rose 19 percent this year, after a record 72 percent jump in 2005.

“There is still room to run in the base-metals markets,” said London-based James Gutman, senior commodities analyst at Goldman Sachs Group Inc. “Investment still hasn’t reached the levels it needs in order to meet future demand. I wouldn’t be surprised to see further spikes in the markets.”

Takeover Battles

Mining companies are battling for natural resource assets and spending on acquisitions to increase output as demand drives up prices. Mittal Steel Co. agreed in June to buy Arcelor SA for 26.9 billion euros ($33.7 billion) in the steel industry’s biggest takeover. Xstrata Plc is poised to buy Falconbridge Ltd. for C$19.2 billion ($17 billion) after shareholders of the Canadian nickel miner on July 28 rejected a takeover offer from Inco Ltd. backed by partner Phelps Dodge Corp., thwarting the mining industry’s largest takeover.

Teck Cominco Ltd., the world’s largest zinc miner, yesterday revised its unsolicited offer for Inco in an attempt to rebuff a competing bid from Phelps Dodge and create North America’s biggest mining company.

“The problem is that companies are spending their money on buying each other instead of adding to capacity,” Hambro said.

China’s economy has doubled in size over the past decade, overtaking the U.K. and France, as it builds bridges, buildings and factories. The country’s economy expanded 11.3 percent in the second quarter, the fastest pace in more than a decade.

Extended Boom

Marc Faber, who told investors to bail out of U.S. stocks a week before the 1987 Black Monday crash, said April 25 that commodities were five years into a rally that may last as long as three decades.

Hambro, who graduated from Newcastle University in 1994 with a degree in marketing and finance, started the World Mining fund with $5 million under management in 1997, three years after joining New York-based Merrill Lynch. The fund is available to investors for a minimum investment of $5,000.

He also manages Merrill Lynch’s World Gold Fund, which is up 16 percent this year, and co-manages the Natural Resources Hedge Fund, which has gained 9.4 percent. Graham Birch heads Merrill’s natural resources team, which manages $24 billion.

Merrill is a passive, minority investor in Bloomberg LP, the parent of Bloomberg News.

Gold and Platinum

Hambro boosted returns this year by increasing the proportion of the fund’s assets in gold and platinum companies, benefiting from a gain in prices and a drop in the value of the South African rand.

Hambro lifted his holdings of platinum-group producers to 8.6 percent of his fund from 5.3 percent and gold miners to 16 percent from 11.5 percent at the start of the year.

This year’s 8.9 percent decline in the currency of South Africa, the world’s largest gold-producing country, against the dollar made mining companies more profitable because gold is priced in dollars.

“This had double-whammy impact,” Hambro said.

Source: quote.bloomberg.com