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Web-only Exclusives
November 30, 2000

From Our Correspondent: Hirohito and the War
A conversation with biographer Herbert Bix

From Our Correspondent: A Rough Road Ahead
Bad news for the Philippines - and some others

From Our Correspondent: Making Enemies
Indonesia needs friends. So why is it picking fights?

AsiaweekTimeAsia NowAsiaweek

MARCH 17, 2000 VOL. 26 NO. 10

Diamonds In The Rough
There is much upside in the mining sector

Thanks to the infamous 1997 Bre-X gold scam in Busang, Indonesia, the nature of Evy Hambro's job has changed. Investment managers like him now take extra pains to muck around the dirt at mines in remote parts of the world. He says the scandal taught them to be more careful about checking the operations of resource companies. Last year, Hamro and his team produced a stunning 62% return with their World Mining Fund. He spoke with Asiaweek's Alexandra A. Seno:


 
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How do you explain the sharp drop in resource stocks very recently?

In the last month, mining stocks had a severe selloff caused by the market taking money out of cyclical shares to put into high-tech stocks. Because of the profits made in resources in the last year, it seemed an easy place to pull cash out of. We are now seeing a 25% correction. It is horrendous. Some of the stock price moves have been very dramatic. London-listed Rio Tinto - the world's largest mining company- plunged 35%, and Australia's Western Mining dropped 30%.

Is the selloff justifiable?

No. The balance sheets are better than they have been in a very long time. These are real companies making real money. They are either going to return [profits] to shareholders through dividends or they will start buying other companies. In aluminum, if the Alcoa-Reynolds and the Alcan-Pechiney-Alusuisse mergers are approved by regulators, these two new companies will control 40% of the market, giving them a great degree of pricing power. With the consolidation and formation of big companies, businessmen who are concentrating on returns to shareholders are increasingly managing these enterprises, instead of engineers and geologists. This better capital management in the industry will give higher returns to shareholders, which will mean a rerating of the sector.

What other metals will see corporate consolidation?

The whole mining sector is going down this route. The upside for aluminum is limited because the assets are all controlled by big companies now. Copper still has potential. Gold is close to some major mergers. The gold industry is so fragmented though. Its capitalization is minuscule, maybe about $20 billion to $30 billion.

Outside Australia, what other Asia-Pacific stock markets have a selection of resource stocks ?

Indonesia. Freeport in Irian Jaya is the largest copper producer in the world. There are also smaller listed miners. We have never taken a large holding in Freeport because of the political situation. But through Rio Tinto we are indirectly exposed, since the company has several operations in Indonesia. Why take the added risk of owning Freeport when you can own a copper producer elsewhere and get just as good returns?

What's the outlook for gold?

In late 1999, the European central banks signed the Washington Agreement. They promised not to sell more than 400 tons of gold over the next five years. Before this, the lack of certainty about gold created a market rife with rumors about what the banks were going to do. The agreement added clarity to the market. There is still more demand than supply. Prices will go up. Asia is recovering and incomes are growing again. That might go into gold which is used mostly in jewelry.

For 2000, which metals are likely to perform well?

We have a very large exposure to platinum-group metals. The fund has 12% to 15% in platinum through a number of investments. The platinum group metals have had just the most wonderful run because of the disruption to Russian supply. There are only four major producers in the world, and they don't have the ability to just turn on the taps to produce the metal when the price is high. The price keeps running up and no new metal is coming to market. Meanwhile, demand has been growing stronger than for any other metal. As air quality restrictions become tighter for cars, you need more platinum and palladium to extract pollutants in automotive systems. The metals are also required to make the exciting new fuelcell technology used in building zero-emission engines for cars. The fund holds investments in South African platinum producers. We hold Impala Platinum, for example. We also have a holding in Aquarius Platinum, which is listed in Australia and London. It's not that we think the metals are going to go higher, but we think the companies are good value.

Is this the right time to buy into the mining sector?

Value is available in the market. If the shareholders don't pay up for it, the other companies will and competitors will start buying each other. We do not need metal prices to skyrocket to be able to generate super returns in this industry. I am confident that there is good profit to be had in the sector.

EVY HAMBRO of Merrill Lynch Mercury Asset Management in Sydney, sees opportunities in mining plays. He notes increased demand for gold and platinum as well as signs of more consolidation among metals producers. The World Mining Fund he manages has $38 million in assets

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