March 26, 2008 / 7:47 AM / 12 years ago

BlackRock says gold record high may be challenged

LONDON (Reuters) - Investment manager BlackRock expects tight gold supply and a gradual rising trend in the price which could lift the metal to new highs above the record $1,030 per ounce hit last week.

Gold bars are displayed at Mitsubishi Materials Corporation in Tokyo March 17, 2008. REUTERS/Issei Kato (JAPAN)

“We expect a gradually rising trend in the gold price and if that happens we will get to a new high. We are expecting that positive trend to continue, with volatility over the short term,” said fund manager Evy Hambro, who runs BlackRock’s $17 billion (8.5 billion pound) World Mining Fund and co-manages the $8.9-billion World Gold Fund.

Gold traded at $931.60 an ounce on Tuesday, well off a high of $1,030.80 hit on March 17.

“We think the replacement cost of gold today is much higher than where the market is right now,” Hambro said, adding that even if the price reached the desired level it would have to be sustained for gold companies to invest.

“Just because it reaches that number doesn’t mean it’s going to change anything. We’re not going to see all gold mining CEOs building new projects. The price needs to average that over a decent period of time for them to start investing shareholder capital into new production assets,” he said.

The Gold fund’s top three holdings as at the end of last month were Australia’s Newcrest Mining (NCM.AX), Canada’s Barrick Gold (ABX.TO) and Kinross Gold (K.TO), which together accounted for over 22 percent of the fund.

“In the gold space we are very much in a situation where production will continue to likely decline. There are not enough new gold discoveries to replace the gold being mined,” Hambro said.

POLITICAL RISK

The gold supply situation is complicated by the fact that many of the reserves lie in African and South American countries where political risk is high.

“We’re trying to find as many companies as possible that don’t have too many assets in areas of the world where governments are trying to get a bigger slice of the pie. But we have to invest where the best quality assets are,” he said.

“We’re seeking a mix of growth and gold price sensitivity. Companies with low profitability move the most with the gold price as it has the biggest impact on their earnings,” Hambro said, adding that the fund wanted to increase exposure to companies with the right type of producing assets in Russia and China.

DEMAND, M&A TO BOOST CHEAP MINERS

BHP Billiton BLT.L, Vale VALE5.SA and Rio Tinto (RIO.L) were the top three stocks in the mining fund, accounting for over a quarter of the holdings.

Hambro said that mining stocks were relatively cheap.

“Mining companies tend to have a lower EBITDA/EV multiple or cash flow multiples than average for the equity index as a whole, and very good earnings growth due to strong commodity prices, and apart from gold companies, they have some volume growth as well,” he said.

“Despite the strong price performance, we haven’t seen any expansion in the multiples the companies trade at,” he said.

The mining sector has been driven by mergers and acquisitions, with BHP Billiton bidding $147 billion for Rio Tinto (RIO.L), and Hambro said he saw the trend continuing.

“It’s cheaper and better value for shareholders for companies to use their cashflows to buy existing assets that are in production and benefiting from today’s commodity prices rather than going and taking the risk of building new assets,” he said.

“Commodity prices are driven by continuous strong consumption in China, Brazil, India and so on where most of the growth in demand has come from. As long as growth in demand remains that will be the biggest driver of commodity prices and they’ll be the biggest driver of returns in the mining space.”

He said the fund had built up exposure to coal, iron ore, ferrochrome and manganese, and predicted a very strong outlook for platinum and the associated metals like palladium, rhodium, and ruthenium.

Hambro said that the fund had a low exposure to zinc and lead and though nickel was now looking more interesting, it could be vulnerable to a slowdown in developed economies because of its use in stainless steel.

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