News from our advisers

Our principal specialist commodities advisers wrote at the end of June:

Merger and acquisition activity shows no sign of slowing up with Yamana Gold and Northern Orion joining forces to jointly acquire Meridian Gold Mined supply is decreasing as depletion outstrips the rate at which new mines are currently being brought into production. The USD will also suffer due to the US current account deficit and likely diversification by holders. All of this creates a positive environment for the gold price.

GTI comment: This news report underlines our much repeated mantra: substantial mining resources in politically secure parts of the world are now as rare as unicorns: “Rio Tinto Group Chief Executive Officer Thomas Albanese says he’s buying Alcan Inc. for $38.1 billion before the competition beats him to it. ‘You ask the question of why now?’ Albanese told investors during a conference in Montreal yesterday. ‘This is competitive. There aren’t that many topquality, global resources in any of the mining sectors that are available.’ Albanese is making the industry’s biggest acquisition just two months after taking over at the world’s third-largest mining company.

The cash offer from Londonbased Rio Tinto overwhelmed a hostile bid for Alcan by Alcoa Inc. and would create the world’s largest aluminium producer.” Here’s a chart of the PER for the basic materials sector, the producers of these scarce resources, which shows that the market is certainly not overvaluing them, hence RTZ’s confidence in buying them. We are not in bubble territory yet, but hang around for a year or so we might be:Plus, the easy pickings have gone, with so much high-grading (mining out the profitable, easier materials) going on.

  Note: Mines included in this analysis are: Nevada (Newmont), Yanacocha, Goldstrike, Porgera, Granny Smith, Campbell, Dome, Kalgoorlie Superpit, Eskay Creek, Golden Giant, Hemlo, Korri Kollo, Fort Knox, Round Mountain, Kubaka. Sources: Investec Asset Management. Company data, Macquarie Research, May 2007

In addition, the gold price (and other industrial materials, take our word for it) is low in real terms:

Sources: Investec Asset Management. Bloomberg

Cheap companies, cheap underlying materials, cheap financing, a global search for scarce extra capacity by cashrich corporate players come on, what Real Gold Price (in Today‘s Dollars) do you think is going to happen to this GTI sector? It’s going to boom. The Supply Inelasticity theme (particularly mining) is our second largest bet after the Energy and Alternative Energy theme. Our only major issue is whether we increase it further or not.