Peter Hambro Mining looks like it has a golden future

Peter Hambro Mining

755½p +46

Questor says BUY

"People are still unhappy about the state of the world's financial system and gold is the ultimate store of value," Peter Hambro told Bloomberg yesterday. He predicted that the price would rise to $1,000 an ounce as investors buy the metal as a hedge against a weakening dollar.

Mr Hambro was commenting after his eponymous mining company posted a five-fold increase in pre-tax profits. The performance reflected an increase in production, cost control, a higher gold price and the devaluation of the Russian rouble. The group also made a $23m (£14.2m) gain on a repurchase of gold exchangeable bonds.

The company produced 222,600 ounces of gold in the period and is targeting full-year production of 500,000 ounces. If this target is attained, the company would produce more gold this year than blue-chip peer Randgold Resources – yet the company is trading on a significantly lower rating.

Randgold shares are trading on a heady December 2009 earnings multiple of 60.1 times, compared with Hambro shares, which are trading on a multiple of just 15 times. With Hambro expecting to dig up more gold this year than its African rival, why is there such an amazing discrepancy between the valuations of the two companies?

Well, the first is Russian risk. Randgold operates in West Africa, although it is making a move into the risky Democratic Republic of Congo. Some investors shun companies exposed to Russia because they are afraid of asset grabs, as has been seen in the oil industry. Whether this is a justifiable fear or not is a moot point. The fact is that it is true – one fund manager recently told Questor he would not invest in any Russian facing stock because of the "Russian risk". However, operating in West Africa carries a high degree of risk as well.

Questor believes these fears are overdone.

Then there is the fact that Hambro is no longer a pure gold play following the purchase of iron ore group Aricom earlier this year. Pure gold plays always trade at a higher rating.

Aricom was originally spun out of the company in 2007, with Jay Hambro, Peter Hambro's son, in the chief executive chair. Aricom is developing an iron-ore operation in Russia close to the Chinese border. Transport costs to Chinese steel mills are less than other sources, notably Brazil and Australia, and should a planned bridge over the Amur River between China and Russia be built, transport costs would fall even further.

As commodity markets plunged, so did the share price of the Aricom spin-off as investors feared it would not be able to raise the cash, as the unit would need to raise about $1bn to develop its resources. Hambro, therefore, repurchased Aricom in April.

The combination shored up Hambro's balance sheet. When the companies merged, there was a net cash position of about $5m when Aricom's $255m cash balance was added to funds raised by Hambro in a convertible bond issue and a $105m share placing. Ultimately, Aricom could become a significant profit contributor, but not for some time.

Then there is the question of growth, which Questor feels is underrated by the market. Randgold's shares trade on a high rating because it is expected to double production over the next three years, but Peter Hambro told Questor yesterday that he thought his company had a better growth profile than Randgold – in fact, he argued that the company's growth profile was one of the best in the world.

Although these reasons go part way to explain the valuation discrepancy, Questor is in no doubt that the market is undervaluing Peter Hambro shares significantly. In effect, the Aricom business is thrown into the valuation for free. The shares have added 20pc since they were recommended as a buy at 626.2p on July 21 – an impressive gain in little over a month. But the stance on the shares remains buy.

Amec

746½p -31

Questor says BUY

THERE was nothing much wrong with interim results from energy and mining services group Amec, but the shares fell on profit taking after the figures. They have had a good run recently, so this isn't that surprising.

The company is continuing to move away from its lower-margin businesses. Margins should be 8pc this year and hit the group's 8.5pc target in 2010. The company has a net cash position of £700m and it is on the lookout for bolt-on acquisitions.

Pre-tax profits in the first half of the year fell 4pc to £88.4m on flat revenues, but the second half of the year is expected to be stronger. The order book stood at £3.2bn at the end of the period, down from £3.3bn in December, but most of this fall is down to currency translation.

Amec hiked its interim dividend by 15pc to 6.1p a share and it will be paid on January 4 next year. This is a confident sign of management's confidence in future prospects.

The shares were recommended at 531½p on January 8 and they are now 40pc ahead of their initial recommendation price. They are trading on a December 2009 earnings multiple of 15.6 times, falling to 13.9 next year. They are yielding 2.3pc.

The company is operating in important growth markets and Questor expects a number of targeted acquisitions over the next year to build its position in important markets such as Australia and Brazil. The stance on the shares remains buy.