Graham Birch, from Merrill Lynch
«The China Factor came to stay»
China emergence and the geo-political
instability are "feeding" a positive momentum
for metal and mineral commodities. Particularly gold
is in a buoyant market - the 500 dollars/oz can be reached
end of 2005.
interviews Graham Birch, November 2004
Natural Resources Funds
GRAHAM BIRCH, 44, is an English PhD in nickel geology
at the Royal School of Mines that manages 7 billion
dollars of Natural Resources Funds at Merrill Lynch
Investment Managers, the independent asset management
unit of Merrill Lynch. Some of the Funds he manages
have posted outstanding recent performance, which has
drawn the attention of private and institutional investors
alike. The press call him the "Merrill's golden
boy" - literally, because one of his specialities
is managing gold. He is based in London where he heads
the Natural Resources Team, with 5 fund managers and
2 graduate research assistants, including 4 geologists
- a bunch of guys that can go to the mining field sometimes
in far-flung places and evaluate with their eyes the
quality of assets and "gossip" what's going
on in the industry. "That's a huge advantage for
our team", he confesses. They are not mere financial
analysts behind their desks and desktops. They go around
the world, even if necessary 2,5 kilometres down the
earth or living for some weeks in basic cabins in remote
places with unglamorous temperatures and environment.
Their motto is simple: "By visiting the asset we
can get information about a whole raft of companies
and can get a sense of the geography, the region and
the politics". "Sometimes we bring along very
sophisticated institutional investors, like the Swiss",
he said with a bit of irony. China is one of the main
destinations nowadays - Graham just organized two major
visits this year. Other destination is the Russian republics.
Or Canada or India. "We travelled a lot in the
last 6 months, because of all this growth in the commodities'
markets and the growing interest from investors that
it was not use", explains Birch. His secrets: total
alert for discoveries in the world mining, globetrotting
the field, good assessment of political risk, not-ideologically
biased, also never take the short-term view. He mixes
knowledge about geology with ten years of stockbroker
specialist in the City.
Mining sector enjoying record earnings growth
Gold price in solid trading up trend above 400 dollars/oz
Commodities likely to remain in deficit during 2005
High oil and gas prices set to continue
Increased earnings from those companies most leveraged
to the oil price
China Factor is one of the new structural constraints
Decline of cost of power generation based in new energy
Investor sentiment on the turn from negative to positive
regarding new energies
A first question, a little bit provocative. With
the geopolitical instability and the "China factor"
the market for commodities is booming since the stock
market crashes of 2000 and the economic recession of
2000/2003 in the US and Europe. So, the global "disarray"
in 2/3 of the world is good for your Natural Resources
Well, yes. And if George Bush policy continues, we
will have a weak dollar and an unstable world politics.
Its foreign policy is quite aggressive, and I do not
see why he will change. So, Bush is good news for gold,
our most important area in our portfolio of Natural
Resources Funds. The situation is quite clear: low interest
rates, weaker dollar, continuing global political instability,
continuing hedge buy-backs, increasing investment in
gold as a refugee asset.
You mentioned gold as your area of excellence in
management of Funds. The GATA (Gold Anti Trust Action
Committee) have been alerting the last years for the
up trend in the gold price, from the lowers of 290 dollars
per ounce in 1998-2002. Do you think we can expect a
"jump" in the gold spot price from the present
high of 436 dollars per ounce?
May be it can reach the 500 dollars per ounce in one
year time. The historical dynamics is 1 dollar higher
per week in the last two years. So, by the end of 2004
we can have 450 dollars per ounce, and at end of 2005
probably 500. A lot will depend on the weakness of the
dollar. And I think the dollar will stay low. But there's
a good reason for investors be interested in gold for
the long term. The structural thing is quite simple:
We can't extract enough gold from the mines regarding
the huge demand. The supply will not increase. Mine
supply continues to decline with further cuts in South
Africa this year. So the price will go higher.
«But there's a good reason
for investors be interested in gold for the long term.
The structural thing is quite simple: We can't extract
enough gold from the mines regarding the huge demand.»
When you talk of a huge demand for gold, you mean
the prospects for China? The China Factor is the crucial
Yes, China has become the most important consumer of
commodities - but not only in the industrial side. In
the gold area we will see in the future the impact of
growing consuming demand from Chinese -as it happened
with India. Analysts forecast Chinese demand to rise
threefold from 200 to 600 tones in the next few years.
Gold supply from Chinese mines is aligned with the present
demand. So, the growing gold Chinese demand will need
to be imported. Not many people thought about this trend.
Including the central banks in the West that sold the
gold reserves in a period of lower prices.
So, the "China factor" is provoking a
"revolution" in the mining world?
Our view is long term. China will continue to grow
quite strong, even if, in the near term, conditions
can fluctuate. The China Factor has a long-term effect.
It came to stay. Demand growth led by China continues
to outpace supply growth. In our Fund, we have made
large investments that will benefit from Chinese imports
of commodities in the metals and mineral sectors.
Oil is, probably, the "king" of commodities
nowadays. Some analysts pointed out in the last years
that the present incredibly hyped oil situation is "pressed"
by two realities: geo-political instability and the
expectation of the world peak of oil in the next years.
What's your forecast regarding the price of the barrel?
It's hard to know. It's a bit like the other commodities
we talk, because of the China Factor. There is no flexibility
in the supply side and the big oil companies have no
flexibility also. We have a historically low level of
spare capacity from OPEC and we witness supply disruptions
more frequent. Oil majors also struggle to grow production.
The price will not go down very much. Also as you know
a lot of oil fields are mature and we saw project delays.
So, our view is that you have to have a high price.
I think the price will remain quite strong.
So, there's a big opportunity for investors in those
oil companies, and not only in the big ones?
Absolutely. The share prices do not reflect yet the
high price of the oil barrel. The shares reflect a price
of 30 dollars a barrel. So, there's a gap, an opportunity
for increase the share value. We are witnessing oil
companies buying its own shares and we will see more
takeovers in the area. Oil companies can't grow from
exploration, so they have to do it by takeover.
«Our view is that you have
to have a high (oil) price. I think the price (of the
barrel) will remain quite strong.»
You see more consolidation in the big ones?
No. Takeovers will target the mid-caps. I saw opportunities
in Russia - despite its risks - and in the Canadian
tar sand companies. Most of our portfolio is exactly
on mid cap companies. In some cases the opportunities
that these mid cap offer are superior to the larger
The perception of high political risk in the main
areas of the oil geography (Caribbean, Africa, Middle
East, Caspian Sea) plays a key role regarding the multinational
and local oil companies. What are the guidelines for
stock investors in this field?
I think the oil Chinese companies will be interesting.
Also interesting to follow the Chinese strategy. China
is avoiding the US trend (its growing dependence in
oil imports) and is developing strategic alliances in
the oil area, with Brazil and Venezuela. And they are
buying companies in the minefield. They do have the
money; they can afford to buy strategic commodity assets.
For instance, they just announced exclusive negotiations
with Noranda Inc., in Canada. China Minmetals wants
to acquire 100% of Noranda's outstanding common shares.
Also recently China has signed an agreement to buy
oil and gas from Iran and to develop Iran's Yadavaran
China wants to guaranty strategic commodities.
Natural Gas is the "challenger" of oil
hegemony in this century?
Gas is a different type of commodity - the markets
are more regional. Demand is good, but there's not enough
investment in gas. And there are not so much reserves
of gas if you compare with coal for instance. But the
prices will stay higher. We think we enter in a new
era of higher gas prices driven by supply constraints.
In our outlook, the US natural gas price will remain
historically high, in a new price band.
Some studies mention the re-emergence of nuclear
power and forecast a boom for the uranium price. Currently
it's traded at 20 dollars/lb, for August next year analysts'
target is over 30 dollars/lb. What is your opinion?
I think China can develop more nuclear
power. But there's worldwide quite a lot opposition.
And you know the cost of decommission is very high in
the future. Uranium was in surplus, some years ago because
of the decommissioning of the nuclear weapons, but now
there's a shortage. So, the price is in an up trend.
«I think alternative energy sources are competitive
in current energy price environment.»
Would you recommend a special attention from investors
to companies in the uranium geography?
South Africa was one of the uranium producers. In the
gold mines you can extract uranium. With lower prices
of uranium they stopped to extract uranium, but, now,
with the high prices, some companies began to think
of returning to exploration.
One of the companies in the breaking news is a gold-uranium
South African producer called Aflease that controls
60% of South Africa's easily available uranium. Its
CEO is currently on an overseas road show visiting potential
Also in Canada, Cameco Corporation, a dominant nuclear
energy company producing uranium fuel, can expand.
Do you expect a real window of opportunity for "green"
I think one of the interesting facts is the declining
cost of power generation from wind or geothermal or
natural gas in recent years. These costs will approach
in 2005 the cost in euros per MWh for nuclear or coal
gasification or supercritical coal. Even from the solar
energy, we are seeing a decline cost trend, even if
its cost is higher than the others. But, how much renewables
will be in the power mix that's the question. I think
alternative energy sources are competitive in current
energy price environment. But our New Energy Fund is
not only about renewables. We include also new technologies
on the cusp of being commercially viable - fuel cell
technology used in cars and buses, super conductors
used in transmission grid infrastructure, etc.. But
that's a quite volatile area.
|Merrill Lynch Investment Managers Approach|
Mining: positive on copper, nickel, aluminium and
bulk commodities (iron ore, coking coal and thermal
Gold: positive on gold companies with by-product
Energy: positive on exploration and production and
oil services which are most leveraged to the higher
New Energy: focus on technologies for blackout avoidance,
emission reduction and energy efficiency
Geo-Economy: increasing emphasis on emerging markets
- China Factor, Russia - and unglamorous places
© Gurusonline.tv, 2004