Investors Chronicle Article
BY MOIRA O'NEILL
Published July 3, 2012

Clive Burstow, manager of the Baring Global Mining Fund, believes diamonds are long overdue a comeback. "We like diamonds," he says. "They are a good store of value, easy to transport and a classy show of wealth."

"For years diamonds have been difficult to access as an investor. Companies have not delivered on their promises. But in the last 12 months we have seen a change in the attitude of companies. The mining process is complicated but there has been a reconstruction in how they approach the mining process."

Diamonds benefit from constrained supply and rising demand, particularly in Asia where disposable income is growing and aspirations are high.

Although diamond prices have seen "a bit of a pull back", according to Mr Burstow, specialist jewellers say wealthy people who want a signature piece will buy it anyway, despite the global economic slowdown. "You can wear your value in diamonds, walk through an airport and not have to hire an airliner to transport them," he says. "Emerging markets want diamond jewellery. De Beers is advertising globally. There is a wealth creation effect - people want to express their wealth." He also has exposure to gemstones.

In April, Mr Burstow identified South Africa-based Petra Diamonds as a company that is delivering industry-leading production growth with a management team that has a track record of successfully modernising and expanding resource-rich mines across southern Africa.

In addition to diamonds, continuing demand for precious metals such as gold bullion is a key investment theme for his portfolio. "Gold jewellery underpins demand for gold. Increasingly, central banks look to hold gold. There's lots of uncertainty in the world. The banks are poised to do monetary easing. Gold will benefit from that, plus the gold supply is being outstripped by demand growth."

"I bought a mini bar of gold with my first pay packet and I wish I'd bought more," he rues, predicting that a $2,000 dollar price per ounce of gold could arrive earlier than next year. "We are starting to see all the factors that will push gold higher."

Elsewhere in precious metals he is also positive on the investment case for platinum and palladium - both are key components of catalytic convertors and beneficiaries of rising global automobile sales. "You don't want to own the equities though," he warns. "The mines are based in South Africa where they have deep mines and unionised workforces. Therefore you want to own the commodity not the equity." He uses exchange-traded commodities (ETCs) to get exposure to platinum and palladium.

Nevertheless, he limits ETC exposure to 10 per cent of the portfolio because he sees several limitations with the products. "An ETC doesn't give you access to the skill of the mining companies. ETCs don't pay dividends. Nowadays mining companies are paying 2-3 per cent yields. Mining companies are under pressure more than ever to return capital to shareholders."

As a general resources investor he argues the long-term commodity bull argument is compelling: "There are 7bn people on the planet and they consume more than the world can produce," he says. "Every year we consume 1.5 times the ability to regenerate resources - that's before we all try to live at the same standard."

While the long-term thematic trend for demand for resources is clear, investors can still achieve very good prices for commodities. "There is value across the chain at the moment," he says. "It's a supply-led story. There has been no investment in mines - in 2009 mining companies stopped investing in exploration and the supply side is now struggling. We've still got demand growth but it is more important that supply is constrained. Sometimes there is a 25-30 per cent shortfall in production. That's a significant gap every year. That's why commodity prices haven't dropped."

On a multi-year basis he predicts supply will be constrained due to political pressures, grade declines and rising costs. "You have to move huge amounts of earth to get to the deposit - therefore it is technically difficult. Key commodities will be under pressure for years."

This is why he also has a positive view on base metals such as copper and iron ore. "Copper has a strong thematic underpin. It is hard for copper companies to find good projects. In the 1990s copper projects yielded 1.5 per cent copper from the dirt dug out. Now there is only 0.5 per cent copper content in a tonne of dirt."

[Investors Chronicle]