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INVESTORS CHRONICLE: THE MATTHEW VINCENT REPORT

3 Mar 2006
Investment guru Jim Slater reveals why oil and mining are his preferred sectors in conversation with Matthew Vincent at the Ritz Hotel in London.
Matthew Vincent, editor, Investors Chronicle
Well, as you can see, we're not in our normal surroundings for the Matthew Vincent Report, because we've just come down the road from the City into the West End here to the Ritz Hotel. And we're not just here for the superior coffee and croissant, compared to those in our studio, we're here because we're talking about one of the hottest investment topics of the moment with a very great supporter of the Investors Chronicle.
Jim, in your recent article for Investors Chronicle, you made a compelling argument for investing in oil and mining stocks based on the economic boom in China and India. Can you tell us a little more about that?
Jim Slater
Yes. I think the key point is that we are in a super-cycle for metals and oil. And this is usually best judged by the intensity of use. And at the moment, China's use is three times that of the US.
MV
How much longer do you think this cycle can last?
JS
The Chinese are going to move 300m people to the cities. And in doing that, all of them want cars, microwaves, refrigerators and houses, obviously. Now, every house that's being built, on average, takes about 400 pounds of copper, for example. Every car takes 50 pounds of copper. Hybrid cars, which are to save power, use 100 pounds of copper. And I'm a great bull of copper for that reason.
MV
We've already seen the prices of metals and, of course oil, rise quite substantially. And also the share prices of companies in that particular sector. What does that mean for valuations of stocks?
JS
Well, that's a good question. BP for example, and RTZ, which are two that I like, have risen a lot over the last few years, but their earnings have also risen. I mean, BHP's I think have gone up four times in the last five years. That sort of level. BHP is on a multiple of about 11 and so is RTZ. And both of them, with recent results, are repaying extra dividends, in the case of RTZ. They're buying back shares very substantially, and they're very cash rich.
You see, what's happened, in the mining world, the analysts and people have all been there before. They've all seen the OECD cycle – these are the short cycles, three to five years. And they think, “Well, metal prices are up a lot now, so this can't go on.” Now, in fact, if you allow for inflation – take aluminium for example, that was in 1988 £1.65, it's currently around £1.15, £1.20, £1.10, that sort of area. A pound. And allowing for inflation, though, the inflation-adjusted 1988 price would be £2.73.
So it's really just begun. And I think this will go on for a long time, with hiccups that will come. For example, in China, the planning isn't all that good. They over-produce quite often, and they end up with big stocks that have to then be cleared. And the banking system isn't very sound. It's very hard to sort of pay for things, and you know, just the things that we take as routine.
But over the years, I think you'll find that it will move forward, very significantly compared with the West.
MV
You've mentioned some of the stocks. But what other ways do you think private investors can play this boom?
JS
I used to coin the expression 'elephants don't gallop.' And the converse of that is that fleas can jump 200 times their own body height. So I like to invest in the fleas! A good example, by the way, one specific share I like, amongst the fleas, is Sterling Energy, which I think you've recommended in the Investors Chronicle. And that share has a deal with Exxon in Madagascar. But in addition to that, it's got in the Gulf of Mexico some producing wells and, most importantly, it's done a deal with the Mauritanian government. A wonderful deal. And their production is just starting – they announced it a couple of days ago. They're going to get enormous cashflow from that, because first of all, their loan to the Mauritanian government will be repaid from the cashflow, and then they're going to be left with the carried interest, which I think will be about, it's either 8 or 12 per cent, I can't quite remember. But it's big. And it will give them enormous cashflow. And they're a very able management. That's the kind of share I like.
MV
And turning to the mining stocks?
JS
You can't do much better than BHP and RTZ, in terms of quality, and easy to deal in. One of the beauties of these kind of shares, too, is that if you did by any chance change your mind at any point, you can sell them just like that.
Another one is… a very good one, I believe, but I don't know much about it, is Xstrata. I've heard good things of that, and it looks pretty good to me on the numbers. I'm personally invested in Galahad Gold, which is a relative minnow. I have 10 per cent of it. And I, for obvious reasons, like that. A very interesting thing about these shares. And I'll just tell you an interesting story about REFS. And that is, REFS has got this, what I call low-PEG tables. And a PEG, of course, is the growth rate in relation to the multiple. And years ago, I was very, very keen on the builders. And so was the Investors Chronicle, by the way, and I remember corresponding with you about it. And all the builders had suddenly started to come to the top of the tables. And I'd never really liked builders. It was a rotten business. But I suddenly thought, “Well there must be something in it.” And I started to invest in them quite heavily.
And Persimmon, for example, which is one of my favourites, was on a multiple of six and growing at a colossal rate in relation to the market as a whole. It's gone up many times since. So Bellway, and all these kind of companies. Persimmon now is still top of the PEG tables but it now in a multiple of 10.
So, you see, you get the status change, from six to 10, in addition to the growth.
Now, in the case of BHP and RTZ, they're on a multiple of 11. BHP is second now in the PEG tables. And the PEG tables are very good, because they're prescient. We do the calculations on two years' past growth, minimum of two years' past growth, and two years' future growth based on brokers' forecasts. So they're very up-to-date and they're really telling you what's likely to happen.
Now, it would not surprise me to see BHP move to having a period of profit-taking at the moment, from a multiple of 10-11 to 13-14. It certainly wouldn't surprise me. And it certainly would be justified by the growth rate.
If you compare that with the retailers in the U.K., they're on a multiple of 16, on average. Take DSG, which was originally, formerly as they say, Dixon's. That's on a multiple of 16, something like that. Or maybe 14, 15. I think it may be 15, but it's around that area. And it's had no growth for the last four years, in contrast to four times growth from BHP. And it's got no growth forecasts. Someone's mad somewhere, in my view.
MV
Well, Jim, thanks for finding both growth and reasonable prices.
JS
I've enjoyed it.
MV
I'm sure you'll agree that Jim raised a number of interesting points there and if you've got any questions about them or any comments you'd like to share, please do email me at the address appearing on the screen right now ([email protected]).
Sadly we've stayed over our check-out time at the Ritz and any minute now reception are going to phone up and ask me to leave, so sadly we'll be back at our normal studio next week we we'll have some more guests and some more discussions of hot investment topics. See you then.
Past share performance cannot be relied on as a guide to future performance

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