Peter Hambro's age-old message: Ingot we trust

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By Ambrose Evans-Pritchard
The Telegraph, London
Thursday, November 30, 2006

http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2006/11/30/ccgold...

Peter Hambro whips an Edwardian ten-shilling note out of his wallet, then a shabby note for two francs Belges, before slamming down a war-time papier for 50 centimes issued by the City of Lille in 1917.

"Absolutely worthless promises," he says triumphantly.

Out of his pocket appears a lovingly-cradled gold coin, the size of a sovereign, from the Ardennes fringe of the Roman Empire. Its metal content is worth more or less what it was when minted circa 50 B.C.

The executive chairman of Peter Hambro Mining, the biggest pure gold play listed on the London Stock Exchange, is not predicting a return to 1920s hyperinflation but he does see echoes of the "beggar-thy-neighbour" policies that played havoc in the inter-war era.

It is common wisdom that the US dollar is stretched to snapping point by the deficit/debt debacle, but less understood that aging Europe and Japan are too fragile to absorb the shock of a dollar slide, one that is perhaps already starting.

"It's now a matter of competitive devaluations. Countries are all debasing their currencies, so the question is: Which one debases fastest?" he said. "Can any finance minister in the world think this is a good moment to buy dollars? But where else do you go?

"Do you think the euro is a structurally sound currency? I don't. It means buying into Italy, Spain, Portugal, and France with unfunded pensions and energy deficits."

"Sterling? Mrs Thatcher's legacy of financial rectitude is all but squandered, and New Labour's creative accounting is Maxwellian," he said.

How high will gold go in the currency Götterdämmerung?

With a smile of approval, Mr. Hambro notes the $4,000 to $5,000 forecast by the Swiss guru Dr. Martin Murenbeeld. Formally, he is sticking to a cautious $750 in 2007, then we'll see.

Mr. Hambro predicts that the rising reserve powers of China ($1 trillion) and Russia ($273 billion) will top up their holdings of gold in a slow, relentless switch away from dollar dependence.

The Hambro empire is smack in the middle of this nascent Asiatic super-economy, operating from Russia's Amur region, bordering China -- once the spot where Mao Tse-Tung feared a Russian tank invasion.

From there a trio of Hambro gold, iron-titanium, and timber companies supply the voracious industrial machine to the south.

"The Chinese are desperately short of iron ore for their mills, and they're so short of timber they've banned the used of disposable wooden chopsticks. There are just so many people in China who are getting a bit richer," he said.

To those such as Morgan Stanley's chief economist, Stephen Roach, who says the "China commodity story" is a speculative bubble, Mr. Hambro suggests a visit to Harbin, a Manchurian city of 9 million people where the Hambro lumber yards supply wood for an immense parquet flooring factory.

"The mayor of Harbin took me to see a basketball court in his building where the whole floor was covered with a model of the town. When I told him I didn't recognise the buildings, he said, 'This is the new Harbin.' The Chinese are doubling the city just like that," he said.

The gold operation, Peter Hambro Mining, is a Russian animal, created with Russian partners to exploit open-pit reserves bought for $1 million in 1994. A decade on, it is worth near $2 billion.

The company is now the fifth biggest listing on Aim. A lot of mid-tier miners have seen the gains of the gold rally wiped out by surging costs, up by an industry average of 70 percent. His diggers somehow manage to extract nuggets at $135 an ounce, the lowest in the world. Output is leaping from a quarter million ounces to 1m ounces by 2009, the cusp of the big league. Profits were up 149 percent in the first half of 2006.

"The secret to low cost is using Russians to do the work. We do all our own engineering and we use Byelorussian Belaz trucks you can mend in the middle of Siberia with a hammer and a spanner," he said.

Mr. Hambro, an ex-Mocatta & Goldsmid man, learned Russian ways as the Soviet Union's chief counterparty for gold trades in the Brezhnev era, a post more fitting than it might look for an old-Etonian scion of a venerable banking dynasty. His family issued the bonds that built the Trans-Siberian Railway. He scoffs at the foreign invaders who gobbled up Russia's assets for nothing in the early 1990s -- with or without bribes -- and are now screaming breach of contract as the Kremlin tightens the terms. "The first lot were mostly drunks, idiots, and crooks," he said.

Others failed to go with the grain of a society they woefully misunderstood, notably PanAmerican Silver, forced to cede its assets to Polymetal.

More controversially, Mr. Hambro takes the Kremlin's side in the dispute with Royal Dutch Shell, facing the threat of expulsion from Sakhalin after investing $22 billion in the world's biggest liquefied gas project. "Russia is an unrecognisable country since the day that Shell deal was signed, and the price of oil is much higher. I agree with the Russians that the original terms were unfair," he said.

"Shell are posturing. They say they've got a contract, and the Russians say you're quite right and if you look closely it says you must not tread on green-throated frogs," he said. "The big guys can change the rules on you. We watched them do it in the UK when they put windfall taxes on the North Sea. Governments do it all the time."

Mr. Hambro got a taste of it this week when Russia's eco-watchdog turned ugly on five exploration licences in the Arctic Circle, a minor headache but enough to knock 23 percent off the share price on the London Stock Exchange in an hour yesterday.

Peter Hambro remains unflustered, admitting only that there may be a "rule of law risk" in Russia. "The gangsters are getting braver," he said.

Indeed they are, mowing down the central bank director on the Moscow metro. But was it just gangsters who murdered KGB defector Alexander Litvinenko with Polonium 210 at London's Itsu sushi restaurant?

Taking an indulgent view of Vladimir Putin's tsarist fits is no doubt wise policy for a man sitting on an unmovable estate worth billions of roubles in eastern Russia, but the Hambro family has not held its place for a quarter of a millennium at the apex of world finance by being stupid.

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