Demand is untarnished for gold, mining chief says


By William MacNamara
Financial Times, London
Tuesday, February 6, 2008

In his wood-panelled office overlooking St James's Park in central London, Peter Hambro opens a cabinet of curiosities. From it he pulls a gold coin he says was minted in the area of Belgium "shortly after the year zero [AD]."

"This coin," he says, "buys the same amount of bread today as it did 2,000 years ago."

Alongside it he lays promissory notes owned by his grandfather, including ones written in gothic script by defunct governments. He points to a pre-war L10 note. "That's worth about 50 pence now," he says. "The others are worthless."

Mr Hambro, chairman of Russia-focused gold miner Peter Hambro Mining, is as confident as ever that gold is a long-term storer of value. He is not alone. The price of gold, which closed at $851 per ounce yesterday, has held up since mid-September, when the prices of industrial metals started a downward plunge. People want real gold, Mr Hambro says. "It is the physical market driving the price."

But his optimism about the price is mixed with deep worries about the global economy. Consumers' hoarding of gold bars is fine for the company's prospects, he says, but it also shows that consumers are fearful and desperate.

Even Mr Hambro, a 68-year-old City patrician, is at a loss in the current economy.

"I'm scared absolutely rigid," he says. "I don't know what to do with my own money." He scoffs at the idea of holding it in sterling. "What is there to support the pound? What do people buy from us? They used to buy financial services. But there won't be much of that exported any more. What else is there -- tourism? We are a tiny little thing," he says of the post-industrial British economy.

"As long as there is demand for gold, we're fine," he says. "But I don't see how people can get out of this mess."

Mr Hambro had close personal experience of last year's financial vicissitudes. As London-based chairman of a company that he says is entirely Russian except for him, his role is as liaison to the City. That role has become difficult -- the company is the most leveraged gold producer on London's Aim market.

Occupying his time, he says, are the terms of a $180 million exchangeable bond -- issued in 2007 -- that can be redeemed in October. Ordinarily the bond, which is exchangeable at a $1,000 per ounce gold price, would not be in danger of early redemptions given the rising gold price. But these are not ordinary times.

"If the whole $180 million came due on one day, it would be tricky," he says. The last word carries a tone of ironic weariness, which he often employs when discussing the markets.

Fears over the company's finances reached fever pitch in November, when an HSBC analyst claimed the company had overestimated gold reserves at its principal Russian mine. Meanwhile hedge funds were allegedly pair-trading Peter Hambro Mining against larger rival Randgold. The effect was a selloff and a shorting spree that knocked shares below 200 pence per share, compared with a year high above L15 per share.

"We had to send a signal," Mr Hambro said. In late November, he and Pavel Mavlovsky, deputy chairman, who runs operations in Russia, loaned $19.25 million to the company. Shares have since been recovering and were ticking above 420 pence yesterday.

Smaller, distressed mining companies are coming to him, looking for a partner. "But we are not positioned to acquire distressed assets when shares are at their current level," he says.

"Our share price is silly," he says. It belies the company's position as Russia's second-largest gold producer with a pipeline of new mines coming on stream -- including the Malomir mine in 2010.

But the fallout is not that much worse than the Oleg Mitvol incident two years ago. In late 2006 the deputy head of Russia's environmental agency briefly called the company's licences into question, in a move that many saw as motivated by not entirely environmental concerns. Shares plunged, and the company lost $500 million in value over two weeks. Since then "Russia risk" has been attached to the company.

But Mr Hambro dismisses investors' worries as largely the product of unbalanced British newspaper reports.

"The most important thing you do in business there is have a partner with brains," he added. "If you do not handle yourself adroitly you can get into trouble. But the Russian state is not to blame."

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