BHP Billiton offer underlines the attractions of miners

UK mining stocks have returned to the fore after Rio Tinto rebuffed a £67bn bid from rival BHP Billiton on 8 November.

The offer is the largest ever made in the mining industry and, according to Sacha Sadan, manager of Gartmore’s £342 million UK Growth Fund, it underlines the attractions of mining stocks generally.

“The BHP offer validates the view that there is long term value in the mining sector and that metals prices over the longer term will be higher than the stock market thinks,” says Sacha.

“The synergies and cost savings that would result from combining the companies strengthens the investment case. However, it’s principally about cashflow and acquiring mines that will produce for another 25 years. With cost pressures so great, it’s significantly cheaper to buy mining assets than develop new ones.”

Gartmore has held a significantly overweight exposure, relative to its benchmark, to mining companies in its UK growth fund for more than a year in the belief that positive demand growth in the global economy and the scope for further consolidation makes the sector attractive. BHP Billiton’s bid approach follows news in late October that China’s GDP increased by 11.5% in the first nine months of 2007 compared with the same period a year ago.

Gartmore’s UK Growth Fund holds an overweight exposure to diversified mining companies, with Rio Tinto, Kazakhmys, Vedanta Resources and Xstrata the manager’s favoured picks.