Ukrainian iron ore miner could be good value – until bubble bursts

June 24, 2008

June 23rd (The Birmingham Post) – If your hopes for a decent pension and prosperous old age rely on a FTSE 100 tracker fund, you’d better start keeping tabs on a hitherto little known outfit called Ferrexpo.

Ferrexpo is a Ukrainian iron ore miner among four companies that took their place in the blue chip index on Monday after the latest quarterly reshuffle.

Out went familiar and home-grown Alliance & Leicester, Home Retail Group, Persimmon (the housebuilder) and Tate & Lyle. In came Drax, the power station operator, Petrofac, oil and gas services specialist, Invensys, an engineer descended from the old Birmingham Tyre & Rubber, and Ferrexpo.

The latter’s inclusion is, in one respect, nothing more than a reflection of the increasingly global nature of equity markets. It is also a sign of the eastward shift in economic power.

Not to mention, some would argue, a potentially dangerous over-weighting of commodity stocks in the “Footsie”.

Cynics would add that Ferrexpo’s arrival is nothing more than a liking on the part of eastern European companies for the lighter regulatory regime that London offers.

That’s not a view that this column shares. To begin with, the Ukraine, which won its independence when the Soviet Union broke up in 1991, is, despite its perceived political weaknesses, nowhere near as dangerous a place for businessmen as its neighbour Russia appears to be.

Second, Ferrexpo is largely headquartered in Switzerland and has Mike Oppenheimer of the famous South African diamond mining dynasty as its chief executive.

He was yesterday quoted as saying of the Ukraine: “This is not Russia. The government does not intervene … there is very little direct intervention in the business from Kiev.” Ferrexpo came to the market only last year. But since then its share price has nearly trebled from 150p to the 430p market, thanks to the boom in demand for iron ore.

So far so good. The downside to the arrival of companies like Ferrexpo and others in the sector (Mexican silver miner Fresnillo is knocking on the Footsie’s door) is that oil (especially oil) and commodities stocks are now beginning to assume the appearance of a bubble.
And, of course, it is not just tracker funds that are going to be exposed to a potential implosion similar to that that wiped out so many when the dotcom boom ended.

Active fund managers are bound to be piling in as well.

If you trust your fund manager to spot a looming bust, then sit back and take the value while it’s there. Needless to say, not many of us have that much faith in so-called experts, some of whom can’t see Christmas coming.

One investment commentator wrote at the weekend: “If I were you, I would check if my UK fund manager has been taking big bets on oil – as many of the top performers have.”

The risk that those who have piled into oil big time recently face is the scrapping of fuel subsidies in some countries is going to put a cap on prices.

At least that would wipe the smirks off the faces of speculators who seem hell bent on talking crude up to a crippling $200 a barrel.

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