The Week In Review: Miners look set to enjoy major success

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The Independent Online

China's industrial revolution and continued robust economic growth in the West combined to keep demand for commodities at record levels in 2005. Commodities prices were at multi-decade highs and the mining sector was the stock market's best performer. Heady times, then, and there are reasons to be positive in 2006.

Global stockpiles of metals and minerals continue to be at historic lows. There is no reason to expect a sharp slowdown in China and every reason to think that infrastructure investment in other emerging markets might accelerate this year.

There are six mining stocks in the FTSE 100. The best performer this week was the newest addition, Kazakhmys, which is one of The Independent's tips for 2006. It mines copper in Kazakhstan, which has an increasingly prominent role in supplying the region with commodities. The stock was underpriced at flotation and there are plans for dramatically increasing production.

Xstrata has the advantage of a big exposure to coal, which looks set to be a lucrative product this year, but it also harbours ambitions to turn itself into a major global player through acquisitions and might bid too much. It is a hold, as is Antofagasta, a Chilean copper miner that could succumb to a takeover bid this year.

Of the big three, Anglo American is the most expensive on a multiple of projected earnings but does have a higher dividend than Rio Tinto, and could outperform. Our favourite of the trio is BHP Billiton, which has the most diverse portfolio of assets and is the only one with oil and gas exposure. Buy.

EXPLORATION

Many of the exploration companies floated in the wake of the commodities boom since 2002 will find themselves out of cash this year and those who have little progress to show will not be re-financed.

Keep an eagle eye on the notices of director share sales, particularly in the spring, when directors' lock-ins are most likely to expire. Follow any who head for the exits. For buys, look for companies with projects moving into a production phase this year or next.

Griffin Mining, which has been patiently preparing its mining project in Caijiaying, in China, for seven years, is now producing zinc there and working out what gold prospects it is also sitting on. It could perform well again in 2006. And we like a recent flotation, Titanium Resources, which is reopening an old rutile mine in Sierra Leone.

For gold bugs, Peter Hambro Mining will be an attractive play on a gold price. Small mining companies are among the riskiest punts on the stock market, but some are more risky than others.

For those with money to punt, one final tip is Metals Exploration, which is attracting comment in the City for its gold exploration work in the Philippines.

PHARMACEUTICALS

The UK's three big drug makers account for 10 per cent of the FTSE 100. As an investment opportunity, they cannot be ignored, but 2006 may not prove to be as good a year for their share prices as last.

An ageing population means inexorably increasing demand for their products, but there are relentless downward pressure on drug prices in the US, currently the most profitable drug market in the world.

That said, companies with genuinely innovative new medicines will be able to charge decent prices for them, which is why GlaxoSmithKline commands a higher stock market rating.

After a reasonable run last year, however, which included a significant amount of hype for its experimental cervical cancer vaccine, investors should bank any profits from the shares.

AstraZeneca, too, looks an unappealing investment for long-term investors, since there is a very large hole in its pipeline of new medicines. Those who have the shares should hold them in case of a takeover bid.

The much smaller Shire proved last year that it had the ambition to create a broad portfolio of lucrative, niche drugs. The company will swing back into the black this year, but it must prove it can market new drugs more successfully than it has it last big launch, of the kidney drug Fosrenol.

BIOTECHNOLOGY

The thesis: Investment in the biotech industry will pay off handsomely in 2006 in a way it has not done since the boom year of 2000. The last few months have shown Big Pharma's hunger to buy promising experimental drugs - or the firms that working on them.

The Independent has already picked Ardana for its portfolio of tips for 2006. The company has been built around the discoveries of the Medical Research Council's human reproductive sciences unit in Edinburgh, but it has also assembled a number of marketed or near-to-launch products in the area of sexual health.

Cambridge Antibody Technology has already spawned one drug to have reached the market, and it should have another good year as news comes out of its collaborative work with AstraZeneca and others. We also likeVectura, an inhaled drugs company, and Acambis, which has a strong pipeline.

Our sells are Ark Therapeutics, whose shares leave no room for regulatory setbacks, and companies spawned by the IP2IPO biotech incubator, which may face a cash crunch.

The above are recommendations from the daily Investment Column.

Pubs groups' spirits lifted by the gift of flexible hours

At least seven pubs groups will publish trading updates for the key Christmas period over the next few weeks.

The big unknown is how much the recent extension of opening hours has boosted trading.Early estimates put the sales uplift at 1 to 2 per cent.

Punch Taverns' recent £2.7bn acquisition of the privately owned Spirit Group, which turned it into Britain's largest pubs company ahead of Enterprise Inns, looks to have been the last big deal in the sector for a while. But more pubs are set to change hands, with Punch poised to sell off big chunks of the Spirit estate. Mitchells & Butlers, Greene King and Wolverhampton & Dudley are all lining up for the larger pubs.

Enterprise Inns is our choice stock: well-run and profitable, it has delivered solid earnings growth and good dividends. Trading at 14 times 2006 earnings, the stock is cheap.

Also good is Greene King, which is well placed to pick up pubs from Punch and is cheaper than Mitchells on a multiple of prospective earnings. Luminar, the bar and nightclub operator, is also worth buying, trading at only 11 times earnings, though it needs restructuring. The jury is still out on J D Wetherspoon, which is trying to contain pressure on its margins.

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