The Investment Column: Peter Hambro Mining is solid enough but pricey

SSL is one to sell now that Reckitt is no longer a buyer; Synergy is only a hold at this level

The company, one of AIM's largest, is Peter Hambro Mining, set up by the financier Peter Hambro in 1994. The shares hit a new record yesterday as analysts returned from a trip to see the company's main operation, at Pokrovskiy in the Amur region of eastern Russia, which borders China. Pokrovskiy produced 84,600 ounces of gold in the first half of this year, up 41 per cent on 2004, and the company said it is on course to meet its production target of 271,000 ounces for the year from Pokrovskiy and its other mines (up from 209,000 ounces in 2004).

Peter Hambro has ambitions to be mining a million ounces of gold a year by 2009. It has proven 78 million ounces of reserves to Russian standards of proof. What analysts learnt on their trip was that the gold deposits at the next big hope, the Pioneer mine, also in Amur, are concentrated in several areas and will therefore be relatively cheap to get out the ground. The City will need to know more details of the plans before being able to work out if debt and gold sales from existing mines will be enough to pay for the development of the Pioneer mines, or whether a future share issue will be needed. Costs across the mining industry are rising, because of labour and equipment shortages, but the effect of this has been more than mitigated by the soaring gold price.

As you can see from the graphic opposite, gold is back at levels not seen since the 1980s, helping Peter Hambro to an £8m profit in the first half of 2005, four-fifths higher than the previous year. Whether gold can go much higher is moot. It is not an attractive asset of itself, since it pays no dividend, but is bought by investors fearful of inflation or of a falling dollar. Rising interest rates should make gold less attractive.

Because of the strong track record of this company, there are few doubters that it can meet its 2009 target and plenty of hope that other assets in the portfolio will boost its fortunes beyond even that. The shares are worth holding for the long term, but their vulnerability at the current price is such that new investors should wait.

SSL is one to sell now that Reckitt is no longer a buyer

Reckitt Benckiser's decision to pay £1.93bn for the consumer products division of Boots took many people's breath away last week, but it didn't upset Reckitt's shareholders. Far from it. They saw the value to be extracted from acquired brands including Strepsils, Nurofen and Clearasil, once they are spruced up by Reckitt's internal product development team and pushed through its mighty marketing machine. The deal had particular resonance for investors who hold shares in SSL International. All of them are betting on a takeover of SSL, which was romanced and then dumped by Reckitt about 18 months ago.

SSL's two brands are Durex, for condoms, and Scholl, for footcare products such as odour eaters and gel pads for uncomfortable shoes. New products in each of these businesses helped SSL report sales growth of 7 per cent in a half-year trading update yesterday. There are also improving profit margins across the business, partly benefits of scale as new ribbed condoms and other innovations are rolled out in America and Eastern Europe, but also because Garry Watts, the chief executive, has spent his time in charge rationalising the company's sprawling manufacturing and distribution operations. He is well ahead of schedule in promising to double 2004's operating profit to £52m by 2007.

Using the same sales and underlying earnings multiples as on the Reckitt/Boots deal suggests SSL could fetch more than 400p per share, but Reckitt is now out of the running as a buyer, the cost savings will be smaller, and the ailing Scholl sandals business is a complicating factor. All that seems certain is that, as a stand-alone business, SSL is overvalued. We said sell at 299.75p in April. At 270p now, sell.

Synergy is only a hold at this level

Synergy Healthcare could clean up as the Government encourages more private-sector involvement in the National Health Service. The company has long done the laundry for hospitals, and is still expanding this business, but its stellar growth over the past couple of years is down to its position as the most significant player in "surgical decontamination", which involves shipping surgical instruments off-site for sterile cleaning. Surgical decontamination is increasingly being outsourced by the NHS, and Synergy said yesterday it is about to compulsorily purchase the remaining shares in Shiloh, a rival, which succumbed to an £8.7m takeover bid.

The Government is trying to prevent Synergy getting a monopoly position in this area, and this will be a worry for Synergy investors. Shiloh also dilutes Synergy's core strategy, since it has other mundane operations such as supplying cotton wool and maintenance of wheelchairs.

Synergy's management is smart and has a strong trading record that now includes last week's positive update, but the risks to the share price look high on a multiple of earnings of almost 19. At 434p, down 1.5p, hold.

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