The Investment Column: Plenty more value still to be mined from BHP Billiton

Colt Telecom could be a bid target but only the brave should take the plunge; Take profits while QXL sorts out its Polish problem
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The Independent Online

Another good year for Chip.

The chief executive of BHP Billiton was able to bask in praise at the natural resources giant's annual shareholder meeting yesterday. Another record year for sales, for profits and for dividends. And for the share price, too, which reflects optimism that we are still early on in a super-cycle of booming commodities prices.

Anglo-Australian BHP Billiton is uniquely well placed to benefit, since it has operations across one of the broadest spreads of commodities and across the globe. Unlike the other miners listed in London, it also has big oil and gas wells, so has enjoyed the benefits of the soaring oil price too.

The past few weeks have witnessed another of the occasional wobbles that send mining shares sharply lower, but it is difficult to believe that metals and energy prices are at their peak. Global demand remains very strong, with significant supply shortages in many base metals in particular. As well as demand from emerging China, India and Russia, the US continues to grow and Japan and Latin American countries are beginning to exceed growth forecasts.

The big picture, painted again yesterday by Mr Goodyear and the rest of the board, is of emerging economies sucking in more commodities to support industrialisation, upgrades to infrastructure and, increasingly, domestic consumption. Additionally, the energy needs of these countries will also be increasing, probably ahead of population growth. China is suffering problematic power shortages. BHP Billiton's oil, gas and coal interests will benefit over the medium term. Over the long term, it is likely that a nuclear renaissance will justify its decision to invest in uranium production.

Costs are rising across the mining industry as companies scramble to bring more projects on stream, but good profit growth can continue even if margins get compressed. With cash coming out its ears, allowing massive investment, share buy-backs and, hopefully, a more generous dividend in future (the yield is 2 per cent now), the shares are a buy.

Colt Telecom could be a bid target but only the brave should take the plunge

The name of the game in telecoms at the moment is consolidation. Cable & Wireless is buying Energis. BSkyB is getting into broadband by acquiring Easynet. So who's next? Colt Telecom, which announced decent third-quarter results yesterday, ruled itself out of buying rival telecoms businesses but could feasibly be a chip in the mergers and acquisitions (M&A) game unfolding.

The fact that Fidelity, the US financial services group, owns a little less than 60 per cent of the group probably makes a deal more likely than less - Fidelity's holding is an investment to be realised at some point. Colt, which still makes a loss, has a market value of a little more than £800m plus £350m of net debt, so it is hardly indigestible.

But does Colt actually own anything that a rival would want to buy? Probably yes, in the form of its telecoms network that runs straight into office blocks in dozens of cities in the UK and Europe. It has "access" in other words, without having to rely on a larger, national incumbent to supply it with connections. It is also having success in switching customers to internet-based voice telephony, where gross margins are 70-80 per cent, three times the traditional margins.

Turnover grew 2.4 per cent in the quarter, compared with a year before, reaching £311.8m, and costs are down, indicating the company is on track for profitability in a few years.

That said, much can change in that time and the telecoms sector is ferociously competitive. Colt specialises in the business market where customers tend to be most savvy in finding cut-price deals. Shares in the company have done pretty well this year, rising from 42p a year ago to 59.5p yesterday. Much of that has been driven by the recent deals in the sector and hopes that someone will swoop for Colt. The stock will always be a punt on future M&A activity, but most investors should avoid.

Take profits while QXL sorts out its Polish problem

You would be hard pressed to find anyone in Britain who hadn't heard of eBay, the global internet jumble sale. QXL Ricardo operates similar auctions sites, but you would be hard pressed to find anyone outside the share trading community who has heard of it. It does, however, have strong positions in several continental European markets, including Switzerland, Denmark and Norway.

By taking a cut of transactions on its sites, QXL is now in profit, by £1.69m in the six months to September. That has been driven by very heavy investment in marketing and is not big enough to justify the company's £120m market value.

What speculators think does is the potential return of the Polish division, QXL's most successful, which has been "stolen". The local management took control by issuing themselves with lots of new shares, an action QXL says is illegal and will eventually be reversed by the Polish courts. However, it may buy the business back to save the hassle, potentially quadrupling group profits and bringing a new growth engine. Quite what QXL will find when it takes control, who knows, and there could still be delays. Take profits.

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