The Investment Column: Unearth a seam of riches in mining groups

One of the more surprising stock market results of last year was that, despite the surge in commodities prices, mining shares actually performed less well than the market as a whole. They had had their biggest gains in 2003 in the anticipation that a rebound in economic growth and the gathering Chinese industrial revolution would fuel demand.

One of the more surprising stock market results of last year was that, despite the surge in commodities prices, mining shares actually performed less well than the market as a whole. They had had their biggest gains in 2003 in the anticipation that a rebound in economic growth and the gathering Chinese industrial revolution would fuel demand.

Neither economic growth nor the Chinese revolution are at an end, although the pace of both will be slower in 2005. Some of the speculative froth came out of commodities prices yesterday, prompting falls for mining company shares, but there is every chance the doomsters will be proved premature.

Projections for supply and demand this year suggest that commodities prices - especially copper, coal, zinc and gold (which is strong when the dollar is weak) - will remain strong and, according to many forecasters, could still be on average higher this year than last.

Meanwhile, the mining giants continue their prudent expansion but this entails big projects that will take until the end of the decade to come fully to fruition. Mining shares look decent value if you take a long view of what is a long cycle.

Only the dollar, in which commodities are sold, threatens another positive year for the sector. The US currency could collapse, of course, but after last year's much-discussed slide, 2005 is more likely to be a year of gentler decline.

Our favourite of the FTSE 350 miners is the Chile-focused Antofagasta (it is one of our tips for 2005) on the basis that, in a consolidating sector, the expanding copper specialist could become a takeover target, especially now its 65 per cent shareholder has stepped back from the chairmanship.

The biggest, most diversified miners are Anglo American, BHP Billiton and Rio Tinto, and BHP Billiton's shares are the most highly valued of these because of its tasty mix of interests, which takes in oil and gas. It is a good company to hold for the long term, but Rio Tinto offers probably the best mix of assets at a relatively lowly share price. Anglo American risks underperforming this year, if a consumer slowdown takes the lustre off precious metals prices.

Xstrata is in the throes of an ambitious acquisition plan that, it hopes, will send it up into the big league by the end of the decade. Its hostile bid for Australia's WMC, for which it is currently offering £2.9bn and will almost certainly need to offer more, sent its shares down yesterday as investors fretted it will overpay. Yet it is worth holding on for what will be a tumultuous ride for this company over the next few years. The betting has to be it will add value in the medium, if not the short, term.

And that leaves Lonmin, the pure platinum play which is all that remains of the old Lonrho empire. As another specialist, it looks a potential takeover for a bigger company looking to increase its exposure to platinum. The long-term outlook for platinum (used in environmentally friendly car engines and a favoured metal for jewellery in the Far East) is stronger than the short term, though, so Lonmin shares are only a hold.

Minnows are looking risky but rewarding

Can this be as good a year for the mining minnows as 2004?

Mining was displaced as the penny punters' favourite gamble by the dot.com business-plan-plcs of 2000 and then the boffin-run biotechs of 2001. But now it is back. And there is no reason to imagine that - barring an unlikely collapse in commodities prices - the flow of speculative ventures will dry up. One in 10 companies on AIM is now a mining company, and brokers say more flotations are in the pipeline for the spring.

Investors will succeed who can tune out the stock market whispers to concentrate on the real value enhancing moments for speculative ventures: the proving up of reserves, paying as much attention to quality as to quantity; the addition of respected managers, or partnership deals with bigger industry players; the start and then results of a feasibility study of production; and then the countdown to extraction itself.

A few ideas. Asia Energy, which is sitting on 430 million tonnes of coal in Bangladesh, is one of the riskiest and potentially most rewarding investments, worth a punt in the hope a feasibility study can begin soon. We also like the less risky European Nickel, where confidence is rising that it will be able to start production in Turkey. Frontier Mining, tipped by Numis as its stock of the year in this sector, has one of the world's cheapest-to-run gold mines in Kazakhstan. And a recent float, Uruguay Mineral Exploration, ought to be able to fund its racier ventures with the stable cash flows from its first goldmine. It is as near to a safe bet as you get in this most exotic of sectors.