Market Report: Miners lead blue chips higher amid bid talk

Rumours that BHP Billiton could be set to renew its interest in rival mining giant Rio Tinto circulated yesterday, giving a boost to the FTSE 100's leading mining stocks.

Investors in the sector enjoyed a buoyant day of trading on the back of the vague and unsourced speculation that appeared in the Australian press overnight, a year to the day after BHP's previous bid for Rio was scuppered by regulatory worries and concerns about Rio's burgeoning debt pile. Nonetheless, the whispers among traders were strong enough to push Rio Tinto up 120p to 2813p, with other mining groups piggybacking on the rumour. BHP, which had to write off $450m of costs incurred after last year's failed bid, was up 46.5p at 1690p.

The speculation was also enough to offset the bad news from Rio Tinto yesterday, when its iron ore boss, Sam Walsh, told investors that there are still a number of regulatory hurdles associated with getting the two groups' iron ore joint venture in Western Australia off the ground.

The FTSE 100 closed the day up 1.2 per cent at 5,104.5, spurred on by the mining companies. However, the march by the market did not convince everyone, with some commentators saying that they expected investors to reduce their exposure to equities: "No matter how you look at it, volume is the key driver for the markets," said Manoj Ladwa, a senior trader at ETX Capital.

"Today's move higher has been accompanied with low volume, indicating that investors aren't entirely convinced of any impending rally. While strong manufacturing and construction numbers from the US are helping to trim some of the losses of last week, investors are likely to use this as an opportunity to reduce their exposure."

At various points yesterday, mining companies occupied the top 10 places in the FTSE 100. The biggest climber was the gold producer Randgold Resources, which closed the day up 6 per cent at 4196p after it agreed, along with rival AngloGold Ashanti, to buy another 20 per cent of the Mutu gold project in the rather precarious Democratic Republic of Congo for about $114m.

The shares put on 236p, despite some analyst concern that the deal increases Randgold's exposure to political risk and may stretch the group's resources.

Other miners, such as Lonmin, up 72p at 1535p, Fresnillo, which jumped 27p to 768.5p, and Antofagasta, up 22.5p to 794p, climbed on renewed optimism in the sector.

The only group to break the miners' iron grip of the FTSE 100 leaderboard yesterday was the technology group Invensys, which climbed 11.5p to 294.5p.

The group is scheduled to publish interim results on Thursday, which analysts at Nomura reckon will be in line with previous estimates, even if orders are down on this time last year.

The FTSE 100 winners did enough to offset another miserable performance by Royal Bank of Scotland, which could soon justifiably be renamed as the Ministry of Banking, such is the taxpayer's growing stake.

The stock dropped 3.3p to 38.65p after the bank announced that it may be forced to sell more assets than it had initially intended. European competition authorities have indicated that RBS may have to offload its insurance arm, parts of its investment bank and more than 300 high-street branches, for getting £270bn of state aid in asset insurance. Lloyds Banking Group, the other part-state-owned bank, was also among the FTSE 100 laggards, falling 2p to 85p, on concerns over what assets it would have to offload.

The FTSE 250 followed in the same vein as the senior index, closing the day up 32.1 points at 8917.89 yesterday, again helped by a number of mining groups.

Petropavlovsk, which until a few weeks ago was known as Peter Hambro Mining, jumped 42p to 1092p after a Russian gold-mining association said that production in the country was up 14.6 per cent in the first nine months of the year.

The good news from the likes of Petropavlovsk more than offset the effect of the fallers on the FTSE 250. However, it was a disappointing day for those with money in the real-estate group Grainger, which followed a number of other property companies in losing ground yesterday amid fears that a shake-up in the banking sector could have an unpleasant impact on lending in the property market. Grainger closed the day down 12p at 275p.

Among the biggest small-cap winners was the software and IT services firm Sanderson Group, which yesterday told the market that a strong year-end would lead to the group with a market capitalisation of just £6.7m beating analyst expectations. The announcement led the analysts at Charles Stanley to upgrade the stock to a "buy", telling clients that the shares will reach 25p. The stock grew 29 per cent to 20p yesterday.

Probability, which produces gambling programmes for mobile phones, closed the day down 11.1 per cent at 48p after disclosing a £255,000 loss.