As BHP Billiton (BHP) continues its pursuit of the white whale known as Rio Tinto PLC (RTP), the world’s second largest miner is expanding its own iron ore operations to better accommodate the rapid industrial growth of China and India.

With demand booming and prices soaring, iron ore has become one of the hottest commodities on the market. Contract prices for the metal have tripled in the past five years and could be up another 50% by the end of 2008. Anglo American PLC (AAUK) has responded by selling off gold, steel and paper assets and expanding in copper and iron ore.

Yesterday (Thursday), reports from local newspapers O Estado de Sao Paulo and Valor Economico revealed that Anglo is looking to acquire a sizeable stake in Brazilian mining and metals company MMX Mineracao e Metalicos. Anglo is negotiating with entrepreneur Eike Batista, who is the company’s controlling shareholder.

Bloomberg News reported that a new company, in which Batista currently has a 64% stake, will be spun off of MMX and acquired by Anglo for $361.25 per share. The total amount to be paid by Anglo American is estimated to be $5.5 billion.

Last April, Anglo paid $1.15 billion for a 49% stake in MMX’s Sistema Minas-Rio mine. The mine is expected to produce 26.6 million metric tons of iron ore by 2011. An initial output of 8 million tons is expected by the fourth quarter of 2009. Anglo also owns 65% of Kumba Iron Ore Ltd., Africa’s largest iron ore producer.

Anglo is struggling to keep pace with BHP Billiton, the world’s largest miner, which made its move to shore up its iron ore reserves by approaching Rio Tinto with a takeover offer. 

While Rio Chief Executive Officer Tom Albanese rejected BHP’s initial $127 billion offer, saying it "significantly undervalued Rio Tinto and its prospects," BHP is widely expected to make another proposal before its Feb. 6 deadline.

Rio has repeatedly attempted to ward off BHP’s overtures, and announced Wednesday that it achieved new records for iron ore, alumina, aluminum, bauxite, gold and copper in 2007. The company said it produced 145 million tons of iron ore last year, a 9% increase over 2006.

Tim Gerrard, an analyst at Austock, told the Independent, that the mining industry’s "super-cycle" of sustained high prices will continue.

"There is a case to be argued that Rio’s iron ore assets may be valued, within three to four years, at the entire market capitalization of the company," he said.

Currently, the contract price at which most iron ore is sold is $85 to $90 a ton, less than half the current spot price of $190 a ton, but the contract price is expected to rise substantially this year.

As the world’s biggest iron ore miner, Vale (RIO), takes the lead in negotiations. While its precise stance this year remains unclear, some analysts believe the company could drive the benchmark price 70% higher.

News and Related Story Links:

• Bloomberg:
  Anglo May Pay $5.5 Billion for MMX Iron-Ore Assets

• MarketWatch:
   Anglo American reportedly to acquire stake in Brazil miner MMX

• Money Morning: 
  BHP Readying Another Rio Bid

After three months of interviewing dozens of candidates, board members of Harmony Gold Mining Co. (HMY) have unanimously elected Graham Briggs as the South African miner’s chief executive officer.

The arduous selection process began in October when a four-person selection panel tapped an executive search company to help find the best candidate. Thirty-six other candidates were reportedly interviewed for the job.

The list was whittled down to four before selecting Briggs, 51, who had already been serving as acting CEO since Bernard Swanepoel resigned in August, when the company forecast a loss for the quarter ended June 30, 2007.

Briggs begins his new/old job immediately.

"He has been overseeing the introduction of the Harmony ‘back to basics’ management style and has done a great job," Harmony Chairman Patrice Motsepe said in a statement. "Harmony is on its way to being the globally competitive and profitable company that we know it can be."

Harmony is the third-largest gold producer in South Africa and is the fifth largest in the world.

Briggs has a 13-year tenure with Harmony, beginning with his first post as a manager of new business in 1995. In 2005, he was promoted to CEO of Harmony Australia and regional manager for Australiasia.

Harmony is hoping its new CEO ushers in a new and better year. In 2007, in addition to having its CEO depart and posting the quarterly loss, Harmony also made headlines for a mining accident that trapped more than 3,200 miners underground.

Although all the miners escaped death, the firm was vilified for allegedly cutting corners of safety.

On top of that, gold production in South Africa – the world’s second-largest gold source – continued its decline, forcing companies with mines to drive up production costs by digging deeper. And above ground, the South African rand appreciated significantly in 2007, biting off a large piece of gold’s 25% gain in value last year.

All That’s Gold Doesn’t Glitter

As the turmoil at Harmony reaffirms, investors should not walk into any gold investment blindly, or think that a gold mining company’s stock is the best way to profit from gold’s metoric rise in the past several years.

Viewed as a hedge, and purchased at the right time, gold will provide a sound addition to many investment portfolios. And if the yellow metal also manages to produce massive gains, even better.

All that said, though, there are gold investments that combine both safety and performance.

The StreetTracks Gold ETF (GLD) offers bullion-based pricing without the storage problems and liability of delivery.

Another possibility is the Prudent Global Income Fund (PSAFX). While it’s not a gold investment per se, it gives you exactly what gold investors look for – protection against a falling dollar.

Shares prices of Toronto-based gold-mining company Barrick Gold Corp. (ABX) – the biggest gold producer in the world – performed about in line with gold itself during 2007. But be wary of mining companies. They face the same inflationary pressures that everybody else does. And gold bugs aren’t inherent risk-takers.

If you are looking for gains that accurately – and safely – track the price of gold, another possibility worth a look is a pooled precious metals account, where you can buy gold and silver for as low as 1% above market price, while reaping the benefit of storage and maintenance fees that are lowered by spreading the costs across a pool of investors.

Editor’s Note: Associate Editor Mike Caggeso, who covers gold and commodities for Money Morning, recently wrote about gold’s prospects in the New Year as part of our  "Outlook 2008" series, which looks at global investing opportunities for the year ahead. To read that report, which is free of charge, please click here.

News and Related Story Links:

• Forbes:
  Can Briggs Bring Harmony to Gold?

• Reuters:
  Graham Briggs Bio

• Money Morning Investment Analysis:
  Outlook 2008: Gold Investments Will Continue to Glitter in the New Year.

• Forbes.com:
  Critics Dig at Harmony Gold.

With its landmark bid for fellow mining giant Rio Tinto PLC (RTP), BHP Billiton Ltd. (BHP) has made it clear it won’t sit still and watch the surging global commodities boom from the sideline.

Instead, the Australia-based BHP intends to transform itself into a mega-giant that can stand toe-to-toe with some of the most powerful nations in the world over the next 50 to 100 years. That’s a strategy that puts BHP on a collision course with China, the biggest consumer of commodities on the planet.

The rapid growth of such emerging economies as India, Taiwan, Brazil and Russia has resulted in a massive stampede for commodities ranging from wheat and dairy products to uranium and gold. As the new heavyweight on the global block, China has become the leader of the pack, heading the worldwide advance.

So far, mining and shipping companies have been content to accommodate China’s massive appetite for commodities. But with no signs of this hunger for natural resources waning, BHP clearly saw the need to boost its efficiency and grab a bigger slice of the action at the same time. And who could blame it?

After all, just look at what commodity prices have done since 1999. And with China, India and other markets continuing to evolve, analysts expect these types of gains to continue over the long run.

Source: Money Morning Staff Research.

The Iron Giant That Has Beijing Quaking

BHP, in its attempt to woo Rio Tinto, has pointed out the tie up would save the newly combined company an aggregate $3.7 billion a year in operating costs.  It also tried to sweeten the deal buy announcing a $30 billion stock buyback, should Rio accept the merger. However, the potential benefits go beyond streamlining operations, cutting costs, and boosting the earnings per share with a simple share buyback plan.

This deal is about a reallocation of the world’s most coveted resources – and on a massive global scale.

The assets of the merged company would include a stake in Chile’s Escondida mine, the world’s largest copper-mining operation, and would have holdings in uranium, aluminum, diamonds, silver, lead and nickel.

BHP’s assets include the "trillion-dollar" Olympic Dam, Australia’s largest underground mine acquired as part of the $8.1 billion [A$9.2 billion] purchase of WMC Resources Ltd. in 2005. BHP hasn’t made a major acquisition since. The mine’s resources include 79 million ounces of gold, making it the fifth-largest deposit in the world.

The BHP-Rio Tinto giant would have a market value of about $380 billion and annual sales of about $54.6 billion, based on 2006 figures. For a comparative illustration, rival Anglo American PLC (AAUK) had revenue of only $33.1 billion last year.

If the companies did combine operations, the new BHP would account for 14% of the global market for thermal coal. BHP-Rio Tinto would also control 38% of the seaborne iron ore trade, according to Australia & New Zealand Banking.

BHP would also gain control of the largest aluminum producer in the world, which Rio became by successfully bidding for Canada’s Alcan Inc. for $38.1 billion this year. The deal, priced at 1.72 times Alcan’s revenue, closed this month and will quadruple Rio’s output of the light metal used in aircraft and automobile components.  BHP would control 13% of the worldwide copper supply as well.
In 2006, Rio Tinto produced 7,094 metric tons of uranium, accounting for 18% of total world production. BHP produced 2,868 metric tons, 7% of world output. Together, the two companies controlled a quarter of all the uranium in the world.

Also, Citigroup Inc. (C) analysts believe BHP could cut $540 million in costs by combining the two companies’ iron ore and coal mines in Australia. The savings would be generated by the combination of cheaper production and higher retail prices.

All totaled, that would provide a very strong arm in negotiations for a commodity that Macquarie Group Ltd. already believes will soar 50% in price next year.

Roberto Castillo Branco, the director of investor relations at Companhia Vale do Rio Doce (RIO), also known as CVRD, surmised that China’s share of global copper consumption would rise to 30% by 2011, up from 21% in 2006. Branco says China’s share of the aluminum market will rise to 41% in 2011, up from 25.5% in 2006. It is already the worlds top consumer of light metal.

According to the Australian Foreign Ministry, with whom China has been negotiating, imports of uranium to China are set to increase from 2.5 million pounds per year, to the unprecedented level of 44 million pounds per year. That would be an increase of 1,760%, and amount to about one quarter of the world’s total uranium supply.

‘It Makes Us Worried’

The market-power implications of this merger deal have both China and its mining companies scrambling for strategies to battle back. Chinese mining companies have wasted no time searching out acquisitions of their own. The International Herald Tribune reported that China Shenhua Energy Company Ltd., the country’s largest coal producer, and Yunnan Copper Co. Ltd., its third-largest copper producer, are planning acquisitions in Mongolia and BHP’s home turf of Australia, among other places.

"A takeover deal between BHP and Rio will trigger a new round of mining acquisitions, and that will be a challenge to Chinese mining companies," Shenhua President Ling Wen said at a forum last week, the IHT reported.

But any deals are certain to be particularly expensive, now, since commodity prices have soared threefold since 2002.

IHT also quotes Yunnan’s deputy general manager, Yu Weiping, as saying Chinese buyers of copper ore would be squeezed by the merger. "After they become one, they will be [much tougher] in negotiations," he said. Weiping went on to say Yunnan, which buys copper concentrate from BHP, is accelerating its efforts to purchase a number of copper mines in Australia.

Officials with Aluminum Corp. of China Ltd. (ACH), China’s largest maker of the lightweight metal, have also voiced major concerns about the merger.

"Yesterday, someone told me that if they combine copper ore and iron ore, prices may double next year," Chalco President Luo Jianchuan told Bloomberg. "It makes us worried."

The Empire Strikes Back

China’s anxiety over diminishing negotiating leverage could force some of the nation’s more influential players into action. One possibility might be a rival bid, in which case the most likely contenders would be consortiums headed by either the state-run China Investment Co. Ltd. (CIC) or the China Development Bank (CDB).

Britain’s Daily Telegraph recently reported that CDB is already building up a stake in Rio Tinto, hoping to gain enough clout to veto any potential deal. Though, CDB has denied those reports.

And over the holiday weekend, both Reuters U.K., and the China Business Weekly – citing anonymous sources – reported that a consortium headed by China Investment Co. would bid $200 billion for Rio Tinto. The consortium would reportedly include such China steelmaking stalwarts as the Shanghai Baosteel Group Corp., Shougang Corp. and Angang Steel Co. Ltd.

One of a growing number of so-called "sovereign funds" that have sprung up around the world, the China Investment Co. was set up recently to invest the country’s foreign exchange reserves, which totaled $1.33 trillion, as of its last report.

Rio Tinto denied both the Reuters and the China Business Weekly reports.

Other Ways to Play the Merger

Industry players don’t have to make a play for the merger partners or even the merged company. They could wait until worldwide regulators force the company to shed assets in markets where the combined entity might enjoy an illegal monopoly – and scoop up those divested properties or business units.

Should China find itself unable to block the merger, another possibility would be for it to accelerate consolidation of its state-controlled steel and coal mining industries in the hopes of creating a stronger competitor to the newly merged BHP.

Another tactic that’s been whispered about – apparently because it’s been seriously considered – would have China artificially play down its demand for certain commodities for a time That bare-knuckles tactic would play financial havoc with the newly merged company at the precise time it needs to deliver solid financial results to build credibility with the financial community. Such tactics would create distortions in the supply chain, and create artificially low prices – none of which bodes well for the merged BHP.

Whatever the tactic, Rio Tinto has suddenly become a very popular target – for market scuttlebutt. And with the potential for a rivaling bid to emerge from China, BHP may well be forced to boost its offer, lest it let a very valuable opportunity slip through its fingers.  Meanwhile, interests in China will continue to plan counter-offensives. Their hope for now is that a higher offer will emerge for Rio, and anti-trust reviews will ensnare the deal in bureaucratic red tape – either of which will keep BHP at bay.

News and Related Story Links:

• International Herald Tribune:
  BHP Billiton’s bid for Rio Tinto stirs fears of iron ore monopoly.

• BHP Billiton:
  Chile’s Escondida Copper Mine.

• International Herald Tribune:
  Chinese mining companies wary of BHP-Rio Tinto deal.

• Bloomberg News:
  Chalco Concerned BHP, Rio Merger May Boost Prices.

• Money Morning News Analysis:
  China Sells Record Amount of Bonds to Fund its Government Investment Arm.

• Bloomberg News:
  Shenhua to Seek Global Acquisitions, President Says.

• Forbes:
  Investors Tense For China’s Reaction To BHP.

• The Australian:
  Investors Tense For China’s Reaction To BHP.

• Money Morning:
  Three Ways to Profit From the Mining Sector’s Takeover Boom.

• Money Morning:
  Rio Sends BHP Packing; Shares Still Skyrocket 23%.

• Money Morning:
  China’s Commodity Consumption Fuels Hyundai Heavy’s Record Profits.

• Forbes.com:
  Rio Tinto Completes $38 Billion Acquisition of Alcan.

•  Money Morning:
  Is China Annexing Africa?

If you bought Rio Tinto PLC (RTP) following my recommendation in November’s Money Map Report, you’ve made out quite nicely. The stock is up about 30% since my recommendation on the news of the $153 billion takeover bid by Australian minerals giant BHP-Billiton Ltd. (BHP). Now the question is: should you hold or buy, hoping for a higher bid, or should you step back?

The takeover bid, which initially valued Rio Tinto at $142 billion, offered three BHP shares for each Rio Tinto share. This would be only be moderately attractive, because you will still own shares in the combined entity, and would be subject to the inevitable post-merger difficulties. However, BHP has since been lining up a $70 billion credit line, which would be used to provide a cash alternative to the deal, making it potentially much more attractive. Indeed, as an added inducement, BHP is now promising shareholders it will mount a $30 billion stock-buyback campaign once the deal closes.

The combined entity would be the world’s largest minerals-extraction company. And with BHP’s offer, Rio Tinto has been "put in play," and so arbitrageurs have stepped in – hoping for a higher bid from a third part.

The Tricky Financial Algebra of a Minerals Company

There are some important differences between bids for mining companies and ordinary takeover bids. With a normal company, it is pretty easy to borrow money and leverage the deal, hoping to sell assets and generate cash flow from operations to pay down debt and return the merged company to a reasonable leverage ratio. Companies that make beer or soap powder, for example, have a very reliable demand-and-cost pattern that even the world’s dimmest leveraged buyout artist can’t destroy in the short run, so it’s easy to borrow pretty well all the cost of a takeover and profit as debt is paid down. A recession, a cool summer or a sudden fashion shift to dirty, "grunge" closing can mess up your cash-flow forecasts, but not by much.

In minerals, this isn’t true. Minerals are commodities. And we’ve all seen this year how the price of a commodity can zip up and down faster than a Duncan yo-yo, so minerals companies have to hoard cash as a reserve for soft periods, which can last a decade or more [Just look at gold, which languished at a painful $300-per-ounce nadir through all of the 1990s].

And even if prices rocket to stratospheric levels, demand can either:

• Decline somewhat as a lower number of consumers grudgingly pay the higher prices.
• Increase, as a flood of hedge-fund capital washes into the sector, as the "hedgies" hope to make a windfall profit from the increase.
• Or can collapse altogether, as consumers find a cheaper substitute that meets t heir needs just as well.

Supply and costs can vary wildly, too, as new mineral supplies are discovered [For instance, this week's discovery of a modest new oilfield in Brazil has helped drop the price of crude oil by about $7 per barrel].

Who Can Play the Takeover Game?

What this all means is that it’s very difficult to borrow huge sums in order to finance a minerals-company takeover. In flush times like the present, mid-sized mineral companies can be bought out with relative ease, because big companies with acquisitive aspirations have amassed massive war chests of cash and want to use that capital to make a big splash in their own markets. But the largest mineral companies, like Rio Tinto, are much less vulnerable, except through a share-for-share merger, because very few people have $142 billion in cash in their pocket available for a deal.

That’s why the market is speculating that the new ogres of the global capital markets, the sovereign wealth funds, may be interested in Rio Tinto. After all, they have the cash in hand, and the need to invest it.

But I can tell you one player than won’t be a buyer. China’s foreign exchange reserves total $1.3 trillion, but its sovereign wealth fund, the China Investment Corp., set up a few months ago, has only $200 billion. And guess what? It has squandered about two thirds of it trying to bail out the hopelessly bad-debt-ridden Chinese banking system, devoting $130 billion to the cause of making Chinese bank balance sheets add up.

As hard as it is to believe, China can’t afford Rio Tinto. With only $70 billion left in its state-run investment fund, China would have to create a new fund to make a run at Rio Tinto. And let me tell you this: The bad debt that remains in China’s banking system could easily consume that cash, too.

The Way to Play the Minerals Market

So what’s the bottom line? Well, Rio Tinto itself is a great company, but it’s probably not worth buying it at a high price in the hope that you’ll profit from an exciting takeover duel [the whole "Barbarians at the Gate" saga involving RJR-Nabisco comes to mind here].

BHP is a great company, too, but its earnings are likely to be horribly diluted if by some mischance it succeeds in getting Rio Tinto. There is brave talk by BHP of $3.7 billion worth of annual cost saving. And while the two firms most certainly have some duplicative operations, it’s hard to believe they’ll yield nearly $4 billion a year in savings in perpetuity. And when you look closely, $2 billion of the proposed savings is due to the group’s ability to ship higher volumes of commodities – in other words, to gouge customers by establishing a monopoly or two. That’s the typical brave talk of a big takeover deal, although history shows that it hardly ever materializes.

Minerals prices have backed off their highs, a bit, but if Federal Reserve Chairman Ben Bernanke cuts interest rates again, as Wall Street wants him to, mineral prices will zoom up and smash all previous records.

With those kind of odds, why roll the dice on a takeover play? Instead, try Brazil’s Companhia Vale do Rio Doce (RIO). With the world’s largest iron ore deposits, Companhia Vale do Rio Doce is still quite reasonably priced at 15 times earnings.
Or, since gold is the commodity most likely to enjoy a "buying panic" if interest rates are cut again and inflation fears reignite, try either the StreetTracks Gold exchange-traded fund (GLD), or an actual gold-mining company like Barrick Gold Corp. (ABX), which is trading at only 19 times leading earnings.

Just as heavy-metal music can ravage the eardrums long-term, heavy-metal takeovers can savage your wallet, and your investment portfolio.

But if you make the moves I’ve outlined here, you’re likely to end up singing a sweet aria – all the way to the bank …

News and Related Story Links:

• Business Week:
  BHP Tempts Rio with $30B Sweetener.

• The Money Map Report:
  Order Form.

• CNNMoney.com:
  BHP Eyes Booming China in Rio Tinto Bid.

• Money Morning Investment Analysis:
  State Investment Funds: Beware of the Big New Buyers.

• Money Morning Investment Analysis:
  The Five Top Plays to Profit from the Gold Boom.

• Money Morning News:
  UBS Boosts Target Price for Gold Stock Recommended by Money Morning Expert Hutchinson.

"Major operations were impacted by scheduled maintenance and tie-in activity associated with expansion projects," the report said, alluding to an ongoing expansion at the Olympic Dam where uranium was particularly affected.

"[Uranium] production was lower than the June 2007 quarter mainly due to a decline in grade and tonnes milled," the report stated. Uranium production from the company’s Olympic Dam project totaled 933 tonnes in the third quarter, well short of its quarterly capacity of 1,250 tonnes. 

Uranium experienced an electrifying price surge over the past year, peaking at $138 a pound in June.  It was only $37.50 per pound in January 2006. The price has slipped to $75 a pound in recent months, but it’s still well above Olympic Dam’s contract value of less than $20 a pound. 
BHP’s production of copper and nickel, were also below many analyst’s forecasts. Only the company’s output of petroleum beat estimates.  Copper production dropped 10% from the previous quarter, but it was still a 23% improvement over last year. Nickel output fell 19% from the previous quarter and 13% from a year ago.

Iron-ore production climbed 7% to 25.87 million tonnes in the three months through September from a year earlier.  The output is a record high for the company, but it stopped short of meeting analysts expectations, and is only a marginal improvement over the previous quarter.

BHP’s disappointing production figures have forced some analysts to scale back their profit forecasts for the company. ABN Amro cut its 2008 profit estimate by 5.5%, while JPMorgan trimmed its profit estimate by 2.8%. 

News and Related Story Links:

• BHP Billiton:
  BHP Billiton Production Report For The Quarter Ended 30 September 2007

• Money Morning:
  BHP to Sell its Rio Algom unit to Uranium Resources

• Money Morning:
  Three Ways to Profit From Australia’s Strong Dollar and Massive Natural Resource Reserves

• Money Morning:
  ‘Trillion-Dollar’ Mine for BHP

• The Age of Australia:
  Olympic Dam shortfalls nuke BHP

• The Age of Australia:
  BHP moves to send Melbourne jobs west

Readers may well have missed the news that Ukraine is currently putting together a new coalition government led by reformist Julia Tymoshenko.

“So what?” you may ask. “I can’t know everything. And besides, how do you ever expect me to make a buck out of Ukrainian politics, a murky affair at best?”

Well, let me tell you a secret to emerging markets investing: The really big returns are made by spotting new markets as they begin to emerge, and then surfing the long wave of their emergence. The story of the independent countries that split from the Soviet Union is mostly a sad one, but there are a few gems beginning to emerge. There isn’t much to plunge into yet, particularly as a U.S. investor, but they’re well worth keeping an eye on.

Beginning first with all those confusing ones called “-stan” – I have to look up whether there are four or five of them. Uzbekistan, Tajikistan and Turkmenistan are backward dictatorships with few redeeming features, only modest amounts of resources and close ties to Vladimir Putin’s mob in Russia.  Kyrgyzstan is an emerging semi-democracy, with an almost functioning free market. Alas, it has only 5 million people, a puny Gross Domestic Product (GDP) of $10 billion, a modest growth rate, and no oil.

Kazakhstan’s the one with the oil. Unfortunately, it also has one-party government, high corruption and close ties to Putin. Nevertheless, with 15 million people, a much chunkier GDP of $53 billion and a growth rate of 10.6% in 2006 there’s money being made there. It has oil pipelines to the Black Sea and to China, so it’s not dependent on Russia to get its principal export to market. An international consortium led by Italy’s Eni SpA is currently drilling at the Kashagan oilfield, a huge project expected to have cost $130 billion by the time it comes on-stream in 2010. Since the Kazakh oil company Kazmunaigaz is state owned, Eni, itself (E), which has a price-earnings ratio of only 10 (well, NOBODY trusts the Italian government, which owns 39% of Eni), is worth looking at – what’s more, you get to share Eni’s new investment in Libya, another fun place with lots of oil!

The Baltic States – Estonia, Latvia and Lithuania – are well known; all three are now members of the European Union (EU), and have enjoyed rapid growth. They’re small, though, and there’s not much for U.S. investors to buy there. Estonia is the most exciting, with a growth rate of around 8%; Latvia, with a similar growth rate, also has a huge balance of payments deficit, which is rather worrying. Lithuania is growing somewhat less fast, and is the least glossy of the three.

Story Continues Below…

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Armenia and Azerbaijan fought a war with each other only a decade ago, which doesn’t fully rule them out, but is still a factor to be considered. Armenia has a population of 3 million, a GDP of $6 billion, and a 13% growth rate; Azerbaijan has a population of 8 million, a GDP of $14 billion, and had an astounding growth rate of 34% in 2006 – that’s what opening a new oilfield will do for you. Unfortunately, neither country has any companies with American Depository Receipts (ADRs), nor does there seem any obvious way to play them – BP PLC (BP) is the most important oil company in Azerbaijan, but it’s a small part of its business.

Then there are the two non-Baltic, ex-Soviet republics that are showing signs of becoming real democracies: Georgia and the Ukraine (though Armenia and Kyrgyzstan are fairly close).

Georgia is small – 4.6 million people and a $5.3 billion GDP – but it has a splendid pro-free-enterprise government under Mikheil Saakashvili and a growth rate of 9.3% per annum that is dependent on real effort, not just oil prices. The other good news about Georgia is that it is the least corrupt country in the former Soviet Union (except for the Baltic states). Alas, that’s a bit like saying someone’s the least evil mobster in the Bambino crime syndicate, but at #79 on Transparency International’s Corruption Perceptions Index, Georgia is only just below India and China. The Bank of Georgia is probably the best way to play the country; regrettably that is listed in London (BGEO) but not in the US.

The Ukraine is much larger: It’s got 46 million people, an $82 billion GDP, and had a decent growth rate of 7% in 2006. For those who haven’t been following, Ukraine’s shaky democracy has recently been the scene of a huge tug of war between the pro-Russian east and the pro-Western, pro-democracy west. The Orange Revolution of December 2004 was supposed to mark the victory of pro-free market forces, but President Viktor Yushchenko proved feeble, and his first democratic government, with Julia Tymoshenko as prime minister, experienced its demise.

Since then, there has been an uneasy coalition between Yushchenko, as president, and the Putin-supported Viktor Yanukovich as prime minister. However, in last month’s election Tymoshenko – once again allied to the remnants of Yushchenko’s support – won a small-but-decisive majority and now seems poised for form a government.

Julia Tymoshenko made an oil-and-gas fortune in the 1990s, and is a very tough cookie. Imagine a cross between Madonna and Hillary Clinton and you have her style. (Amusingly for onlookers, there was a very old-time-Chicago series of delays in counting the election results, as first Donbass, controlled by Yanukovych, and then downtown Kyiv, controlled by Tymoshenko, had unexpected delays in announcing their results – in each case, a landslide for the local favorite with suspiciously high turnout!).

Putin hates her, which is a worry since Russia, through Gazprom, has the ability to turn off Ukraine’s heating every January. Fortunately, in doing so, they turn off half the EU’s heating as well, so there may be limits on how rough Putin wants to play.

However, Tymoshenko understands how a free economy works, and is determined to clean up the corruption in Ukrainian business, so prospects for Ukraine’s emergence currently look good. Don’t forget, the country has a 99.4% literacy rate and 15% rate of college graduations, yet a per capita GDP of only $7,800 – even at purchasing power parity – so there’s a hell of a lot of room for growth.

Like the other ex-Soviet states, Ukraine doesn’t have a lot of ADRs. It makes sense for a country with EU ambitions to list its shares in London first, but the hugely expensive requirements of the Sarbanes-Oxley Act must also be a factor. Even when ADRs are available, they don’t trade – the big electric power company Centrenergo (CTEUY.PK), for example, last traded 3 months ago. What’s more, there aren’t any mutual funds with more than a small share of their investments in Ukraine.

That’s bound to change, however, as the country opens up. We at Money Morning will keep an eye on the Ukraine, and will report back to you if and when their rapid growth inevitably brings investment opportunities. When that happens, the Ukraine will probably be well-worth buying.

Even in the apparent basket cases of the non-Russian former Soviet Union, there are growth opportunities and investments worth buying. The wise emerging-market investor must cast a wide net.

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Uranium Resources Inc. (URRE) agreed to buy a uranium mining company and a mill license from BHP Billiton Ltd. (BHP) for about $126.5 million in cash.

Uranium Resources announced that it would pay $110 million for Rio Algom Mining LLC, whose assets include New Mexico properties with 20 million pounds of U308 uranium ore. The company will pay $16.5 million for a U.S. Nuclear Regulatory Commission (NRC) license to build and operate a conventional uranium mill.

According to published reports, the agreement reached by Uranium Resources calls for the company to assume certain retirement benefits and reclamation liabilities, of which up to $35 million will be pre-funded at closing.

"The purchase of Rio Algom provides one of the key assets we need to achieve our strategic goal to produce 10 million pounds of U3O8 per year by 2014," said Uranium Resources President and Chief Executive Officer Dave Clark. "We believe building a new mill on an NRC licensed site with associated water rights could allow production to begin within four to five years."
The deal should close before June.

Uranium was milled at the site beginning in the 1950s, when Kerr-McGee operated what was then the biggest operating mill in the United States. It was dismantled in 2003.

Uranium Resources is planning to build a new milling facility to process the uranium ore that it will be mining from around the region. The planned mill is expected to process up to 8,000 tons of uranium ore a day, and will employ over 200 people.

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After reporting a near-doubling of the ore reserves at its massive Olympic Dam ore deposit in Southern, BHP Billiton Ltd. (BHP) yesterday (Wednesday) said it is sitting on more than $877 billion worth of copper, uranium and gold, according to published reports in The Australian newspaper.

In Australian dollars, the reserves are worth "$1 trillion,” as the headlines in Australian newspapers blared yesterday and early today (Thursday).

The increase is set to support mining at Olympic Dam and the tiny town of Roxby Downs, for 100 years or more. And it will likely spur incoming BHP chief Marius Kloppers to boost the size of a planned expansion, analysts and published reports predict.

It is likely to encourage incoming BHP boss Marius Kloppers to perhaps double the size of a planned expansion – although analysts say that will boost the aleady massive anticipated construction costs to $15 billion.

The high market value of commodities and the speculation about the expanded ore reserves has many analysts speculating that Kloppers will want to maximize the size of the construction project, or possibly even increase it. And that could have a global impact on the mining industry.

"The potential to expand the size of the project could be an opportunity to mitigate the clear capital and operating cost pressures affecting all projects globally," Macquarie Equities resource analyst Brendan Harris told The Australian.

Investment bank Merrill Lynch (MER) is tipping copper production to 1 million tons a year. Such an expansion would yield 30,000 tons of uranium dioxide, 500,000 ounces of gold.

Merrill speculated that BHP may seek to maximise value by spinning off the gold and silver production into a separately listed company, or selling it as a gold royalty. Pure precious metal assets commonly attract a higher market valuation than base metal mining assets, according to the report by The Australian.

Deutsche Bank AG (DB) says that BHP has determined that a discrete gold-only resource amounting to 4.4 million ounces could be worth as much as $500 million in a separately listed vehicle.

News and Related Story Links:

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From Staff Reports

With prices for the metal molybdenum remaining high, Australia’s Moly Mines Ltd. has turned its attention to the huge financing task ahead after demonstrating its $582 million Pilbara moly project could provide good returns in the current economic environment, the Sydney Morning Herald reported.

A financial feasibility study released yesterday (Monday) said the Spinifex Ridge open-cut mine could profitably produce 5% of the world’s supply of the specialty metal starting in July 2009. The 470 million ton moly and copper deposit could last 20 years, the company said.

Molybdenum, also called moly, was discovered in 1778 by Carl Wilhelm Scheele , the famous pharmaceutical chemist, and was then first isolated in 1781 by Peter Jacob Hjelm. It is a high-melting-point alloying metal – in fact, it has the sixth-highest-melting point of any known element – and for that reason is used in iron, steels and super-alloys to enhance harden-ability, strength, wear and corrosion resistance. Those qualities make it a key ingredient in the high-grade steels used in oil pipelines, nuclear reactors and desalination plants. Moly is produced on a large scale in North America, South America and China, but Spinifex would be Australia’s first major moly mine.

Given that moly is an unfamiliar metal to many Australian investors, Moly Mines has attracted heavy interest from overseas and has a dual-listing in both Australia and on the Toronto Stock Exchange (ASX/TSX: MOL).
The company has already ordered some "long lead-time" items for the mining project and it expects to complete the rest of the project financing by the end of the 2008 first quarter.

The cost estimate was higher than the original estimate of $488 million two years ago, partly because the project’s annual production target was boosted to 20 million tons from the original target estimate of 15 million tons a year.

Moly Mines is reviewing several financing models, although it’s understood that virtually any strategy will involve a mix of debt and equity. Indeed, the company said it’s been clear that the project’s characteristics could allow for more than 50% of the funding to come from debt, including high-yield bonds.

Moly Mines has also held discussions with potential joint venture partners, and published reports state that the company has made it clear that it could sell up to half the project to a venture partner under the right circumstances.

Moly Mines general manager Collis Thorp said Spinifex Ridge was a "very, very robust project" but also noted that the large open-cut mine would be extremely simple to operate.

"We have no innovation at all," he said. "We’re about as dull and bloody boring as you can get."

News and Related Story Links:

• Sydney Morning Herald:
  Holy Moly – A Goer if Price Remains Strong.

• Moly Mines Ltd:
  Corporate Web Site.

• Google Finance:
  Moly Mines Ltd.

• Wikipedia:
  Molybdenum.

• Wikipedia:
  Carl Wilhelm Scheele.

• Wikipedia:
  Open-pit/Open-cut Mining.

Global mining giant Rio Tinto PLC. (RTP)  has agreed to provide a credit facility of up to $350 million to Ivanhoe Mines Ltd. (IVN), its partner in Mongolia’s Oyu Tolgoi copper-gold project.

The credit agreement is part of an interim-funding deal to keep mining project-development work moving, and will also lead to Rio Tinto boosting its maximum possible stake in Ivanhoe to 46.65% – from the previously agreed upon 40%.

Rio Tinto paid about $300 million last year for its initial 9.95% stake in Ivanhoe. It will gain an additional 9.95% when it pays another $388 million when the partners all cement a long-term investment agreement with the government of Mongolia.

"An equitable investment agreement is essential if Mongolia is to attract sustainable international mining investment," Bret Clayton, chief of Rio Tinto’s copper business, said in a statement. "This will encourage further exploration, development, employment and skill training programs."

Ivanhoe said the credit facility would permit site preparations and final design work to continue through the coming months. The huge project is aiming to produce more than a billion pounds of copper and 330,000 ounces of gold a year.

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