Peter Hambro Mining

Two weeks ago, Russian gold miner, Peter Hambro Mining (POG), released a solid trading update for the six months to 30 June. We were heartened that the company remains on target to achieve 271,000 ounces of gold production this year. We believe that the group's solid production profile, growing reserve base, along with a rising gold price will drive shareholder value.

Gold production in the first half of the year rose an impressive 41 percent to 102,178 ounces. Encouragingly, the miner reported that operating costs were kept low despite increases in raw material prices and a stronger Rouble. Given a 7 percent increase in the average realised price of gold to US$422 per ounce we expect turnover and earnings for the period will be robust.

Production at the core Pokrovskiy mine rose 41 percent to 86,400 ounces on the back of last year's capacity upgrade and higher quality ore. Economies of scale and enhanced mining operations have allowed management to control costs at the deposit despite higher input prices and exchange rate fluctuations. A further plant expansion project aimed at increasing ore processing capacity by 47 percent should make similar efficiencies available in our opinion.

Not to be out done, the 65 percent owned Omchak joint venture (JV), increased attributable production a healthy 36 percent to 17,015 ounces. Future production received a further boost as Omchak successfully bid for the exploration and mining license at the Verkhne-Alliinskiy gold property. The JV acquired the licence for US$2.2million, with the area estimated to contain 593,000 ounces of gold resources. Significant silver reserves are also in place.

Peter Hambro has made important progress in the development of Pioneer deposit in the Amur region. Reserve estimates have risen 3 percent to 10.2 million ounces. More significantly, extensive exploration and development work has increased management's understanding of the resource which should bolster mining efficiencies. We believe Pioneer will be a critical contributor to Peter Hambro's long-term production targets.

In our opinion, POG offers excellent leverage to rising gold prices. Current development work is clearly critical if the miner is to achieve the annual gold production goal of one million ounces by 2009. Therefore, we were encouraged to learn that POG had secured the capital necessary to fund these projects. Although POG now trades on a prospective price earnings multiple of 21 times while yielding only 1 percent, we believe the shares still offer solid value.