DEBT FINANCING. Fund view: He who has the gold, makes the rules - JPM Asset Mgt

LONDON (Reuters) - The mining sector is ripe for mergers and acquisitions, with tight supplies of metal, still solid demand, and share prices that have suffered this year, said Neil Gregson, co-manager of J.P. Morgan Asset Management's Natural Resources fund.
"The whole sector is very cheap. Macro concerns have been increasing, but it's a pretty robust sector in terms of balance sheets, margins, and cash flow," Gregson, who also manages JPM Asset Management's Global Mining Fund, told Reuters.
"It's also as hard as ever to find new deposits. For base metals the capital costs have been rising and with the setback in equity prices it's pretty obvious that these companies should be looking to acquire, so I think we will see more of that."
The FTSEurofirst 300 .FTEU3 is down around a quarter since February 18, while the FT350 mining index .FTNMX1770 has fallen around 21 percent.
The JPM Natural Resources Fund has some 2.6 billion pounds under management. It was up 7.05 percent in the 12 months to end-August, according to Lipper data, outperforming its peers in the Lipper Global Natural Resource Equity Sector by almost 3 percentage points.
Top 10 holdings include Rio Tinto (RIO.L), BHP Billiton (BLT.L), Xstrata (XTA.L), Anglo American (AAL.L) and Freeport-McMoran Copper (FCX.N).
Gregson believes the next decade will be marked by further industrialisation and urbanisation in emerging economies, as well as supply problems, boding well for natural resources companies.
"He who has the gold makes the rules. If you're an iron ore producer or copper producer and you've got a good asset it's a very valuable asset with high barriers to entry," he said.
"We think investors should pay up more for that than they are currently."
Demand from China, the world's leading copper consumer, and supply fears helped lift copper prices to record highs this year, but they have since fallen due to uneasiness over the world economy.
Three-month copper on the London Metal Exchange hit an all-time peak of $10,190 per tonne in February. It was around $8,800 on Tuesday, nearly 14 percent off the February high.
Still, labour unrest and extreme weather in Chile and other top copper-producing countries have affected production, and a tight global copper market is expected in the medium term.
The average of 24 forecasts in a Reuters poll carried out in July showed the copper market would still have a deficit of 343,150 tonnes this year, although narrower than the 444,000 tonnes deficit forecast in January.
GOLD A WINNER
Gold has been a clear beneficiary of the market turmoil, Gregson said, which had fanned new interest in gold mining shares and gold companies.
"In the early part of August, gold shares were falling along with the diversifieds, copper miners and everything else," Gregson said.
"But from the middle of August they have started to link into gold price developments more, so gold shares for the last month have been relative outperformers in the resource equity sector."
Gold has risen by a third so far this year and by 22 percent in the third quarter alone, driven by a push by investors seeking an alternative to currencies and stocks to escape market volatility.
The Natural Resources Fund has around 33.1 percent in the gold and precious metals sector, and 34.6 percent in base metals and diversifieds.
The Global Mining Fund, which is down 11.62 percent in the six-months to August, has around 23.6 percent in gold and precious metals, and 66.4 percent in base metals and diversifieds.

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