Miners are 'staggeringly cheap' after share prices dropped while metals prices stayed strong, and some of their earnings may beat expectations, said Evy Hambro, a fund manager at Merrill Lynch Investment Managers (MLIM).

Mining stocks, which had been star performers in recent years, have suffered since the stock market downturn in May on concerns that commodity prices may be too high and the pace of global growth may fade, which would hurt earnings.

Over the month to September 25, the HSBC Global Mining index of mining stocks has fallen 10.3 percent, while the MG Base Metals index is down just 1.7 percent, which creates an opportunity, said Hambro, who helps manage $22 billion (12 billion pounds) of assets.

The last few months have been tough for the mining sector ... But metals prices have been incredibly strong and have remained firm. This is creating absurdly high levels of profitability for mining companies, which is not reflected in share prices, he told a recent meeting hosted by broking firm Arbuthnot Securities.

It's staggering how cheap these shares are ... I expect mining shares to catch up with commodity prices. The catalyst will probably be strong earnings in the second half.

He said he has stopped writing call options on stocks the right for the owner of the option to buy shares at a predetermined price to writing put options the right to sell.

According to Reuters data, Rio Tinto and BHP Billiton are priced at about eight times forecast 2006 earnings and Anglo American at about 10.5 times.

That compares with the FTSE 100 index at about 12 times earnings.

EARNINGS CONCERNS

Some fund managers have expressed concerns that although the price/earnings ratios of mining stocks are low, earnings could fall sharply if metal prices drop.

Aberdeen Asset Management's head of Pan European Equities, Chou Chong, for instance, has said that commodity stocks could be heading for a fall.

Hambro said, however, that the next set of mining firms' earnings would be strong and some could even beat expectations.

The cost of diesel is lower, the South African rand is at 7.60 (to the dollar) compared with 6 (to the dollar earlier this year). This has a big impact on (mining companies') costs that isn't in the (analysts') numbers, he said.

There is a lot of earnings conservatism built in ... (Earnings) could surprise on the upside for some companies.

Many investors have underestimated the impact of China on demand for commodities, Hambro said.

We believe we're going through an industrialization phase in China similar to the industrialization in Europe a couple of hundred years ago. It's very, very long term and incredibly commodity intensive.

The impact on the world has really been misunderstood. China's demand for commodities will continue for longer than people expect.

He said concerns over recent falls in China's copper import levels were misplaced.

China's refined copper imports fell to 78,928 tonnes in August, a drop of 34.5 percent, customs data showed on Monday. The recent fall off has prompted fears of a long term downturn in demand.

They were running down their inventories during periods of high prices ... We're very close (to the point where) ... China will need to restock. Inventories are down to very, very low levels.

GOLD

Hambro said he has been increasing exposure to gold stocks over the past year.

The outlook for gold is good. Central banks are selling less than in the past, and the jewellery industry is comfortable with gold around $600 (an ounce), he said.

We think gold equities are very cheap relative to the gold price. In the past they (gold miners) have not been able to convert the higher gold price into higher earnings, because cost inflation has kept pace with the gold price ... (But) we believe the cost inflation in the industry is coming to an end.

On Thursday the price of spot gold touched a two week peak at just over $600 an ounce. Dealers said it could now head up to $620.

Hambro also said his 730 million pound Merrill Lynch World Mining trust cut its borrowing in early summer and that he has shifted away from smaller mining stocks to large companies he regards as being of higher quality.

China Inflation Investment