Goldman Sachs JBWere Pty. said investors should buy shares of miners including BHP Billiton and Rio Tinto Group in the face of declining metal prices as the environment for producers remains "hugely bullish."

The falls of copper, zinc and other metals prices from their records over the past month were driven by concern about the increasing cost of funds rather than declining global demand for raw materials, Goldman analysts Malcolm Southwood and Neil Goodwill said in separate notes yesterday.

Investors are concerned central banks worldwide will keep increasing interest rates to counter rising inflation, triggering fears the higher borrowing costs will slow global growth and demand for commodities. Shares of miners BHP and Rio fell by 18 percent and 16 percent between touching records in May and yesterday's close as metals prices plunged.

"We still think there's legs in the general resources picture, and we're confident that earnings can grow," said Hans Kunnen, who helps oversee $70 billion at Colonial First State in Sydney, including BHP shares. "And following the corrections, valuations look better than they did three weeks ago."

Shares of Melbourne-based BHP Billiton, the world's largest miner, rose as much as 66 cents, or 2.6 percent, to A$26.28, and traded at A$26.18 at 2:26 p.m. Sydney time. Shares of London- based Rio Tinto, the world's second-largest miner by market value, rose as much as A$1.31, or 1.8 percent, to A$74.36, and traded at A$73.55.

Goldman Sachs JBWere is the Australian affiliate of the world's largest securities firm by market value.
'Buying opportunity'

"From a supply/demand perspective, the commodities environment remains hugely bullish for producers," said Goldman's Southwood. "While we recognize the pain that this sort of pullback in metal prices and share prices causes, we believe that as the dust settles around the current price correction, a very attractive buying opportunity is opening up."

Copper supply continues to be constrained by production difficulties, and zinc and nickel could face similar problems over the next 12 months, Southwood said. Many miners are failing to reach production targets, he said.

Antofagasta Plc, the London-based owner of three copper mines in Chile, yesterday said production dropped 9 percent in the first four months as it mined ore with lower metal content. It joins other miners such as Freeport-McMoran Copper & Gold Inc. and Codelco in announcing falling production.
'Demand is growing'

"Copper and zinc have potential for upside spikes because of low inventory and tightness in the market," Helen Lowe, marketing manager for commodity derivatives at BNP Paribas SA, said yesterday. "Demand is growing, but the problems are clearly in supply."

Prices of commodities such as steel, coal and iron ore, which are not traded on the London Metal Exchange and offer a better guide to physical demand, are holding firm, Southwood said.

Rio and BHP, the world's second-largest and third-largest exporters of iron ore, last month won a 19 percent price rise for the steelmaking component from most global steelmakers.

"We expect global commodity demand to remain strong and prices firm," said Goldman's Goodwill. "This should result in strong earnings and a faster share price recovery from BHP and Rio than the general market."

Copper has fallen 26 percent from its all-time high of $8,800 a ton on May 11 in London, and zinc has also dropped 26 percent from its record $4,000 a ton.

"Spot prices are still above the assumptions many analysts have for their valuation models," for miners, said Colonial's Kunnen. "There could still be earnings upgrades."

Merrill Lynch & Co. analysts on June 9 raised their earnings estimates for BHP Billiton by 31 percent to a record $13.4 billion for fiscal 2007. They also raised 2006 earnings estimates for Rio by 15 percent to a record $7.6 billion.