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TWST: Is there a lingering impact from the pre-Soviet breakup and current Russian monolith’s ability to produce, or at least inability to export?

Mr. Phillips: In the short term, Russia remains a source of uncertainty in the market. But no, the changes that occurred in the former Soviet Union were the reason for the tremendous oversupply of metals in the first half of the 1990s. The market has fully adjusted to that. The former Soviet Union is now a necessary part of the western world’s supply/demand equation. Without it there wouldn’t be enough metal. That being said, in both nickel and aluminum the Russians remain a very strong competitor. The western companies certainly need to be wary of that competition because the Russians are not going to go away. However, the one-time shock of the opening up of those formerly controlled economies has worked through the system.

TWST: What are the right strategies for these companies today? Is scale important? Is it a focus on efficiencies that can be achieved? Should companies be going through a culling or a closing process? What is the proper tack in these winds?

Mr. Phillips: The industry is going through a period of tremendous consolidation. That has been one of the main ways thus-far this year that investors have been able to realize any value — to have been invested in one of the companies that was a target. The trend toward consolidation will continue because consolidation is required to improve profitability, and in particular, improve return on assets for this industry. The industry has had a reputation for destroying capital over the years, investing in projects that didn’t provide reasonable returns on the capital employed. At this point in the cycle, with equity prices depressed, it remains better, cheaper, for the companies to buy capacity in the equity market — to consolidate — rather than build greenfield capacity, or in some instances, perhaps even brownfield expansions. We believe that this situation will continue because, while we don’t think that there’s much upside potential in the metal prices at this point in the cycle, we don’t expect prices to collapse either. As a result we could continue to see depressed equity valuations combined with strong underlying business fundamentals, putting the industry in a good position to continue to consolidate.

TWST: What should an investor focus on in the zinc and nickel group?

Mr. Phillips: We see nickel prices remaining under pressure. Prices are well down from their highs and the market looks as though right now it is in a balance moving into surplus. At the same time, we have Falconbridge (Toronto:FL.TO), the third largest producer in the world, on strike at its main operations in Sudbury, Canada. This is a little worrying in that, even with that big an operation substantially curtailed, the nickel market appears to be balanced or even in surplus. In this context, it is hard to recommend significant exposure to nickel and both stocks — Inco (NYSE:N) and Falconbridge — are rated market perform. That is market perform as opposed to underperform, because the valuations already reflect a fair amount of this bad news. As between the two stocks, Inco and Falconbridge, my preferred exposure would be to Falconbridge. The reason for that choice is actually its higher exposure to copper than Inco. So I would maintain a little exposure to nickel, but do it through Falconbridge because of their good strong position in the copper business.