Bigger isn't better at BHP Billiton

Jarvis Hotels still worth checking into; European Diamonds adds a little sparkle

BHP Billiton thinks of itself as a beauty of a beast. It is huge, the world's largest mining company with interests spanning base and precious metals, coal and, unusually, oil and gas. But it has also been able to show some good-looking results since its creation from the merger of Billiton and Australia's BHP last year.

Its annual shareholder meeting yesterday – a telecoms triumph hosted simultaneously in Melbourne and London – tried to be a robust defence of the merger. But that Don Argus, chairman, and Brian Gilbertson, chief executive, still need to defend the deal reveals the scepticism that still exists in the City.

BHP Billiton's raison d'être is that something, somewhere will always be going great guns. Its oil and gas interests have kept earnings relatively buoyant despite the collapse in other commodities prices since the company's creation. First-quarter results last week showed how 45 per cent of group earnings were generated from petroleum product sales. Most of those in the City who do not recommend buying the shares are concerned mainly about the prospect of a slide in the oil price. It is a convincing thesis: with industrial demand likely to remain weak, the start of a war in Iraq would end the uncertainty that keeps the oil price artificially high.

For that reason, BHP Billiton shares are not likely to be the best choice for investors in need of capital gains. Income investors could also do better elsewhere, since the shares yield less than 3 per cent.

The dividend is underpinned by the very stable cashflows the group's geographical and product diversity allows. But while stability is all very well at the pit of a bear market, it is ultimately unexciting, and ambitious cost-cutting won't be enough to generate interest. In better times, when perspectives change, it will probably look as if something, somewhere is always going wrong.

BHP Billiton shares remain more beast than beauty. Avoid.

Jarvis Hotels still worth checking into

Forget Bridget Jones-style mini breaks, Jarvis Hotels reckons it is benefiting from growth in a different type of holiday. Britain's ageing population is booking longer breaks in UK hotels, often lasting four or five nights and not necessarily including weekends.

This area that helped boost Jarvis' interim results yesterday. While the corporate market was down by 5 per cent, UK leisure breaks rode to the rescue with a 12 per cent increase in sales. Profits fell 16 per cent to £11.7m but occupancy levels are stable at 70 per cent and the fall in the average room rate was held to 2.7 per cent.

Jarvis has been addressing what it sees as the "disconnect" between its share price and its net asset value (NAV). It announced a £150m sale and leaseback deal on nine of its 67 hotels last month. The plan is to return £85m to shareholders via a share buyback at 137.5p a share with a further £55m used to cut debt. This has helped raise the shares a little and they now stand at 122.5p, up 4.5p yesterday, compared with what would be a 189p NAV after the buyback.

Jarvis, which specialises in mid-market, three-star hotels, hopes growth will come from more contracts to manage other people's hotels, and from an improvement in the business market. But fears of a consumer downturn may weigh on the shares. Hold.

European Diamonds adds a little sparkle

If Diamonds are a mining explorer's best friend, kimberlite is his next best friend. Kimberlite is the sort of volcanic rock in which, in some cases, diamonds are embedded, and European Diamonds has found a good deal of the stuff in central Finland, where it is hoping to establish the Continent's first diamond mine.

That is the dream of geologist Roy Spencer, whose success in finding commercial quantities of diamonds in Russia led investors to back him when he said he thought the rock formations across the border in Finland may yield the same. The shares floated at 70p in December 2000 and, after figures showing losses rose from £366,000 to £609,000 in the year to June, were down 9p to 150p yesterday.

Exploration is slow work and shareholders will no doubt have to stump up again for the next phase next year, but Mr Spencer has made some exciting if inconclusive early finds so far. Work should progress faster through the winter, now marshland has frozen. At the end of the day, there are either commercial quantities of diamonds in Finland or there aren't. European Diamonds is, therefore, not one to bet the pension on, but it could be a high-reward investment for someone with cash to spare.