Mike Salamon: The miner with his eye on the big picture

The Business Interview: The executive chairman of New World Resources tells Nikhil Kumar how China is driving a new mining boom

Mike Salamon knows a thing or two about mining. Yesterday, he unveiled the latest results from New World Resources, the FTSE 250-listed coal miner that he leads as executive chairman.

At the same time, investors on the FTSE 100 poured over half-yearly figures from BHP Billiton, the resources behemoth that he helped to create, playing a key role in the merger of BHP and Billiton in 2001. And earlier this month, we saw similar releases from the diamond miner Gem Diamonds (which counts Mr Salamon as its senior independent director) and the iron pellet producer Ferrexpo (for which he is a non-executive director).

At first glance, it looks like a great time to be in the sector, with commodity prices booming to record highs. After falling sharply during the credit crunch, when the so-called commodity supercycle of unremitting price rises unravelled with astonishing speed, metals have bounced back, scaling new heights at the same breakneck pace.

Emerging markets, and China in particular, have been the key drivers of this surge, consuming copious amounts of metals to feed growth. But, against the backdrop of doubts about the global recovery and sky-high in inflation in India, China and elsewhere, the near-term outlook looks cloudy.

The industry also faces risks from rising costs – highlighted by BHP yesterday – and resource nationalism, as governments eye bigger slices of the profits generated by mines in their backyard. Indeed, those of a bearish disposition have begun whispering about the prospect of another slump. So, is the sector on the verge of a bust?

"I don't think so," Mr Salamon says, before quickly adding that he's "not terribly fascinated by the short-term, cyclical things".

"I look much more at the big picture. And the big picture in China... [is] 1.2 billion people who are going from not the stone age, but not a long way from it, to a level which is probably, in some ways, beyond the US and Europe. It's the same as when Japan and Korea built themselves. They actually bypassed everyone else because they were building everything at state of the art. If you go to Beijing or Shanghai... you see the same sort of phenomenon."

Warming to the theme, he says that the question is "can that all implode?" And the answer? To begin with, he believes that "the millions of guys who try to read tea leaves and whatever – most of them, quite frankly, haven't the faintest idea. Half of them have been there twice."

All the while, China continues to expand. The issue, Mr Salamon says, is that, while many have seen the benefits of growth and climbed up the economic ladder, many millions still remain "in the rice paddies", as he puts it, putting pressure on the government (or the Communist Party leaders, who Mr Salamon says "realise so much that if they get it wrong they'll be terminated"). "You have a sense", he asserts, "that the China story is going to play for some time." And this, he ventures, "scares the hell out of everyone."

"One hundred per cent of the growth in resources in the last 10 years has been China," he says. "When you look at most resources today, 40 to 45 per cent is consumed in China. Those numbers are scary. And if you're sitting in Wall Street or in the City, you just don't want to hear that because suddenly you're not that relevant anymore."

Given his views, Mr Salamon's association with New World may look odd: the hard coal and coke producer is based in Central Europe, with mining operations in the Czech Republic and development projects in Poland. But though the company is some distance from Beijing, Mr Salamon points out that "the key economic driver in New World Resources actually ends up being China."

"Central Europe is the heavy industry economic engine of Europe – there's a lot of steel production, car production, etc. And because it's inside the EU, and from a cost structure point of view is more competitive than some of the older European countries, it's where a lot of the heavy duty stuff gets done."

Historically, steel production moved to these parts because of the coal mines in places like the Czech Republic and Poland. Over time, however, the mines have become deeper and deeper, and thus more expensive and difficult to manage.

The result, Mr Salamon explains, is that production has been falling, "in particular in Poland". "On the other hand, demand has been rising and, some years ago, they parted company. So the region is net short coal, which means it has to import. Consequently, the pricing mechanism has now morphed to the global pricing mechanism... the industry has become more and more like the global industry."

Currently, New World produces more thermal coal than coking coal, but its reserves have more of the latter, which is helpful given the higher margins and the mismatch between global supply and demand, most notably from steel makers. Given the historical backdrop, the company has many big steel producers, including ArcelorMittal, with mills in the region, as well as numerous automotive and other manufacturers – all of which bodes well for the long term.

Mr Salamon says one of the company's main preoccupations now is safety, as it mines deep underground. With this in mind, the business has been investing heavily in new mining equipment – at one point it was one of the biggest buyers of mining equipment in the world – and in safety.

Beyond this are the challenges that come from being geared to the global commodity cycle. "Effectively, our product is priced in US dollars... [but] cost structures [are] in Czech crowns [a currency that has been rising]," Mr Salamon says.

As for growth, he has his eyes on Debiensko in Poland, the company's most advanced expansion project, which will be Europe's first new coking coal mine in decades.

Debiensko holds 190 million tonnes in coal reserves and was approved by the board in June. If Mr Salamon is right about China, the mine should be well placed to cash in on the demand as it reaches full production in the coming years.

A life in mining

* Born in Budapest in 1955, Miklos 'Mike' Salamon graduated with a degree in mining engineering from the University of Witwatersrand in Johannesburg in 1975.

* In 1997, he was a co-founding director of Billiton, and oversaw the company's listing on the LSE. In 2001, he oversaw the merger integration of BHP and Billiton, helping create what has become the world's biggest miner.

* Beyond business, Mr Salamon's interests include motorcycles – he has a big collection – and fine wines.