MARKETS SPECTATOR: Pengana loathes a bank bias

Pengana's global resources head, Ric Ronge, believes the market is simplistically choosing bank stocks over the undervalued major miners.

If mining stocks are going to rally it cannot come too soon for Pengana Capital fund manager Ric Ronge.

His hedge fund, Pengana’s global resources fund, is down 12 per cent in the year to March 31. Over five years the fund’s total return has been 2 per cent per annum.

Perhaps more in hope than conviction, Ronge says mining stocks are “overdue” for a rally.

"There is a black and white view of the market, banks versus resources,” he says.

“The market is looking at banks through rose colored glasses”.

Not surprisingly Ronge says miners have been “oversold”. But he does not think they will rally to all-time highs. The Pengana fund manager says cryptically that investors who buy mining stocks now will reap significant value.

Ronge’s been buying BHP Billiton and Rio Tinto, not the shares that trade in Australia, but the stock of both companies that trade on the London Stock Exchange. He says BHP Billiton and Rio Tinto trade at 16 and 20 per cent discounts respectively to their ASX-listed shares. Pengana values Rio Tinto at $80 a share and BHP Billliton at $50 to $60 a share on forecast earnings.

The fourth quarter last year, Ronge says, was the nadir for mining company earnings after $50 billion worth of “value destruction” in the resource sector that led to 12 of the top 20 mining company chief executives being replaced, including those at BHP Billiton and Rio Tinto, because of shareholder pressure.

“Management is now mandated to be shareholder friendly,” he says.

“Their job is to manage volumes, margins and costs.”

Iron ore, Ronge says, will end 2013 priced between $US130 to $US140 a tonne. There is a global glut in steel production, he says. But that has not stopped BHP Billiton’s and Rio Tinto’s plans to produce an additional 30 million tonnes of iron ore this year.

Yesterday on the ASX, BHP shares rose 63 cents, or 1.9 per cent, to $34.30. The stock is up 3.3 per cent over the last 12 months. Rio’s shares added $1.51, or 2.6 per cent, to $58.90. Its stock is down 1.2 per cent over the last year.