Resources stocks with a strong investment case


Transcription of Finance News Network Interview with Pengana Global Resources Fund Portfolio Manager, Tim Schroeders

Lelde Smits: Hello I’m Lelde Smits for the Finance News Network and joining me from Pengana Global Resources Fund is its Portfolio Manager, Tim Schroeders. Tim welcome back.

Tim Schroeders: Thank you, pleasure to be here.

Lelde Smits: Last time we spoke in July you said you were looking for companies that think outside of the square. Could you give us an example of a stock that meets this criteria?

Tim Schroeders: Over the past 12 months we have found a couple and they’ve been good performers, thankfully. One of those is LNG Limited, Liquefied Natural Gas Limited (ASX:LNG) which is extensively developing a US, LNG plant. But has some interesting characteristics about outsourcing financing, marrying gas producers, pipeline, infrastructure and endues as in really sitting in the middle and co-ordinating it, which is a different model from the traditional LNG model. We’ve made good money out of that. We’re out of the stock at the moment, but it’s one that we continue to watch with interest.

Lelde Smits: What other stocks have you made money from?

Tim Schroeders: Another one that we have made good money out of is Poseidon Nickel Limited (ASX:POS), which is basically looking to toll treat the ore that it mines with BHP Billiton Limited (ASX:BHP), at their Nickel West joint venture. And that’s been somewhat successful, finally the agreement’s come through, the Company’s recently raised capital. The share price is well and truly up from where it started the year. We’re out of that stock too at the moment, given the uncertainty around nickel prices.

Lelde Smits: Now again since we last spoke, the price of iron ore has slumped. What exposure does the Fund have to iron ore plays?

Tim Schroeders: We tend to be a bit cautious, but what we’re seeing is an evolution of thinking with regards to iron ore. So the market’s now paying more attention to those companies that have a distinct advantage in quality of product; so higher grade, lesser impurities. But also those companies that can produce that iron ore at a low competitive price, even given the 40 per cent fall year to date in iron ore prices.

Lelde Smits: Could you give us some examples?

Tim Schroeders: Those companies Rio Tinto Limited (ASX:RIO), BHP, Vale. Some of the pure play domestic iron ore producers continue to be under pressure, because one, the lack of diversification and two, their positioning on the costs curve. So we are very much skewed towards the better, more competitive producers of iron ore and it’s still a great business to be in.

Lelde Smits: Looking at the Fund’s performance now Tim. Under these challenging conditions, how has the Fund performed?

Tim Schroeders: So for the 12 months to the end of October, our Fund is roughly up about 0.9 per cent. The index that we measure ourselves against has fallen 0.5 per cent and the all resources Accumulation Index domestically, is down about 6.8/6.9 per cent.

Lelde Smits: So which stocks have delivered a standout performance and which have you disposed over the year?

Tim Schroeders: Primarily due to commodity price falls, the large cap stocks have become more compelling value and there’s been more risk associated with some of the small caps. So we’ve halved, or over halved our exposure to the small cap sector from its peak. And really been putting some of that money back into the larger cap stocks, but also increasing our cash, given the prevailing uncertainty in volatility at the moment.

Lelde Smits: Finally Tim, investing in resources is generally considered risky. So how does the Fund manage risk?

Tim Schroeders: We’re lucky and have more tools available at our disposal, relative to a long only manager. Our philosophy is different, we’re not afraid to take money off the table and hold large positions in cash, or in fact short positions. So that gives us a distinct advantage and we’re really not looking to – we’re more focused on absolute returns, rather than being invested for being invested’s sake. So we’ll always have a positive exposure to the sector, but we have a great degree of flexibility and we’re not frightened to take profits, or in fact cut losses at appropriate junctures. And that discipline has worked well since the Fund’s been incepted and is a distinct advantage, versus some of the competitors we have.

Lelde Smits: Tim Schroeders, thank you for the update from Pengana Global Resources Fund.

Tim Schroeders: My pleasure Lelde.