As Australian miners take a hit on the markets from the unveiling of the country’s carbon tax plan, one analyst says now is the time to buy shares of mining heavyweights Rio Tinto and BHP Billiton.
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Simon Ho, Executive Director and CIO of Triple 3 Partners tells CNBC that either of the two stocks should sell off “meaningfully” as a result of the current negative sentiment.
“For those people who are looking to add, I would suggest that a dip in the market represents a decent opportunity, particularly for something like a bellwether stock like BHP and Rio,” Ho said.
Ho believes the carbon tax impact on BHP and Rio will be fairly limited as they mainly sell iron ore and raw materials.
He is also is fairly positive on the China’s economy and doesn’t foresee a hard landing that would affect Australia’s big miners in the long run.
“All of the fundamental indicators we see actively remain strong, so therefore we think that those stocks will benefit particularly from that kind of situation.”
Shares of BHP, Australia’s largest coal producer, and Rio, the country’s third largest coal miner, were down over 1 percent on Monday morning, as investors digested news that the top mining companies would have to pay A$23 ($24.70) per ton of carbon gas emissions. The bold new tax would come into affect in July 2012, raising the cost of making coal to over A$1.80 per ton, according to Australian Coal Association.
For investors planning to scoop up more of these two stocks, Ho recommends they take on a “replacement strategy.”
“If you own the underlying stock and you still like it, perhaps a better way to do that is by using options,” he said. “You can sell out your stock and replace it with an equivalent position, but expose the right options so that you know that your loss is limited.”
Ho also advises selling one to two month call options if the price moves down.
Editor's note: Simon Ho does have holdings in the companies mentioned above.