5 Resource Companies Ready To Rally Significantly

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Includes: CCJ, EVEP, MCPIQ, POT, TCPTF
by: Matthew Smith

Small to mid cap resource stocks have been assaulted recently due to investors fleeing the sector as the risk on trade dissipates in reaction to Europe and general world economic malaise. We believe now is the time to look at a few of our favorites. It is our opinion that these plays could outpace the general market as they increase production, which could really boost earnings, so long as their underlying commodity prices do not falter.

Companies we are either buyers of, or currently watching:

Molycorp (MCP) has fallen to prices last seen months ago when there was still risk in whether they would get their operations that were in production to be profitable. Well last quarter the company blew by estimates and surprised everyone which got investors excited. The stock was down over 20% during Tuesday trading due to a research report from JPMorgan pointing to falling REE prices, resulting in a cut in their target price to the $60 range from $105 and a downgrade from Outperform to Neutral.

In our view, REE prices are still amazingly high, even after the fall in prices due to speculators leaving the market. What investors need to remember is that when Molycorp was doing their road shows they preached how they had technology (such as XSORBX and even this new investment in the wind manufacturer) which would allow them to succeed even with lower REE prices. Currently the company is not pursuing the in-house XSORBX, as it is more profitable to simply mine and sell the raw material than manufacture the proprietary substance. At this point we think that MCP shares offer a nice entry point for speculative capital.

EV Energy Partners, LP (NASDAQ:EVEP) is, of course, a partnership, and thus taxed differently. If you own it in a taxable account, it could cause serious headaches for you come tax season trying to compute and add schedules. With that said, EVEP offers probably the 2nd best play in the Utica Oil Shale, and arguably the best leverage. Their acreage has the potential to more than double the market cap of the company, should Chesapeake’s estimates be anywhere close to accurate, over the medium term; in the short term, one gets to sit back and collect a 4% yield.

Investors should begin to see data coming out of Ohio regarding hard evidence that the Utica is for real, and in the next 30-45 days Chesapeake should have a JV worked out which we believe will lend credence to our thesis that EVEP is undervalued. If you have the time and want to follow the play, you can find a must read article here.

Thompson Creek (TC) has been hit hard, much like MCP. Thompson Creek is in a niche industry, and has exposure to gold via its semi-recent acquisition. Shares, currently priced at $6.94, are off of their 52-week high of $16.06, and most importantly, unlike many of the other molybdenum companies out there, TC actually produces the stuff. The company had revenues of over $700 million and showed a profit of $1.41/share, according to Yahoo Finance.

It is our belief that, long-term, TC is a buy, much like after the last financial crisis we saw shares fall to levels at half of current, the company ultimately rose 50% above previous highs. In its industry, TC is the cream of the crop. If you own Exxon because it is the best oil company, or Cameco due to its market leadership, then for the same reasons, one would own Thompson Creek.

Potash Corporation of Saskatchewan (NYSE:POT) prices have rebounded from their lows set at the depths of the financial crisis. There are two things we know about this commodity based on recent history, and those are that, yes, speculative juices flow in the pricing of it, and that places such as the BRIC countries see a fall in demand, and thus pricing, in lean times.

POT and its allies, which collectively comprise one of the two parties in the world’s duopoly, will enjoy further pricing power for the next few years, at which point BHP Billiton (NYSE:BHP) and others should have mines coming online. POT could once again turn up and give investors gains in the 20-35% range once the issue(s) in Europe are resolved.

Due to POT’s market cap, and need for the world’s population to be moving up the food chain (think meat consumption and storing more food in their homes, thus driving up the demand for potash), the company needs the economy to be in a better state than it is currently for the share price to start humming again. Nevertheless, at $50.14 we find the shares attractively priced, based on recent valuations, and believe that the company can provide investors with 20% upside.

Cameco Corp. (NYSE:CCJ) is one of those companies that moves at its own pace. Currently CCJ is engaged in a takeover battle for Hathor, a small Canadian uranium explorer which owns the Roughrider deposit, among other exploration properties. The property is located in the prolific Athabasca basin in Saskatchewan. Although we believe that the junior uranium explorers offer the most upside in a market upswing, CCJ offers investors the most protection should we have a protracted downturn.

The shares closed at a 52-week low today; hardly comforting, but we zig when the market zags and vice-versa.At $19.93, the shares trade at less than half of the 52-week high of $44.81, and we believe that long-term investors initiating positions could see future gains on any number of events, including but not limited to Japan sticking with nuclear power, the company resolving their flooding issues, the U3O8 price rebounding or mining issues at any of their competitors’ new mines coming online over the next 12-36 months.

If Europe gets its act together and can figure out a way to calm markets over what appear to be likely defaults by members, we could see large rallies in the major indices and even larger run-ups in the shares of the aforementioned companies.

Disclosure: I am long EVEP.

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