5 Resource Companies Ready To Rally Significantly: Part 2

by: Matthew Smith

Our article on September 22, 2011 which highlighed five stocks that we believed could rally significantly if Europe got its act together and the US did not provide anymore rude surprises, has thus far underperformed the market as a whole. Ironically, as of today there has not been a whole lot of movement in the stocks mentioned.

We used BigCharts to go back and get the closing price for Molycorp (MCP) and EV Energy Partners, LP (NASDAQ:EVEP-OLD) for that day, as they were not mentioned in the article (as Thompson Creek (TC), Potash (POT), and Cameco (NYSE:CCJ) were). Although not a whole lot has changed in prices for the majority of our recommendations, we do feel the need to update you on the happenings for the companies and their actual businesses.

Molycorp is one of the few material gainers since our article, rising $3.03 from $35.96 to $38.99 as of the close yesterday. The rise of 8.43% can be attributed to a rebound in shares after the stock was slaughtered as J.P. Morgan (NYSE:JPM) downgraded shares and investors fled in droves.

The company has subsequently announced a heavy rare earth discovery (which we have written in other articles we are not impressed with) and announced that it will be speeding up completion of its rare earth processing facility, as well as purchasing the remaining shares of its Estonia plant.

MCP will report quarterly earnings on November 10, and investors should remember that last quarter it surprised investors due to higher rare earth prices, as well as record production (since production was restarted). A repeat this quarter of that same magnitude will be difficult, however one would expect management to have some positive comments during the conference call. If China is serious about keeping prices for rare earths of all kinds, both heavy and light rare earths high, then MCP will be a benefactor.

EV Energy Partners, LP was a big winner initially, however as the market has rebounded, investors have wanted to assume more risk, thus the fleeing of the 4%+ yield. The shares since our article are up $0.09 at this point, which is probably a result of the recent news out that analysts do not think that Chesapeake Energy (NYSE:CHK) (a JV partner of EVEP) will be able to realize anywhere near the $12,000/acre for the 1/3 share of its Utica acreage it is shopping around for.

This news knocked many of the players in the area down, however CHK and EVEP are the big players in this space and however we look at it, EVEP is undervalued. Our calculations, using prices paid by competitors for Utica Shale property, indicate that EVEP is a $100/share stock at a minimum. With the 4% yield the company is willing to pay us, it is hard not seeing ourselves hanging around as the company develops its acreage over the next few years. Also, CHK should have an announcement out any day regarding the sale of the 1/3 stake in its acreage which should give us some insight to the overall value of EVEP's acreage (there is also a chance that EVEP could realize some cash in the deal as they could monetize some assets due to the JV).

Thompson Creek has inched up from $6.94 to a current $7.10. The stock can be a real rocket when resource prices are moving and investors are in full "risk-on" mode. The company has a current production of molybdenum with a future near-term production of gold and copper as well. The miner makes money, and is plowing its free cash flow back into the business to create further shareholder value. TC could easily be a buyout candidate, but we still believe that as the economy recovers, demand will go up for the company's main product and as prices for the underlying commodity increase, all flows down to the bottom line.

Potash Corporation of Saskatchewan was one we took a lot of heckling for as the market collapsed on European fears right as we put the article out. It is also a stock we believe in for multiple reasons. Although BHP Billiton Limited (NYSE:BHP) was denied in its hostile bid for the company not too long ago, we now know an effective floor for the company and where potential buyers would be interested in taking another look. POT is the premier potash company around the world, and with evermore mouths to feed, much more potash is going to be needed in order to keep living standards where they are now, let alone raising them for the entire world.

The company faces a few headwinds in the years ahead, but with its market pricing power and production base, we think that the company is uniquely positioned to capitalize where other competitors may have problems dealing with the new competition. BHP Billiton is going to be another low cost provider, but POT should face little trouble from some of the other junior miners which plan to have production coming online, as our recent research into its deposits and projects indicates they will be of much higher cost than the core of POT's production.

We have mixed emotions about Cameco's recent performance feeling that its stock price would fare much better if it walked away from the Hathor Exploration (OTC:HTHXF) hostile bid and simply let Rio Tinto plc (NYSE:RIO) take it over. The total price is now far higher than we ever imagined anyone would pay for the junior explorer, but such is the industry. Cameco itself now looks as if it is a deal, with a market capitalization of $8.25 billion with real production spread across multiple production bases. A takeover is highly unlikely due to the ties to the Canadian government, but with uranium prices headed higher out of necessity the shares should rally nevertheless.

The fact that both Rio Tinto and Cameco were both on the prowl for an acquisition of a long-term development project bodes well for the industry, as both companies have expertise within it. RIO needs to add production as its Rossing Mine is aging and very near the end of its production lifespan and Cameco needs to replace the material they will lose once the 'Megatons to Megawatts' Program with Russia ends in the next couple of years.

We think the juniors provide the most upside, however CCJ is the logical choice due to its current production, low cost of production, expertise in the field and market leader status. The shares are only up 4.81% since our first article, however we still believe that the shares could rally over 20% in the coming months.

These shares have been flat for the most part over the past month, however we believe that the over the past month the outlook for two of the companies, Molycorp and Cameco, has materially improved and we await the news from Chesapeake in Ohio’s Utica Shale which should highlight the true value of EV Energy Partners’ acreage in the play.

As investors rush back into resource plays in general, we expect Potash and Thompson Creek to rebound as well. The past month has been a bit disappointing as we missed the exact bottom, however we still view the future as bright for these equities.

Disclosure: I am long EVEP-OLD.