2 Stocks Delivering Value in Commodities

This article is part of our Rising Star Portfolios series.

So far in Rising Stars, my portfolio is down 3%; yet on a granular level, one stock I bought, Northgate Minerals (AMEX: NXG), has fallen 11%, while one stock I considered but haven't yet bought, L-3 Communications is up 8%. Did I pick the wrong stock? Aside from the fact that this is way too early to make a judgment, I don't think so -- L-3 is a fine company and still a wonderful purchase, but I expect much more appreciation from Northgate over time as gold appreciates. It is more likely to double, even at the risk of sporadic fluctuations such as the current correction in gold that has hit mining stocks.

With Northgate Minerals, I suspect most of its drop is due to gold's retreat. Remember, cash costs for Northgate will be high over the next two years until the new Young Davidson mine comes on stream in mid-2012. With higher costs, profit margins shrink faster when gold contracts and grow faster when it appreciates, so it is natural for the stock to have extra leverage to gold's spot price.

Good news
But recent news has been positive. Drilling at Young Davidson West has been promising, and the estimated volume of mineral in the hidden asset I mentioned in my report called Kemess Underground has grown by 12% in gold and 3.5% in copper. Finally, gold production should increase from 200,000 ounces in 2011 to 300,000 ounces in 2012 and 350,000 ounces in 2013, with steadily declining cash costs.

Northgate has excellent managers who know how to run mines and even more importantly, allocate capital. Combine this with an excellent outlook, exploration potential, and the hidden Kemess Underground asset, and I am excited. I'm not the only one. Foolish precious metals expert Christopher Barker made it his No. 2 gold and silver stock for 2011. I agree: This is a long-term winner and an even better bargain today, at an 11% discount to where I bought.

Better news from Sprott Resource
Only five days after I profiled Sprott Resource (PINK: SCPZF.PK), an owner of energy and farmland assets, the stock jumped 5% on the news that its main subsidiary, Orion Oil & Gas, announced a 34% increase in its proved reserves. This works out to a $106 million increase in present value, which is significant when you consider the market cap of Sprott Resource is only $575 million. By my estimation, less than a third of the new value is reflected in the stock -- meaning Sprott Resource might have just gotten cheaper.

Verdict
The value in Northgate Minerals has been enhanced, and yet the price is 10% lower than where I bought. Also, Sprott Resource looks cheaper than we knew just a few days ago. These two companies have good assets and excellent managers to develop them, making them good choices for a foray into commodities. 

This article is part of our Rising Star Portfolios series, where we give some of our most promising stock analysts cold, hard cash to manage on the Fool's behalf. We'd like you to track our performance and benefit from these real-money, real-time free stock picks. See all of our Rising Star analysts (and their portfolios).