Pat McKeough responds to many personal questions on stocks and other investment topics from the members of his Inner Circle. Every week, his comments and recommendations on a selection of the most intriguing questions of the past week go out to all Inner Circle members. And every Friday, we offer you one of the highlights from these Q&A sessions.

This week, an Inner Circle member asked Pat about one of Canada’s major mining stocks. Labrador Iron Ore Royalty has quietly built a position as a world leader in iron ore. Now it faces several challenges in today’s volatile commodity markets.

Q: Hello Pat: What is your opinion of Labrador Iron Ore Royalty Corp.? Would it be a buy now or in the future? Thanks.

A: Labrador Iron Ore Royalty Corp., (symbol LIF.UN on Toronto; www.labradorironore.com) holds a 7% gross overriding royalty (or 7% of the selling price for all iron ore produced, sold and shipped), and a 15.1% equity interest in Iron Ore Company of Canada (IOC). On top of that, Labrador Iron Ore gets a $0.10-per-tonne commission on all iron ore that IOC makes, sells and ships to steelmakers around the globe.

IOC, which has produced iron-ore concentrate and pellets since 1954, is Canada’s largest iron-ore producer, and is among the world’s top-five makers of iron-ore pellets. Rio Tinto (symbol RTP on New York) is IOC’s operator and majority shareholder, with 58.7% of its shares. Mitsubishi Corp. of Japan holds the remaining 26.2%.

IOC operates a mine, a concentrator (a machine that separates ore from waste rock) and a pellet plant at Labrador City, Newfoundland. The company also has year-round port facilities at Sept-Iles, Quebec. IOC has proven ore reserves for at least 30 years of production at current levels, along with the potential to add to its reserves through exploration and development drilling.

Mining stocks: Exporting to all the world’s major markets

IOC transports the iron-ore concentrate and pellets to its port facilities at Sept-Iles, using its wholly owned Quebec North Shore and Labrador Railway, a 418-kilometre rail line that links the company’s mine to the port. From there, the products are shipped to markets throughout North America, Europe and Asia.

This mining stock’s unitholders receive quarterly distributions of $0.25 a unit, which yield 3.1% on an annualized basis. Each payment consists of a $0.133 common share dividend and a $0.117 interest payment.

If you hold these units outside an RRSP, the dividend portion qualifies for the dividend tax credit, and the interest portion is taxed at the same rate as ordinary income.

You can see Pat’s recommendation on Labrador Iron Ore Royalty Corp. in this week’s Inner Circle Q&A. In his buy-hold-sell analysis, he looks at the long-term outlook for iron ore prices amid slower economic growth as well as the effect of the stronger Canadian dollar on the company’s prospects.

Inner Circle members see Pat’s analysis and recommendations on the stocks other members have asked about in each week’s Inner Circle Q&A. You can view it immediately when you become a member of this special investment group. You will get Pat McKeough’s answers to your personal investment questions, full access to our members-only Inner Circle website, and many other membership privileges. Click here to get started right away.

(Note: If you are a current member of the Inner Circle, please click here to view Pat’s recommendation. Be sure to log in first.)

CanAlaska will receive roughly $2.2 million from the unit sale. That’s equal to 22% of this uranium stock’s $10.1 million market cap. It will use the cash to further explore and develop its 21 uranium projects in Saskatchewan’s Athabasca Basin region, sometimes referred to as the “Saudi Arabia of uranium.”

Uranium stocks: CanAlaska has one of the largest positions in the Basin

Since September 2004, the company has acquired one of the largest land positions in this area, totalling over 2.5 million acres. To date, it has spent over $75 million exploring its properties and delineating multiple uranium targets.

It’s a long way between the exploration phase, which is now underway, and the commercial production phase, when the company starts making money. But we think CanAlaska has a better-than-average chance of success.

We updated our advice on CanAlaska Uranium in our September 23, 2011, Stock Pickers Digest hotline, which you can immediately view when you take a 1-month free trial to Stock Pickers Digest. Click here to learn how you can start profiting from Stock Pickers Digest right away.

(Note: If you are a current Stock Pickers Digest subscriber, please click here to view Pat’s recommendation. Be sure to log in first.)

We receive a number of questions on mining stocks from members of our Inner Circle service. This week I received this question from a member who wonders whether the market is giving this stock enough respect.

Q: Could I please have your opinion on Thompson Creek Metals? There is a lot of local enthusiasm in B.C., but the market does not seem to share the same optimism. Thanks.

A: Thompson Creek Metals Co. Inc., $7.78, symbol TCM on Toronto, www.thompsoncreekmetals.com), is a Canadian molybdenum producer with mining, milling, roasting and marketing operations in Canada and the U.S.

This mining stock’s operations include the Thompson Creek mine in Idaho, a roasting facility in Langeloth, Pennsylvania, and 75% of the Endako mine and roaster in B.C.

Molybdenum is either mined directly or recovered as a by-product of copper mining. The metal helps strengthen alloys and high-temperature steels, and prevents them from rusting.

Although my team carefully researches all the stocks that members ask about, I personally review each and every recommendation. To ensure this close personal attention, only a limited number of members can be admitted to our Inner Circle. Under the pressure of world events, even more investors are asking for my personal investment advice. We are nearing our membership limit already. Click here to secure your membership in the Inner Circle right away.

Mining stocks: Molybdenum prices rise and fall with the economy

In the three months ended June 30, 2011, Thompson Creek’s revenue jumped 28.6%, to $190.9 million from $148.4 million a year earlier (all figures in U.S. dollars). That’s mainly because the company produced 30.4% more molybdenum in the latest quarter compared to a year earlier. As well, Molybdenum prices rose 2.6%, to $17.28 a pound from $16.84. Molybdenum has since dropped to around $14.70 a pound on uncertainty about the direction of the global economy.

Excluding one-time items, the company’s earnings jumped 54.3%. However, earnings per share fell 8.1% on 19.7% more shares outstanding. Cash flow rose 4.3% in the latest quarter.

As of June 30, 2011, the company held cash of $560.4 million, or $3.25 a share. Its long-term debt of $363.7 million is a reasonable 30.3% of its market cap.

Mining stocks: Thompson completes friendly takeover

On October 20, 2010, Thompson Creek completed its friendly takeover of Terrane Metals Corp. Terrane owns the Mount Milligan copper/gold project in central B.C. This project’s reserves should support a mine that will produce 81 million pounds of copper and 200,000 ounces of gold a year over its 22-year life. The mine could start up in 2013. This purchase allows Thompson Creek to expand into other areas beyond molybdenum.

Thompson Creek paid $700 million for Terrane, including $420 million in cash and 24.3 million common shares. Goldcorp (symbol G on Toronto) owned 52.4% of Terrane. As a result of the takeover, Goldcorp now owns roughly 8% of Thompson Creek.

While it was pursuing Terrane, Thompson Creek reached a gold-selling deal with Royal Gold (symbol RGL on Toronto). Under the terms of this arrangement, Royal Gold will receive 25% of the gold that Terrane’s Mount Milligan mine produces over its working life. In return, Royal Gold paid Thompson Creek $226.5 million when the takeover closed, and will pay $85 million more during the mine’s construction, for a total of $311.5 million.

A renewed global economic recovery would push up molybdenum prices. The metal offers opportunities for gains, but only for highly aggressive investors who are willing to accept substantial risk. The Terrane purchase gives Thompson Creek additional growth prospects. As well, the company is expanding the mill at Endako, with start-up projected for early next year.

The stock trades at 6.9 times this year’s forecast cash flow of $1.12 a share, based on today’s lower molybdenum price.

Thompson Creek Metals is okay for aggressive investors to hold.

The company’s cash flow per share rose 30.4% in the three months ended June 30, 2011, to $0.30 from $0.23. Higher gold and copper prices were the main reason for the gains.

Imperial aims to use the cash flow from its existing mines to build a $228-million open-pit mine on its Red Chris copper/gold property in northwestern B.C. The company bought Red Chris in 2007.

Imperial Metals is a hold.

Hathor’s main exploration properties are on the east side of the Athabasca Basin. Right now, it is focusing its exploration on the Roughrider zone at its Midwest Northeast property, where it has found significant uranium mineralization over the last couple of years. Roughrider could hold as much as 57.9 million pounds of uranium. It is also near Cameco’s Rabbit Lake mill.

Cameco holds cash of $1.2 billion, or $3.30 a share, so it can easily afford to buy other mining firms that enhance its long-term growth prospects.

Hathor is trading at $4 a share, or 6.7% above Cameco’s offer. That means Cameco may have to raise its offer to gain the support of Hathor’s shareholders or fend off a rival bid.

Cameco is still a buy.

Hathor’s main exploration properties are on the east side of the Athabasca Basin. This region in northern Saskatchewan and Alberta contains all of Canada’s producing uranium mines, and accounts for 23% of the global production of uranium.

Right now, Hathor is exploring for uranium at its Midwest Northeast project, which is close to producing properties that are currently owned by Cameco and AREVA of France.

The Midwest Northeast property is Hathor’s most advanced project. This mining stock’s exploration is focused on the Roughrider zone, where it has found significant uranium mineralization over the last couple of years. Roughrider could hold as much as 57.9 million pounds of uranium. It is also near Cameco’s Rabbit Lake mill.

Cameco holds cash of $1.2 billion, or $3.30 a share, so it can easily afford to make acquisitions like Hathor to enhance its long-term growth prospects. Hathor is trading at $4.13 a share, or 10.1% above the senior mining stock’s offer. That means Cameco may have to raise its offer to gain the support of Hathor’s shareholders or fend off a rival bid.

We updated our advice on Cameco Corp. and other Canadian mining stocks in our September 2, 2011, Stock Pickers Digest hotline, which you can immediately view when you take a 1-month free trial to Stock Pickers Digest. Click here to learn how you can start profiting from Stock Pickers Digest right away.

(Note: If you are a current Stock Pickers Digest subscriber, please click here to view Pat’s recommendation. Be sure to log in first.)

Among Canadian mining stocks, Sherritt International (Toronto symbol S) is prominently identified with political risk due to its extensive involvement in Cuba. The company’s Cuban operations are profitable, but it is expanding into other countries to lessen that risk.

Sherritt is a diversified natural resource company that produces nickel, cobalt, thermal coal, oil and gas. It also manages 376 megawatts of power-generation capacity in Cuba.

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Sherritt is best known as a major nickel producer with operations in Cuba and Canada. It is also Canada’s largest thermal coal producer. As well, the company produces oil and gas in Cuba, Spain and Pakistan.

Canadian mining stocks: Sherritt joins Rio Tinto in Indonesia

Sherritt gets the majority of its revenue and earnings from Cuba, and is the country’s largest foreign investor. Cuba’s uncertain political and economic situation adds to Sherritt’s risk. The impending end of Fidel Castro’s regime contributes to the air of uncertainty.

However, Sherritt is diversifying away from Cuba by investing in other countries. For example, in late 2011 it bought 46% of mining giant Rio Tinto’s huge Sulawesi nickel project in Indonesia.

It is also close to finishing a mine at its 40%-owned Ambatovy project on the island nation of Madagascar, off Africa’s east coast.

Canadian mining stocks: Sherritt keeps its production costs low

In the three months ended June 30, 2011, Sherritt’s revenue rose 23.2%, to $500.6 million from $406.3 million. Excluding one-time items, earnings per share rose 5.3%, to $0.20 from $0.19. Higher nickel sales, as well as higher prices for coal and oil, were the main reasons for the improved results.

Sherritt’s long-term debt of $1.5 billion is equal to 100% of its market cap. However, the company holds cash of $609.1 million, or $2.05 a share.

Sherritt’s production costs are low. That enhances its prospects. However, the company needs a strengthened global economic recovery to fuel commodity demand. As well, it needs to successfully develop its new mines.

Our analysis of Sherritt International in the latest edition of Stock Pickers Digest concludes with our clear buy-sell-hold advice on the stock.

If you’re looking for stocks with the potential for gains of 50% or more in 6 months or less, you should subscribe to Stock Pickers Digest.

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BHP is one of the blue chip mining stocks we analyze in our Wall Street Stock Forecaster newsletter.

In the fiscal year ended June 30, 2011, BHP earned $21.7 billion, or $7.87 per ADR (each American Depositary Receipt represents two BHP common shares). That’s up 73.9% from $12.5 billion, or $4.48 per ADR, in fiscal 2010. Even so, the latest earnings missed the consensus forecast of $7.16 per ADR. Revenue rose 35.9%, to $71.7 billion from $52.8 billion.

Strong economic growth in China, Brazil and other developing counties continues to push up prices for many of the blue chip mining stock’s commodities, such as iron ore, coal, copper, aluminum and diamonds.

In addition, BHP is expanding its oil and gas operations. It recently paid $4.75 billion to Chesapeake Energy Corp. (New York symbol CHK) for shale-gas properties in Arkansas. (Shale gas is natural gas that is trapped in rock formations. To extract it, companies must pump water and chemicals into the rock. This fractures the rock and releases the natural gas.)

In July 2011, BHP agreed to pay $12.1 billion for Petrohawk Energy Corp. (New York symbol HK). Petrohawk produces oil and natural gas from properties in Texas and Louisiana. This purchase should close by September 30, 2011.

These projects have big potential. However, the blue chip mining stock’s costs for labour and mining equipment are rising. That could hurt the profitability of these and other new projects. Moreover, the Australian government is considering new taxes on mining companies. That adds risk.

We updated our advice on BHP in our August 26, 2011, Wall Street Stock Forecaster hotline, which you can immediately view when you take a 1-month free trial to Wall Street Stock Forecaster. Click here to get started right away.

(Note: If you are a current Wall Street Stock Forecaster subscriber, please click here to view Pat’s recommendation. Be sure to log in first.)

Sherritt is a major nickel producer, with operations in Cuba and Canada. It is also close to finishing a mine at its 40%-owned Ambatovy project on the island nation of Madagascar, off Africa’s east coast. As well, Sherritt produces oil and gas in Cuba, Spain and Pakistan. It is also Canada’s largest thermal coal producer.

In the three months ended June 30, 2011, Sherritt’s revenue rose 23.2%, to $500.6 million from $406.3 million. Excluding one-time items, earnings per share rose 5.3%, to $0.20 from $0.19. Higher nickel sales, as well as higher prices for coal and oil, were the main reasons for the improved results. Cash flow per share rose 13.6%, to $0.50 from $0.44.

Sherritt’s long-term debt of $1.5 billion is equal to 94% of its market cap. However, the company holds cash of $609.1 million, or $2.05 a share.

Sherritt gets the majority of its revenue and earnings from Cuba, and is the country’s largest foreign investor. Cuba’s uncertain political and economic situation adds to Sherritt’s risk. However, Sherritt is diversifying away from Cuba by investing in other countries. For example, in late 2011 it bought 46% of mining giant Rio Tinto’s huge Sulawesi nickel project in Indonesia.

The company needs a strengthened global economic recovery to fuel commodity demand. But its production costs are low. That enhances its prospects

Sherritt International is a buy.

AMERIGO RESOURCES $0.88 (Toronto symbol ARG; TSINetwork Rating: Speculative) (604-681-2802; www.amerigoresources.com; Shares outstanding: 174.0 million; Market cap: $174.0 million; No dividends paid) processes copper and molybdenum from the waste rock from Chile’s El Teniente, the world’s largest copper mine. The contract runs at least through 2021. Amerigo has a further agreement to process a supplementary source of material from the nearby Colihues tailings pond.

The company gets 94% of revenue by processing copper. The remaining 6% comes from molybdenum.

In the three months ended June 30, 2011, Amerigo’s copper production fell 17.9%, to 9.45 million pounds from 11.51 million pounds a year earlier. However, the decline was entirely caused by a strike by 11,000 workers who are employed by subcontractors. Even with the strike, the company was able to increase its molybdenum output by 22.6%, to 190,917 pounds from 155,755 pounds.

The strike is now over, and the company has resumed full production.

Amerigo’s total debt of $10.7 million is a low 7.2% of its market cap. It holds cash of $37.2 million, or $0.20 a share.

Amerigo is a buy for aggressive investors.

In the three months ended June 30, 2011, Endeavour’s revenue rose 84.7%, to $36.4 million from $19.7 million a year earlier (all amounts except share prices in U.S. dollars). It earned $0.20 a share in the latest quarter, compared to a loss of $0.05 a share. Higher production and sharply higher gold and silver prices were the main reasons for the gains.

Endeavour is nearly finished expanding the Guanajuato mine. That will let it produce 3.7 million ounces of silver in 2011, up 12.1% from 3.3 million ounces in 2010. The company has lots of room to increase the reserves of its two mines. It also has three other properties with exploration potential.

Endeavour Silver is a buy for aggressive
investors.