Share prices and valuations are depressed throughout the Basic Materials section of the Australian Edge coverage universe.

Sentiment is firmly against mining and resource stocks, with a lot of nervousness among investors who do hold shares in such companies, as pretty much the entire sector appears to be going over a cliff.

That doesn’t necessarily mean it’s full of deep-value plays.

Fundamentals for gold producers, for example, remain extremely challenging, with generally high cost structures, stretched balance sheets and still-sliding spot bullion prices making for substantial headwinds.

The major factors that supported gold’s rapid ascent from early 2000 through late 2011–the potential for a full-blown US dollar collapse, another major financial crisis, hyperinflation–are no longer in play, and the Midas metal’s status as a “store of value” is in question.

Gold also has very limited and low-volume industrial utility. No longer minted for use as a currency, it’s primarily used to create jewelry.

Iron ore producers–except for large-scale, low-cost operators such as Rio Tinto Ltd (ASX: RIO, NYSE: RIO) and BHP Billiton Ltd (ASX: BHP, NYSE: BHP)–are getting squeezed as prices slide toward USD70 per metric ton amid rising global supply.

Rio and BHP continue to ramp up output of the key steel ingredient in a bald attempt to grab market share at the expense of smaller, higher-cost producers.

The long-term picture, based on the urbanization of emerging Asian economies, remains bright, though it appears the two Australia-based giants, along with Brazil-based Vale SA (Brazil: VALE5, NYSE: VALE), want the dance floor to themselves.

The future of coal is more fraught, with the US and China this week agreeing to a long-term plan to curb emissions of carbon dioxide (CO₂) and other gases linked to climate change.

It’s unclear whether the ambitious goals announced this week will have a real-world impact.

But the Stowe Global Coal Index declined by 2.5 percent this week. The index, which includes “significant” participants in the global coal industry, is up 3.5 percent from its Oct. 13, 2014, five-year low.

Shorter-term concerns about growth in key global markets and longer-term issues such as large-scale demand in the US and China continue to weigh on producers.

There are two metals where decent fundamentals and attractive valuations coalesce: nickel and copper. And there’s a unique materials story playing out in Australia focused on sandalwood and sandalwood oils.

We also spotlight a mining services name that at these levels, based on its operating and financial track record, looks like a compelling high-risk, high-reward story for aggressive investors.

Nickel

Nickel prices are likely to climb as investors put aside worries about growing stockpiles of the metal and refocus on a limited supply outlook.

Prices recently fell to eight-month lows, as the amount of nickel stored in London Metal Exchange (LME) warehouses reached an all-time high. The massive stockpiles signaled weak demand for nickel, a key component of stainless steel.

But the stockpile may be simply the byproduct of a financing probe in China. Authorities are investigating whether metal stored in the port cities of Qingdao and Penglai was pledged as collateral for multiple loans.

Some banks are insisting that borrowers provide LME warrants as collateral for loans, forcing those seeking loans to move their metal into LME warehouses. The tighter credit conditions have led others to sell the metal to repay debts.

And an ore-export ban in Indonesia could soon impact global supplies. Indonesia banned all shipments of nickel ore in January 2014, in an effort to force mining companies to process the ores before shipping and create jobs in the Southeast Asian nation.

According to the US Geological Survey, Indonesia produced about 18 percent of the world’s nickel in 2013.

 The ban boosted nickel prices early in the year, but the Philippines increased shipments, filling the supply hole for Chinese nickel pig-iron producers and supporting Chinese stockpiles.

Chinese nickel pig-iron producers are also managing the situation by blending the ore used in production, mixing high-grade ore stock with lower-grade Philippine ore.

China is the world’s largest nickel consumer, using the ore to produce nickel pig iron, a low-grade, cheaper alternative for making stainless steel.

But Philippine shipments usually decline from October to February, when the rainy season disrupts nickel mining. In the past, Indonesian exports have picked up the slack. That won’t happen this year, and as Chinese ore stocks shrink, nickel prices are likely to rise.

Nickel prices will likely see a nice uptick over the next three to 12 months on the back of rising costs of production–reflecting the maintenance of the Indonesia ore ban–and lower Philippine ore exports to China.

Nickel traded on the LME ended at USD15,342 per metric ton on Nov. 14.

The longer-term picture is favorable as well. Delays in starting new mines and disruptions at existing ones are crimping production.

According to the International Nickel Study Group, output will barely top demand this year and could fall short next year for the first time since 2011.

While output is limited, demand for nickel is growing. Steel industry information provider MEPS International forecast that global stainless steel production in 2014 is likely to reach 41 million metric tons, up 7.8 percent from a year ago.

Supply continues to fall short of expectations due to the export ban in Indonesia and technical problems in mines elsewhere. A tightened market situation should lend support to nickel prices and boost share prices of nickel producers.

Our top picks for nickel exposure include Independence Group NL (ASX: IGO, OTC: IPGDF), Mincor Resources Ltd (ASX: MCR, OTC: MCRZF), Panoramic Resources Ltd (ASX: PAN, OTC: PANRF) and Western Areas NL (ASX: WSA, OTC: WNARF).

All four continue to boost nickel production at lower and lower cash costs.

Independence Group reported fiscal 2015 first-quarter attributable production from its Tropicana gold joint venture was down 10 percent sequentially to 35,878 ounces.

And Long nickel and copper production was down slightly, while Jaguar zinc, copper, silver and gold output was up slightly. The main takeaway from the operational update is that cash costs continue to trend lower.

Independence Group, priced at just 9.06 times forecast fiscal 2015 earnings, is a buy under USD4.

Mincor Resources produced 2,515 metric tons of nickel-in-ore at a cash cost of AUD4.93 per pound of payable nickel during the first quarter of fiscal 2015, as output rose 5 percent while cash costs declined 4 percent on a sequential basis.

A pure nickel play that’s priced at book value, Mincor Resources is a buy under USD0.70.

Panoramic Resources met expectations with fiscal 2015 first-quarter nickel production of 5,178 metric tons. Management maintained its full-year output guidance.

Importantly, cost trends continue to move in the right direction, lower. And Panoramic is resting on a net cash position of AUD70 million, as strong free cash flow continues to support the balance sheet.

Panoramic Resources, priced at just 5 times forecast fiscal 2015 earnings and 0.61 times the value of its assets, is a buy under USD0.75.

Western Areas reported production of 133,543 metric tons of nickel ore at an average grade of 5 percent for 6,660 nickel metric tons for the first quarter of fiscal 2015.

A further decline in cash costs drove strong free cash flow for the quarter. Western Areas, trading at a forward price-to-earnings ratio of 10.47, is a buy under USD4.50.

Copper

Copper, the commodity that’s said to hold a PhD in economics, suggests the health of the world economy may not be so bad after all.

Sliding oil prices have captured the attention of doomsayers worried that Brent crude’s 29 percent decline from its June peak to a four-year low is a sign of deteriorating international demand.

Meanwhile, the red metal’s recent selloff is half the 18 percent peak-to-trough decline during slowdowns since 2010.

Indeed, the 7 percent drop in the price of copper on the LME suggests the global economy may hold up and soon accelerate.

The metal has long been seen by analysts as a proxy for economic health because its function as an input in everything from pipes to wiring makes positions it well to signal shifts in global production.

Its weakness earlier this year came before the subsequent global deceleration. The more recent drop indicates, according to Barclays Plc (London: BARC, NYSE: BCS), that the world economy should be able to grow 3.1 percent in 2014 and 3.5 percent in 2015.

That’s stronger than the median forecasts of 2.4 percent for 2014 and 2.9 percent for 2015 based on a survey by Bloomberg News.

From 2007 to 2008 and in early 2011, the ratio of copper’s price to crude’s fell, presaging a drop in equities. When it bounced in early 2009 so did stocks.

For the short term, the increase in the ratio of copper to Brent oil has historically correlated with a pickup in growth.

The longer-term supply-demand scenario is not as favorable for copper as it is for nickel.

According to the International Copper Study Group’s October Bulletin, 2014 will conclude with refined copper demand exceeding production, while 2015 will find a supply surplus as demand lags production growth.

Copper usage is up 12 percent thus far in 2014, while mine production has increased 3 percent. The shortfall in supply relative to demand is due in part to declines in production in Indonesia, Zambia and Australia due to export bans, operational failures and temporary mine closures.

Threats to supply could persist into 2015, as the cost of powering mines by coal increases, political risks to security and transportation grow and foreign exchange risks remain if strong exports drive up domestic costs.

Despite downside risks, annual copper mine production capacity is still expected to expand at an average rate of 7 percent per year through 2017.

From a demand perspective, growth in China–which accounts for 40 percent of global demand–is expected to slow to 5 percent next year on a cooling real estate market.

OZ Minerals Ltd (ASX: OZL, OTC: OZMLF) and PanAust Ltd (ASX: PNA, OTC: PNAJF) are attractive speculative plays on copper.

OZ reported 2014 third-quarter copper production of 26,249 metric tons and gold production of 47,376 ounces, both figures exceeding expectations. Cash costs were also lower than forecast, and the company is on track to reach full-year production targets.

OZ, which is trading at just 0.47 times book value, is a buy under USD4.50.

PanAust reported third-quarter production at its key Phu Kham mine in Laos of 16,562 metric tons of copper at a cash cost of USD1.69 per pound. Output from the Ban Houayxai mine, also in Laos, was 22,541 ounces of gold at USD748 per ounce.

Management noted that the company is on track to meet the upper end of its 2014 production guidance.

PanAust, trading at 0.91 times book value, is a buy under USD2.

Sandalwood

“Sandalwood” is the name of a class of woods from trees in the genus Santalum. The woods are heavy, yellow and fine-grained, and unlike many other aromatic woods, they retain their fragrance for decades.

Sandalwood oil is extracted from the woods for use by aromatherapists and perfumers and pharmaceutical companies.

TFS Corp Ltd (ASX: TFC, OTC: TFSCF) manages the largest sustainable supply of Indian Sandalwood (Santalum album) in the world. In addition to this species, TFS offers a sustainable supply of Western Australia Sandalwood (Santalum spicatum) oil and wood products for the global market.

It’s a supplier to the global fragrance industry, with a customer base ranging from Asia and the Middle East to the US and Europe.

In 2009 TFS announced a multi-million dollar agreement to supply up to 3 metric tons of Indian Sandalwood oil to ViroXis Corp for the development of its botanical drug, albuterpenoids, for the treatment of skin disorders.

Galderma Pharma SA, which is owned by Nestle SA (Switzerland: NESN, OTC: NSRGF, ADR: NSRGY), will launch Indian sandalwood oil-based acne product at the end of December 2014.

TFS generates a US dollar revenue stream on an Australian dollar cost base, a significant advantage with a softer aussie.

Fiscal 2014 financial product sales were up 5.8 percent, as TFS’ total estate size grew by 19.4 percent to 9,085 hectares. Net profit after tax (NPAT) was up 48.1 percent, and total new plantings were up 34.4 percent to 1,587 hectares.

Management recently reaffirmed fiscal 2015 guidance for NPAT of at least AUD70 million and EBITDA growth of 10 percent.

TFS Corp, which is trading at less than the value of its assets at just 0.97 times book, is a buy under USD1.75.

Services

MACA Ltd (ASX: MLD) is a solid mining services company with long-term relationships with big-name resource producers around the world.

MACA offers contract mining, civil earthworks, crushing and screening and material haulage primarily for iron ore and gold mining companies.

It’s leveraged to continuing production rather than the capital-expenditure-heavy exploration and development cycle of the mining process. The company continues to win orders for new work, building an impressive backlog that makes its future cash flow highly visible.

MACA raised its fiscal 2014 final dividend by 36.4 percent, as management reported a 25 percent increase in fiscal 2014 revenue and 18 percent growth in earnings before interest, taxation, depreciation and amortization (EBITDA). Work in hand as of June 30, 2014, was AUD1.3 billion.

Held back by general sentiment against mining and mining services companies, MACA is trading at just 3.75 times earnings. The P/B ratio is 1.01.