Earnings season is always a tricky time for vital resource producers. Investors are quick to ignore good results in favor of focusing on future projections for commodity prices. And if the numbers are disappointing, it won’t be long before the stocks crash and burn.

From our perspective, we’re certainly interested in the headline numbers. More than that, however, we want to know what’s going on behind them. In other words, what’s going to make our recommendations more valuable as companies?

Vital resource prices are extremely volatile by nature and mostly beyond these companies’ ability to control. What managements can influence are the various projects in which they’re involved, their productivity and their costs. That’s ultimately what’s going to set the real winners apart as this resource bull market unfolds, on both the upticks and the inevitable downticks along the way.

This week, Freeport-McMoRan Copper & Gold (NYSE: FCX) blew the doors off first quarter earnings projections, turning in a tally of $2.64 per share versus estimates of $2.17 and $2.02 a year ago. Higher prices for the company’s three major products—copper, gold and molybdenum—were the major factor. But the company also came in with stronger-than-anticipated copper production while keeping a lid on costs.

The stock has been white-hot for the past month, surging from a late-March low of less than $90 a share to within an eyelash of all-time highs in the low 120s. That’s largely been in anticipation of such strong first quarter results because copper prices have risen sharply. Now that the news is out, the price has retreated a bit, a classic case of “buy on rumor, sell on news.”

We’re still looking for great things from Freeport. For one thing, it’s looking less and less like the US economy is going to melt down enough in 2008 to take down the rest of the world–particularly China, which has emerged as the market for the red metal. That should keep prices high, despite lower demand from the US.

Also, Freeport has a rising production profile: Several new copper and molybdenum mines slated to come on stream globally over the next several years. Molybdenum is set for an explosion of demand, in large part because it will be needed to strengthen steel for the immense pressures inherent in undersea oil and gas drilling.

Rising production and prices promise much higher earnings—and further moves up for Freeport’s share price—in the years ahead. The second half of 2008 could be particularly explosive. That’s because the majority of the company’s production takes place then, and it’s likely to coincide with the beginning of a recovery in US demand.

Freeport does face some challenges. One of its most promising mines is located in the Congo, a country with less-than-steady politics. The mine won’t come on stream until 2009, plenty of time for resource nationalism to rear its ugly head before anything comes out of the mine. Moreover, the company’s costs for the project continue to rise, basically doubling from estimates given in October. Rising costs are also a concern for mines in other countries, particularly for electricity.

Obviously, high copper prices will redeem any number of faults, particularly when accompanied by higher prices for molybdenum and a rising production profile. But these factors also make the stock more sensitive to changes in the price of copper on both the upside and downside.

On the plus side, Freeport’s generally strong results are bound to make it more attractive as a potential takeover target. With its deal for Xstrata (OTC: XSRAF) off the table, it’s rumored that Brazilian giant Companhia Vale do Rio Doce (NYSE: RIO, CVRD) is already considering an offer. And with every major mining company a potential target/acquirer for every other, a high premium deal is certainly possible, and even likely.

As we pointed out last week, Freeport’s focus on a few vital resources makes it more volatile and risky than our diversified companies such as CVRD or Rio Tinto (NYSE: RTP). But at this point, its pluses far outweigh its minuses. And despite its gains so far this year, Freeport-McMoRan Copper & Gold remains a buy.

Over the next several weeks, we’ll be similarly examining the earnings of VRI Portfolio recommendations as they’re released. Again, headline earnings for most are going to rise with commodity prices, some quite steeply. We’re looking for signs that companies are running their various projects well.

Our pure play in the agrochemicals business is Syngenta (NYSE: SYT). The company reported first quarter 2008 earnings this week, with sales up 20 percent to USD 3.8 billion. The crop protection division led the way once again, accounting for 80 percent of profits.

Syngenta is the world’s second largest crop protection producer, behind Bayer, controlling a 20 percent share of the market. It’s also involved in genetically modified triple-stacked seeds, mainly corn.

The fundamentals for crop protection are still solid, and the company is well positioned to take advantage. Its seed business is viewed as emerging but has signed a lot of seed development agreements with other bigger players in the industry, including DuPont. Seed traits will gradually become Syngenta’s growth engine as it continues to contribute to the company’s bottom line.

Although there’s been a lot of excitement lately regarding food-related investing, global population growth and gradually evolving eating habits around the world remains a legitimate investing theme. For instance, meat consumption has been increasing in China and India, causing an upsurge in grain demand for feeding livestock.

At the same time, we see global crop stock levels sliding to new lows as prices rise. Meanwhile, policymakers continue to push the biofuel theme as a transport fuel, putting more pressure in corn production. If this trend continues, 36 percent of US corn will be used to make biofules by 2013.

That said, we now recommend taking some profits of the table. Since our initial recommendation at the end of November, Syngenta’s stock is up 25 percent. But because we favor the company, we advise taking out any profits and allowing the initial investment to run its full course.

We’re also advising taking some money off the table via PowerShares DB Agriculture Fund (AMEX: DBA), a VRI-recommended exchange traded fund (ETF), which holds a wide range of agricultural products. It’s composed of futures contracts on some of the most liquid and widely-traded agricultural commodities: corn, wheat, soybeans and sugar.

We favor this ETF as a general play on the agricultural boom. But this is also a group of commodities that have been on a parabolic uptrend in recent months. It’s easy to see why, given the daunting headlines regarding food shortages and riots in several regions around the world.

But even the most rip-roaring bull markets take a pause. And with vital resources, those pauses often mean steep declines, even with the long-term factors still in force and the uptrend intact. By all means, continue to hold positions in PowerShares DB Agriculture Fund and Syngenta. But you’ll make a boatload more money selling some of your holdings in similar leveraged plays when they run particularly hard in a short period of time and are more likely to pause.

Hyflux (OTC: HYFXF) hasn’t released its earnings yet. But the company has given a pretty good indication of how good it’s likely to perform in future quarters, after announcing this week that it’s won the contract for the world’s largest desalination project.

Hyflux is one of Asia’s largest water and fluid treatment companies, specializing in the use of membrane technology for industrial and municipal use. Established in 1989, the company focuses on municipal projects, such as water treatment and desalination projects, concentrating its business predominantly in Singapore and China. Since 2004, Hyflux has also been involved in the Middle East and North Africa.

The most recently announced project—valued at USD468 million—will be the world’s largest reverse osmosis membrane desalination plant and will be built in Magtaa, Algeria. It has a designed capacity of 500,000 cubic meters of water per day and is scheduled for completion by 2011. Hyflux is undertaking the project in a joint venture with Algerian Energy Company in which it will have a 51 percent stake. The company will receive USD45million per year from operations and maintenance of the plant, which it will manage for 25 years.

Water remains one of our favorite long-term themes, and we expect more positive surprises in the future because investors have been relatively slow in realizing the sector’s potential.

This is why we’ve recommended a leveraged play rather than big conglomerates such as France’s Veolia Environnement and Suez, for which water production is a relatively minor contributor to overall earnings. Leveraged plays can also magnify the outcome on the downside, but we prefer the odds on this one. See VRI, 29 November 2007, Water…Water Nowhere, for more on the water investment theme.  

For Hyflux, the Algerian project will push its order book above USD1 billion. It will also allow for more projects in the fast growing, increasingly thirsty Algerian market, where the company already controls 30 percent of the desalination market.

Furthermore, Hyflux has been growing rather rapidly in China. We expect longer-term growth to remain strong as the water investment theme unfolds in the coming years. Hyflux remains a buy at current prices.