Deep value and generous dividends don’t normally come to mind with vital resources and the companies that produce them. But that’s precisely what we’re seeing here in late October.

Resource stocks are cheap now for one major reason: the strong conviction of investors that the global economy is headed into the tank, despite the fact that the global financial crisis appears to be easing.

The fears were fanned this week by China’s announcement that its economy grew at an annual rate of “only” 9 percent in the third quarter of 2008, down from 10.1 percent the prior quarter. For the past year, demand growth in the world’s fastest-growing consumer of commodities has kept overall global usage on the rise for a range of resources. The prospect of a real slowdown there–coupled with a continued slide in the developed world–is the last straw for many investors, who are now in the process of wholesale liquidation of positions they coveted earlier in the year.

VRI Portfolio stocks are chosen for their staying power as businesses. We’ve consistently warned against the penny mining situations that trade solely on speculation. Rather, our focus is on businesses set to prosper from two very long-term trends: growing scarcity of easy-to-get-to resources and the giant call on those resources from nations rapidly constructing 21st century economies.

Our picks have been hard hit by the dramatic reversal in commodity prices. Freeport Copper and Gold (NYSE: FCX), for example, has sunk to less than eight times earnings and 0.6 times book value, and yields more than 6 percent. Rio Tinto (NYSE: RTP) sells for barely one times annual sales and yields close to 3 percent. Both companies are now selling for roughly a quarter of the price they did earlier in the year. So is equally dominant giant Vale (NYSE: RIO), and much of the rest of the Portfolio.

These companies’ shellacking, however, can’t compare with the wholesale wipeout of the industry’s smaller fare. And herein is the silver lining: Even as their weaker rivals vanish, our picks are still cash-flush. In coming months, they’ll be able to put that to work to increase holdings of solid reserves at low prices, further enhancing their positions for the next leg up.

Moreover, despite the losses sustained in these stocks the past several months, the underpinnings of the bull market of the past few years are still very much intact. Basically, low prices discourage the kind of massive development of new reserves needed to meet the long range demands of the developing world. And they also discourage the kind of conservation and alternatives that permanently destroy demand, such as happened to end the last great commodity bull market in the 1970s.

As long as investors are this worried about the global economy, it will be hard to mount a sustained rally in commodity producer stocks. But it will be an excellent time to lock down the sector’s best at prices not seen since early in the decade.

Even in normal times, the market for commodities and natural resource producers is extremely volatile. A lot of the downside to date is in direct relation to the rush to buy the US dollar, both as a “safe haven” currency and because investors must buy dollars in order to buy US Treasury bonds. And the further the US dollar rises, the further we can expect commodity prices to back off. The liquidation of massive hedge fund positions in everything from copper and gold to grains has also accentuated the downside. And today, many investors are just giving up on the market entirely.

Prices could well go lower, even from these clearly deep value levels. But let’s put that in perspective: This is far from the first time we’ve seen this kind of action in the commodity markets. In the bull market ’70s, for example, there were enormous selloffs that induced many to throw in the towel. They were, however, followed by staggering rebounds when the overall economy again showed signs of life.

This is truly a spectacular opportunity to lock in solid gains for the next leg up. At the same time, however, we didn’t anticipate the depth and breadth of this selloff.

That said, we also want to leverage ourselves more closely to what should be a very strong recovery rally in the near term. Part of that is to be far more aggressive in banking share-price increases in individual holdings on the way up than we’ve been in the past.

Put another way, it could be a year or more before Freeport hits $100 a share again. But in this fear-drenched, volatile investment climate, it could well move between $50 and $20 or less several times before that. That’s the kind of volatility gain we’re interested in booking as it appears. And we intend to apply that rule throughout the portfolio.

As we’ve said from the outset of our tenure at VRI–dating from October 2007–we’re playing very long-term trends here. Again, that’s a gigantic and multiyear call on natural resources in the developing world, coupled with growing scarcity of easy-to-get-at reserves and the rise of production-inhibiting resource nationalism.

This is a formula for a multiyear bull market that’s still in its early stages. But as we’ve seen demonstrated yet again over the past year, bull markets in natural resources are inherently volatile, and there are plenty of ups and downs along the way.

The bad news is we’ve just lived through a colossal meltdown, even in the strongest natural resource stocks. The good news is we’re now back to prices that prevailed in the early years of this bull market, and that means we have an incredible amount of upside to play with in the coming months.

Below, we look at the best fresh money buys for this week and reiterate our preference for investing in water-related companies. Ideally, you’d want to buy them incrementally over a period of several weeks.

All are certainly cheap enough to be bought at once, with the caveat that we may not have hit bottom.

Despite the economic turmoil, water is one investment theme that’s remained relatively intact. Asia is still rapidly urbanizing, and infrastructure needs are still acute. Meanwhile, as the population continues to grow, countries require more land for agriculture. And that means developing sufficient water supplies for irrigation.

India and China, because of their respective population sizes and strong economic growth, also have a lot of problems with the use and supply of water. The majority of India’s water needs are met by groundwater. This has led to rapidly declining water tables and depleted aquifers, many of which suffer from contamination.

The Chinese Institute of Water Resources has calculated that 80 percent of that country’s wastewater is released without any form of treatment, polluting 90 percent of urban waters and 70 percent of rivers.

China offers by far the best opportunity in water investing, not only because of its strong economic growth and extremely deteriorated water quality, but also because the country has well-conceived plans to deal with the problem.

Our favorite way to gain exposure to this trend is Singapore-based Hyflux Ltd (OTC: HYFXF). 

It began in 1989 as Hydrochem Ltd and has evolved into a trading company selling water treatment systems in Singapore, Malaysia and Indonesia and, later, China. Its two main business segments are municipal and industrial, with projects and operations in Singapore, China, India, and the Middle East and North Africa.

It has four core businesses. Its water business includes seawater desalination, raw water purification, wastewater cleaning, water recycling, water reclamation and ultra pure water production for municipal and industrial clients.

The industrial business includes separation, concentration and purification treatments for manufacturing process streams. The structured project division includes privately financed projects either as build-own-operate (BOO) or build-own-transfer (BOT) schemes.

Finally, its consumer division includes air-to-water and home filtration products, including faucet and under-sink filters for the consumer. The company is well known for its membrane technologies. Its membrane and materials research center in Singapore is the largest in Asia outside of Japan.

The company is also now involved in the biofuels business. This is happening through collaboration with BP International and the Dalian Institute of Chemical Physics. Hyflux is expected to use its membrane technology in order to develop zeolite and ceramic membranes for the dewatering and separation process of bio fuels such as ethanol. A leveraged play on the water investment theme Hyflux is a buy at current prices.

French water/waste management giant Suez Environnement (Paris: SVE) is our second Portfolio recommendation focused on water.

The company was spun off from its parent Suez after the latter merged with GDF earlier this summer. Its association with its parent, GDF Suez, also offers a lot of benefits, especially in the energy-intensive desalination business. And Suez Environnement’s waste-to-energy operations can only benefit from its parent’s global electricity presence and associated engineering skills.

The company has a great reputation in research and development (R&D). Sector R&D is becoming ever-more important as the water/waste sector advances and the global need for highly sophisticated operation becomes paramount.

Europe remains the company’s main market. But overseas expansion is also a part of the strategy, as long it’s done judiciously, “not,” in management’s words, “expansion at any price.”

The international division contributes 22 percent of Suez Environnement’s earnings and is split roughly 50/50 between water and waste. In recent years, the company has been expanding its international water and desalination operations in the US, China and the Middle East, while its waste business has found new growth avenues in Australia, Hong Kong and Morocco.

Its subsidiary Degremont and Safege, which specializes in water treatment, has a presence in over 70 countries, allowing Suez Environnement to explore new market opportunities.

Degremont is often used as a way to enter new markets, initially in a small, leveraged manner (i.e., the construction of a water treatment or wastewater treatment plant). Once the local relationships have been developed and the viability of bigger projects established, then Suez Environnement comes in for the much larger projects.

Although smaller operators can occasionally be extremely competitive for certain of Suez Environnement’s business, the company’s integrated business model and global presence often allows it to get the whole contract, using the knowledge of the smaller competitor for a specific part of the project. Suez Environnement is a buy at current prices.

The first ecological city in the world will be built in one of the most polluted countries: China.

Although the paradox is obvious, the project shows that the Chinese are trying to find ways to deal with the challenges their economic development has created. Furthermore, when completed, the new city could show the way to other countries around the world facing similar situations.

The city’s name is Dongtan, and it will be built on the third-largest island in China, situated at the mouth of the Yangtze River. The site is fairly close to Shanghai and is three-quarters the size of Manhattan. Dongtan is currently a large area of mostly agricultural land.

According to Arup, the well-known global planning, engineering and design consultancy that’s planning the city, the first phase of Dongtan is scheduled to be completed by 2010. This includes a wide range of developments with urban parks, ecological parks and world class leisure facilities. Around that time, a 12-mile bridge and tunnel combination and subway extension will link the city to Shanghai’s new international airport (45 minutes away) and financial district (30 minutes away). Up to 20,000 people are expected to start living in the town at that time.

Priority projects include the process of capturing and purifying water in the landscape to support life in the city. Community waste management recycling will generate clean energy from organic waste, reducing landfills that damage the environment. There will also be a twin water system in the city, one supplying drinking water and the other treated wastewater for flushing and farm irrigation.

The city will have a combined heat and power system that will use rice husks to produce electricity, providing clean energy. Energy will be further saved by building designs to reduce use and generate energy from renewable sources.

The details of the project are very impressive. Even with the apparent commitment of the Chinese authorities, it could still wind up failing in its zero footprint goals. But if it’s even moderately successful, it could become a global model in places increasingly choked by waste and runaway resource demands.

And, in any case, it means a lot more spending on water and plenty of profits for vital resource investors.

Dongtan is competing with Abu Dhabi’s idea of the eco city of the future: Masdar City. The Chinese are quite ahead, but you can watch a video here of the Masdar City plans and get a feel of what is in store.

Freeport-McMoRan (NYSE: FCX), our copper focused play, reported third quarter earnings and missed estimates by almost two percent on lower metals prices. Third quarter net income fell from $1.87 a year ago to $1.31 per share.

Overall sales were higher though, as the company sold more than 1 billion pounds of copper in the period and 307,000 ounces of gold, compared to 949 million pounds of copper and 269,000 ounces of gold last year. Unfortunately, the average realized price per pound for copper fell to $3.14 from $3.53 in the third quarter of last year.

Copper has been weak for sometime now and our expectation has been for some more short-term weakness. (See VRI, September 11, 2008, Resources: The Long View.)

That said, Freeport-McMoRan remains our favorite way to play copper. At current levels the stock offers a good long-term entry point as short term catalysts are still lacking. Buy Freeport-McMoRan at current prices.

Nothing has changed in our favorite five stocks to own now. See last week’s issue for more details.

China Green Holdings (Hong Kong: 904, OTC: CIGEF) is a China-based producer and supplier of fresh produce, processed and pickled products, branded food and beverage, rice and rice flour products.

Monsanto (NYSE: MON) is the leader in the genetically modified (GM) seed industry. Its business consists of two segments: Seeds/Genomics and Agricultural Productivity. The Seeds/Genomics segment consists of the company’s global seeds and traits business, and genetic technology platforms, including biotechnology, breeding and genomics.

The Agricultural Productivity segment consists primarily of crop protection products, residential lawn-and-garden herbicide products, and the company’s animal agricultural businesses.

Australia-based Paladin Energy (Australia: PDN; OTC: PALAF) is a pure-play uranium producer with a strong portfolio of developed assets and developing properties in Africa and Australia, but it’s currently focusing on its African projects, Langer Heinrich in Namibia and Kayelekera in Malawi. The company has a mine in production, one that will be starting output early next year and six more that are in various planning stages.

Switzerland-based Xstrata (London: XTA; OTC: XSRAF) is the world’s fourth-largest copper producer. It also has substantial positions in nickel, thermal and metallurgical coal, zinc, aluminum and an alloys division for chrome, vanadium and platinum group metals. The project pipeline includes further investment in all of these areas and extends to six continents.

UK-based Rio Tinto (NYSE: RTP). The company is one of the premier iron ore produces in the world, and it’s also the largest aluminum producer following its acquisition of Alcan.