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Three Stock Picks: Base Metals

U.S. Steel, Cliff Natural Resources and Thompson Creek Metals are seen outperforming their metal peers in 2010.

U.S. Steel (X) - Get United States Steel Corporation Report, Cliff Natural Resources (CLF) - Get Cleveland-Cliffs Inc Report, an iron ore producer, and Thompson Creek Metals (TC) - Get TuanChe Ltd. Sponsored ADR Class A Report, a molybdenum producer, are seen outperforming their metal peers during 2010 on the back of a metal outlook, competitive advantage, price-to-earnings multiples and recent selloff of these stocks.

World steel demand is expected to increase by 10.7% in 2010, driven by strong demand in the emerging markets that will continue driving the demand for iron ore. Demand for molybdenum will likely remain strong as stainless steel, accounting of 25% of the world demand for the metal, is expected to increase by 8% in 2010. In addition, supply additions are limited until at least 2011, supporting higher molybdenum prices.

U.S. Steel

With steel demand picking up, steel producers are ramping up their production. Utilization rates in U.S. reached 73.4%, a level last seen in October 2008, according to American Iron & Steel Institute's data release on Monday.

U.S. Steel, the largest integrated steel producer headquartered in North America, will likely outperform its domestic peers in this inflationary environment of rising iron ore and coal prices. While many global and domestic steelmakers will be witnessing significant increases in cash costs, U.S. Steel will likely see limited increase in its cash costs.

First-quarter results of the company suggest increasing steel volumes that improve the fixed-cost absorption of capacity additions. Utilization rates, especially for flat-rolled segment, are expected to improve further in the second quarter.

The company is set to report earnings of $1.64 per share for 2010 and $5.65 per share for 2011, a significant turnaround from a loss of $10.42 per share in 2009, according to analysts polled by

Bloomberg

. Currently, the stock has two buy, five hold and no sell ratings, according to

TheStreet's

Analyst ratings guide.

Cliff Natural Resources

Recent selloff of the stock, declining 24% from its peak on April 14, provides an attractive buying opportunity. Analysts expect second-quarter pellet prices to be up 115%, which means that company earnings for the second quarter will be significantly higher.

During the first-quarter earnings release on April 28, the company upgraded its guidance for 2010 sales volume to 27 million tons for North American iron ore, from a previous expectation of 25 million tons. Most importantly, the company upgraded its guidance for iron ore revenue per ton by $17 to $20 and coal revenue per ton by $25.

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According to analysts polled by

TheStreet Recommends

Bloomberg

, the company is set to report earnings of $7.86 per share for 2010 and $9.67 per share for 2011, up from $1.63 per share in 2009.

At $57.34, the stock is currently trading at an attractive price-to-earnings multiple of 6.91. The stock has 11 buy, three hold and no sell ratings, according to

TheStreet's

Analyst ratings guide.

Thompson Creek Metals

During a conference call on May 6, Chairman and CEO Kevin Loughrey of the company said, "Reflecting the recovery in the world economy and the steel industry in particular, the company's average realized price on molybdenum sales for the first quarter of 2010 has risen by 43% from the same quarter a year earlier. A continuation of the economic recovery can be expected to yield a positive trend for molybdenum prices and an improving financial performance for the company over the medium term."

During the first quarter, the company produced a quarterly record of 8.3 million pounds of molybdenum at a cash cost per pound of $5.36, below the average guidance of $6 to $7 per pound for the full year. An increase in cash costs per pound from the second quarter will likely take the cash costs to the upper end of this range.

The stock declined 23% after peaking on April 5, thereby offering an attractive buying opportunity. Currently, the stock has five buy, seven hold and one sell ratings, according to

TheStreet's

Analyst ratings guide.

The company is set to report earnings of 95 cents per share for 2010 and $1.65 per share for 2011, a significant turnaround from a loss of 44 cents per share in 2009, according to analysts polled by

Bloomberg

.