Energy is Canada’s most important natural resource. But as BHP Billiton’s (NYSE: BHP) aggressive takeover bid for Potash Corp of Saskatchewan (NYSE: POT) demonstrates yet again, prolific oil and gas reserves are far from the country’s only bounty.

I put the odds at better than 50-50 that BHP will eventually walk away from its current USD130 per share all-cash offer for Potash Corp. For one thing, major shareholders look increasingly unlikely to accept a penny less than USD150. And if the company does pony up, it will certainly be taken as a sign of weakness, encouraging demands for a still higher bid. That’s despite the fact that before BHP made its offer, shares of Potash Corp had been stuck in the neighborhood of USD100 for more than two years, after plunging to as low as USD50 in late 2008.

We’ve already seen the Australian giant walk away from an arguably more valuable resource company in recent years, Rio Tinto PLC (NYSE: RTP). Moreover, the global price for potash–a key element of fertilizer of which Potash Corp is a major low-cost producer–remains weak, as it has been since mid-2008. That’s shown up in Potash Corp’s generally lackluster earnings in recent quarters. And Russian producers’ willingness to undercut on price means a full recovery will take time, even with Asian demand apparently robust.

As we wrote in the Oct. 7 Maple Leaf Memo, the Conference Board of Canada, in a report commissioned by the government of Saskatchewan, gave more or less its blessing to BHP, while implicitly rejecting a rumored counterbid from Chinese fertilizer giant Sinochem. But only support of enough Potash Corp shareholders will get this deal through. And that doesn’t appear likely at this point.

The BHP offer, however, does once again highlight a major profit opportunity here in late 2010 in undervalued Canadian resource companies outside the energy business.

Not every timber, metals, agricultural products or export infrastructure company will receive a takeover offer this year.

Even Potash Corp is in danger of lapsing back towards CAD100, should BHP walk away before global potash markets fully recover.

And our advice to sell Potash Corp to lock in profits still stands for those who bought on our recommendation earlier this year under CAD100.

Unless BHP succeeds, odds are we’ll have another chance to get the stock cheap before potash markets recover.

There are still a large number of non-energy resource-related companies trading as cheaply as Potash Corp was before BHP came along. They may or may not get a takeover offer. But the best meet my No. 1 criteria for all takeover bets: They’re poised for strong returns whether any deal occurs or not.

Below I highlight the best, from agricultural and forestry products to metals, specialty chemicals, uranium and renewable energy. Several are already portfolio picks, and most pay outsized dividends as well. That includes High Yield of the Month and new Aggressive Holding Canfor Pulp Income Fund (TSX: CFX-U, OTC: CFPUF). The rest are strong alternatives if purchased below my target buy prices.

Resource Rich

Just as pipeline and storage companies are the surest plays on energy, so are commodity transport and storage companies the highest percentage bets on Canada’s bounty of other resources. Two strong bets now are Westshore Terminals Income Fund (TSX: WTE-U, OTC: WTSHF) and Canadian Pacific Railway (TSX: CP, NYSE: CP).

Westshore’s sole business is operating a coal storage and loading terminal in British Columbia. The company’s primary customer is Teck Resources (TSX: TCK/A, NYSE: TCK) subsidiary Teck Coal, which acquired the old Fording Canadian Coal two years ago. Teck pays a fee to ship its metallurgical coal through Westshore’s facilities to fast-growing Asian markets that are now the world’s primary consumers of steel.

Most volume is assessed on a straight fee basis, with a portion at variable rates tied to the mineral’s price. In recent years Westshore has restructured its contracts to ensure a greater portion of throughput is at fixed rates. As a result, none of the contracts for fiscal 2011-12 provide for variable pricing, allowing the company to lock cash flow and minimize fluctuations due to factors beyond its control.

That dovetails nicely with the other half of Westshore’s strategy: a plan to convert from income trust to a corporation traded as a “staple share,” or a single security that’s part debt and part equity.

The plan, which unitholders will vote on at a special meeting Nov. 4, calls for each trust unit to be exchanged for a hybrid security consisting of common stock and a secured debt with face value of CAD5 due in 2040 and bearing a “commercial interest rate.”

Management currently anticipates dividends will be paid “on essentially the same basis as the current distribution policy of the fund.” That is basically to “distribute to unitholders all of its earnings after interest (including on the new notes) and taxes but before depreciation and unrealized gains or losses on forward exchange contracts” less maintenance capital expenditures and “special pension contributions.”

Debt will shield income and therefore dividends from the new taxes. And, since Westshore has basically no borrowings outstanding now, it will hardly be over-leveraged by the transaction.

The key to sustaining distributions under a hybrid security format is operating a stable business; with its contracts restructured, Westshore certainly qualifies. It pays a yield of 9 percent after last month’s 12.2 percent bump from first-quarter levels–dividends are up 43.8 percent from a year earlier. Westshore Terminals Income Fund is a solid buy up to my target of USD20.

With nearly half of its cargo capacity devoted to shipping commodities in bulk, Canadian Pacific Railway is another solid infrastructure play on Canada’s resource bounty. In fact, this week the company inked a contract to ship Teck Resources’ metallurgical coal to Vancouver area port facilities, including Westshore’s.

The 10-year deal calls for CP to invest more in its rail system, to further expand its capacity to transport resources and cash in on continued growing demand for Canadian resources in Asian markets. The company currently derives about 40 percent of its book from transport to jumping points for overseas exports, and has enjoyed 40 percent growth in shipments to Vancouver facilities this year.

Potash shipping volumes have been stellar, posting a 200 percent year-over-year gain in the second quarter. And fertilizers are now up to 16 percent of book.

But CP is also seeing substantial traffic in grain (60 percent of volume) as well as coal (24 of percent of volume). Coal shipments are up 20 to 25 percent year over year.

The one downer in 2010 has been the Canadian grain harvest, which is off due to the cool spring but offset by a stronger US harvest.

Looking ahead, that’s a lot of fuel for more investment that in turn will further drive growth in throughput, revenue and earnings. Yield focused investors will definitely prefer Westshore. But CP is already up 18 percent since the May issue of CE, when we recommended the stock and added it to How They Rate coverage.

Canadian Pacific Railway is an excellent buy for low risk strong total returns up to USD60.

Resource Rich

As for Teck itself, the stock has now surged into the low 40s, well above my buy target of USD35. That seems mostly due to takeover rumors, which have sprouted up in the wake of BHP’s bid for Potash.

Teck’s a great mining company with some of the richest reserves in the world. My concern is any serious offer would be subject to severe regulatory scrutiny. That was the case when the company–on the brink of bankruptcy last year–arranged what was, in effect, a CAD1.5 billion cash rescue package from sovereign wealth fund China Investment Corp (CIC). Despite the miner’s dire straits, regulators insisted on an arm’s length transaction.

It’s unclear whether or not CIC could actually block the offer of another company, as it doesn’t have any seats on Teck’s board. But considering its 17.2 percent stake, it would certainly have to be appeased. And that could well prove to be an even more formidable hurdle than provincial and federal regulators.

It’s entirely possible Teck could attract a serious offer that would surmount even these hurdles. But with the stock back near its 2008 high, it’s unlikely to snare a deal significantly above the current price. In other words, shareholders have already priced it in the possibility, and the stock is no longer a bargain.

In contrast, major uranium producer Cameco Corp (TSX: CCO, NYSE: CCJ) is still trading at less than half its mid-2007 high, which it reached at the height of the hype for a potential US nuclear build-out. Since then, despite a promised USD50 billion in loan guarantees and a streamlined federal approval process for new plant construction, nuclear development has failed to get off the ground in the US, with the exception of a few states with progressive enough regulation to allow their utilities to do sufficient long-term planning.

Ironically, that’s sucked the air out of Cameco and other uranium stocks just at the time nuclear development is heating up in earnest globally. While only 1.2 gigawatts (GW) of nuclear power are under some stage of development in the US, China has 21.4 GW under development, according to the International Atomic Energy Agency. Other countries with more action than the US include Russia (9.2 GW), South Korea (5.6), Japan (2.7), Taiwan (2.6), India (2.5), Bulgaria (1.9), Ukraine (1.9), Finland (1.6) and France (1.6).

Ironically, the lack of new plants to replace them will make existing US nuclear capacity increasingly valuable in coming years. Carbon regulation may stay hung up in the US Congress for decades and the Environmental Protection Agency rules to be announced next year will come to naught if the Obama administration is voted out in 2012. Nonetheless, producing power from the coal-fired plants that now contribute half of US electricity is set to be increasingly expensive in coming years.

One reason is simply the average age of the US coal fleet is 44 years, and those plants are wearing out. Another is a quarter of coal plants still operate without any pollution control equipment, simply because they couldn’t be run economically with it. As a result, no matter who rules in Washington some 30 percent of current coal-fired capacity is likely to be shut down over the next decade. The likely fuel to replace it is volatile-priced natural gas. That means hefty profit margins for those who operate nuclear plants, which means continued steady demand here for uranium even as demand ratchets up dramatically overseas.

With its low-cost output and potential to ramp up production with the slated 2013 opening of the Cigar Lake mine, Cameco is by far the highest-percentage play to weather current rough going in uranium markets while sowing the seeds for immense future prosperity. Flooding has plagued Cigar Lake twice during its development, once in 2006 and again in 2008 as repairs were being made from the prior deluge. Once up and running, however, it’s expected to produce 18 million pounds of uranium a year, or 15 percent of global supply. Another sign of strength: Despite the company’s ongoing capital spending on Cigar Lake, debt maturities through the end of 2011 are just CD100 million, or less than 1 percent of market capitalization.

Growth potential, a low price and a strong balance sheet make Cameco Corp a solid buy up to USD30.

The biggest drawback to Cameco is its meager dividend, a necessary evil for any company ramping up capital spending.

Consequently, dividend seekers may be more interested Labrador Iron Ore Royalty Corp (TSX: LIF-U, OTC: LIFZF), a high-yielding company that’s benefitting directly from Cameco’s driving demand for steel.

Labrador’s chief asset is a royalty stream based on the profitability of the Iron Ore Company of America (IOC), a major producer of iron ore operated by Rio Tinto.

Iron ore is the key element for the manufacture of steel, for which global demand and pricing remain strong thanks to Asia’s continuing need to build out its essential infrastructure.

Labrador benefits directly from a higher price for IOC’s output of iron ore pellets and concentrates, as well as from increased output at the facility in response to higher demand. And it passes its bounty directly on to shareholders in the form of generous dividends.

As Westshore Terminals plans to do, Labrador has now converted from an income trust to a corporation traded as a staple share, or stock-bond hybrid. This move has allowed management to shelter income and pass more of it along to shareholders despite new taxes, even as market conditions for iron ore globally continue to improve and boost cash flows.

The quarterly dividend declared Sept. 16 and payable Oct. 25 is a total of CAD1, CAD0.50 “regular cash” and CAD0.50 “special cash.” That’s up from a total of CAD0.75 declared the two prior quarters and the flat rate of CAD0.50 a quarter declared throughout 2009. The regular cash portion is divided into an interest payment on the debt portion of the security of CAD0.234 and an equity dividend of CAD0.266.

Even in the dark days of Oct. 2008, Labrador was able to dish out a special cash payment of CAD2.50 a share. And it was able to hold a CAD0.50 payout throughout recession-choked 2009. That’s a pretty good indication the CAD0.50 “regular cash” portion is a solid baseline for the dividend.

That’s also the yield for Labrador shown by our quotation service and therefore in our How They Rate table. The actual current dividend, however, is twice that level, or roughly 7.5 percent. Better, it has strong potential to grow going forward as global steel demand reaches new heights with recovering North American demand combining with runaway Asian demand.

It adds up to a solid opportunity for income investors to cash in on another valuable Canadian natural resource. Labrador Iron Ore Royalty Corp is a buy anytime it trades at USD50 or lower.

Best of the Rest

Many readers have asked me to recommend a high-yielding Canadian gold mining company. Unfortunately, most mining companies are ill suited to be generous dividend payers, due to often jagged price volatility for their products and the ever-rising cost of going further and deeper to ferret out economic reserves of increasingly scarce resources.

Only the largest and most powerful mining companies can really offer anything resembling a reliable dividend. Some, however, may be interested in Canadian mining giant Barrick Gold Corp (NYSE: ABX), which managed to pay reliable dividends twice annually despite the ups and downs of the past decade for gold prices.

Like the rest of its industry, the company is currently on something of a roll, as gold prices have surged to more than USD1,300 an ounce, four times its level of just a few years ago.

The yellow metal’s surge has accelerated the past couple years due to concerns quantitative easing will eventually debase global paper currencies like the US dollar and the euro and ignite inflation, as well as arguably a lack of confidence in the Obama administration.

Gold’s rally, however, actually began early in the last decade. That’s when the Bush administration turned the US budget surplus built up under President Clinton and the Republican Congress during the 1990s into an out-of-control deficit by simultaneously cutting taxes and increasing spending on everything from Medicare to fighting two wars. As such it has much deeper roots than current concerns. In fact, the metal is arguably still well undervalued, given that the 1980 high in today’s dollars would be some USD3,000 an ounce.

I’ll leave that kind of prediction to the real gold bugs. In any case Barrick offers a useful hedge if the pessimists on the global economy are half right. And though its dividend is as yet paltry at barely 1 percent, it was recently both increased 20 percent and made quarterly, as opposed to the semi-annual disbursement made historically. With Barrick no longer hedging output, there’s plenty of upside, even as the company’s great size protects it from the worst of gold’s inevitable downturns. If you want a gold play, you can do a lot worse than buying Barrick Gold Corp up to USD45.

Even more volatile than the market for gold, coal, iron ore and steel is the global trade for specialty chemicals. Used in a wide range of industrial processes from steel manufacture to pulp processing, demand and prices surge during good economic times, swelling producers’ profits. In contrast, when industrial output slows, demand and prices fall, hitting producers with a double dose of trouble.

That’s the kind of cyclical business where companies have to watch their cash carefully and dividends are typically scarce. That’s what makes Aggressive Holding Chemtrade Logistics Income Fund (TSX: CHE-U, OTC: CGIFF) such a rare find. Not only does it pay a yield of over 10 percent. But management has set up its finances and business strategy so conservatively that cash flow covers the payout even in the worst economic conditions, or when a major facility is temporarily out of service.

That was clearly proven last year, when prices for specialty chemicals plunged in the global recession but Chemtrade kept its payout ratio well under 100 percent. And it’s being demonstrated again this year, as the Beaumont sulfuric acid plant in Texas is undergoing unexpected repairs.

Third-quarter 2010 earnings are likely to reflect the negative impact of the Beaumont outage as well as the stronger Canadian dollar, which reduces the value of revenue earned outside the country (nearly 80 percent of the total).

That’s likely to be offset, however, by reduced operating costs and debt reduction, as well as generally stronger product pricing–with a restart of Beaumont on track for later this month.

The resumption of production of by-product acid by supplier Brazilian mining giant Vale (NYSE: VALE) is another plus, as will be insurance covering the cost and lost business from the Beaumont outage. And the company also continues to benefit from the good fortunes of High Yield of the Month Canfor Pulp Income Fund, which is one of its major customers. Note that high-yielding Canfor is my favorite play on Canada’s forestry bounty and a new Aggressive Holding.

After down-trending for most of the summer, Chemtrade units have been in rally mode since mid-September. The stock is likely to add to those gains as Beaumont returns to service. Meanwhile, insiders remain staunchly bullish, evidenced by consistent purchases.

Chemtrade at this point remains organized as an income trust and has no plans to convert. That’s likely due to two reasons. First, the vast majority of its income is earned overseas and therefore is exempt from the tax. Second, with a market capitalization of just CAD357 million, it’s a small company and the cost of converting simply isn’t worth the effort.

What that adds up to is management anticipates little impact on distributable cash flow from 2011 taxes and intends to maintain its current distribution. The only drawback is for US IRA investors, who won’t get the benefit of an end to 15 percent Canadian withholding tax that converted trusts offer. But the dividend is qualified for US tax purposes if held outside of IRAs, and the withholding can be recovered with a Form 1116.

Chemtrade units are slightly ahead for the year. I expect to see more substantial gains as Beaumont’s troubles are resolved and the company demonstrates its ability to hold dividends steady in the face of trust taxes. In the meantime, Chemtrade Logistics Income Fund is a buy for yield alone up to USD12.

At first glance, my final resource pick may look like a fee-based power producer or even a utility. To be sure, Innergex Renewable Energy (TSX: INE, OTC: INGXF) does have many stable qualities, operating 17 hydro and wind  generating facilities and selling power under long-term contracts to government entities and regulated monopolies, who essentially bear all rate and commodity price risk. It also pays a generous and well-covered quarterly dividend over more than 6 percent, protected by reliable cash flows and a modest debt load.

What makes Innergex truly interesting, however, is its unmatched pipeline of projects developing Canada’s immense wind and hydro power potential. Because facilities emit no carbon dioxide or other gases and particulate matter deemed harmful by environmental regulators, demand for new wind and hydro power sources has remained robust despite the ups and downs of the North American economy the past two years plus. Moreover, once they’re built variable costs at these plants are very low, as they require no fossil fuels to run.

The upshot is Innergex can literally count on inking a lucrative sales contract with an extremely creditworthy buyer every time it starts work on a new facility. The company currently has interests in seven projects that are under development with a total capacity of 203 megawatts (MW), all of which are already under contract and will start producing cash flow immediately after startup. That alone will increase the company’s current installed operating capacity of 326 MY by more than 62 percent.

Meanwhile, the company also has some 2,000 MW in prospective projects it will launch once it wins sales contracts. That includes eight 24.6 MW wind projects submitted to the Hydro-Quebec Distribution 250 MW Community Wind RFP.

In Canada, wind power projects earn money based on capacity, so owners get their cash even when the air is uncharacteristically still.

In contrast, profits from hydro power are usually affected by output, which, in turn, is affected by water flows that are largely beyond plant owners’ control.

One season’s dry spell is usually the next one’s soaker, so water flows have a way of balancing each other out.

Innergex limits fluctuations even more by spreading its facilities among different watersheds. And that effort will be enhanced as it builds out its 2,000 MW of prospective projects in coming years.

As a result, cash flow shortfalls like the one experienced in the second quarter–and very likely the summer as well–aren’t really causes for concern. In fact, power producers like Innergex are quite used to them and maintain cash reserves for just such times.

Rather, the thing to focus on here is the progress of Innergex’ capacity build-out. The more it brings on line and signs to long-term contracts, the greater its earnings power will grow. Profits are further improved by the low cost of project financing; cheap capital has given the company unprecedented balance sheet flexibility as well.

Given the capital needs for its ambitious build-out, Innergex is unlikely to increase its distribution anytime soon. On the other hand, it’s already converted to a corporation, so there’s no 2011 risk. And once enough new projects are completed, there will be plenty of cash to fund a larger disbursement, and eventually a return to the higher rate that held before the merger of the old income trust with its parent last spring.

That’s all the reason conservative and aggressive investors alike should need to buy Innergex Renewable Energy, a high-potential yet extremely solid company, up to my target of USD10.

Note the Canadian government no longer should withhold dividends from US IRA accounts.

Editor’s Note: For additional information on this topic, check out Roger Conrad’s latest report on Top Canadian Income Trusts.