I believe it was Burton Malkiel, author of "A Random Walk Down Wall Street," who said that God alone knows the proper P/E for a stock. Of course, he was referring to how difficult it is to know what price to pay. Graham and Dodds came up with some metrics which are very useful in valuing traditional companies. Unfortunately, they don't work well when valuing stocks whose book value and cash flow derive from the underlying price of a commodity. To add to the difficulty of valuing a resource stock is that the value of the resource (be it oil, gold, or copper) may be discounted or given a premium depending on the location of the mine or oil well.

A couple of quick examples can illustrate this point. Petrokazakhstan had one of the lowest valuations of any oil and gas company listed on the TSX. It was heavily discounted because of the political risk associated with Kazakhstan. It's price would fluctuate with the price of oil like any other oil stock, but with a much more limited upside. In contrast, a company like Canadian Natural Resources (CNQ) trades at a premium because its reserves lie in Canada, a country with little perceived political risk.

In addition to political risk, one must assess when reserves will become producing assets. As a general rule, the closer to production, the higher the valuation. This is more pronounced in the mining sector. It takes anywhere from 5 to 10 years to build a mine depending on geography, infrastructure, financing, etc.

For example, let's assume the spot price of gold is $500/oz. A producing company like Goldcorp (GG) will receive full valuation, while an exploration company with proven reserves but years from production, will only be valued at perhaps $100/oz. As the exploration company approached production, its value will increase by jumps and starts (assuming the price of gold doesn't crater) as the market reassesses the probability of those reserves becoming producing assets.

This is a tough game to play if you're not a geologist or have specialized knowledge of the industry. To be honest, I don't have that specialized knowledge and feel more comfortable giving my money to proven managers in the field. One of the best in the precious metals sectors is John Embry, who runs the Sprott Precious Metals Fund.

In general, I don't have time to do my due diligence on specific companies, so when possible I'll just buy a sector fund or with precious metals I use mutual funds. I avoid the gold ETF on the TSX (XGD.TO) because the largest holding is Barrick and it has a LARGE hedge book. I see this as a major liability and want nothing to do with the risk.

In addition to political risk and time to production, the biggest factor in determining a resource stock's valuation is the percieved future value of the underlying commodity. As for myself, I like the prospects for uranium, coal and the energy complex in general. I also like silver and palladium.
Cameco is the leading uranium stock and has done very well recently. Others of interest are IUC.TO and SXR.TO
There are a number of coal stocks mentioned in the link above, so I'll leave it at that. The leading silver play is SLW.TO. If anybody knows of a great palladium play that isn't in South Africa, please let me know!