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Nathan: Small companies tend to outperform large companies over time. That's the case in many industries -- but it's particularly true when you're talking about natural resources.

Take gold, for example. You could have the tiniest operation, and any gold it finds will be sold for $1,600 an ounce. Then you could have a giant multinational company with operations around the globe -- and it gets the same price, $1,600 an ounce.

It's not like a semiconductor, where you can differentiate on size or speed or other product features. Mining and energy companies are all generally selling the same products as their competitors, and at the same prices.

So if that's the case, how do you capture the market's eye? How do you stand out from the crowd and earn superior returns? Well, the easiest way is to grow your production and reserves faster than everybody else.

It stands to reason that a company whose oil output climbs 50% or 100% will be rewarded much more than one whose output inches up just 5% or 10%.

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And that's where small companies have an insurmountable advantage. It's a lot easier to double in size when your output is 10,000 barrels per day than it is if you're at 100,000 or 500,000 or a million per day.

Bob: Can you give us an actual David-versus-Goliath example?

Nathan: Statoil (NYSE: STO) is an $80 billion company based in Norway. Last year, it produced 2 million barrels of oil equivalent (Boe) per day. That's an 8% increase from 2011 -- which is pretty impressive.

But compare that with Magnum Hunter (NYSE: MHR), one of my portfolio holdings, which is one-one hundredth the size. Magnum Hunter was gathering only 2,200 barrels per day at the beginning of 2011, a drop in the bucket next to Statoil.

But by the end of last year, production had raced to 18,000 barrels per day. That's a powerful 740% increase.

So both of these companies are selling the same product at the same price. But one has grown 8% and the other 740%. Which would you rather own?

It's no wonder Magnum Hunter's shares have outrun Statoil's by a 28-to-1 margin (197% to 7%) over the past five years. That edge will likely continue in 2013.

Bob: What else do you find appealing about the juniors?

Nathan: They're sometimes on the receiving end of generous takeover bids.

If you're an oil giant faced with dwindling reserves and stagnant production, where do you turn for fresh blood? Well, you can always write a check and acquire a smaller company with exciting growth prospects.

There have been 11,000 global mining transactions over the past decade worth $785 billion. No other industry even comes close to that level of M&A activity.

Now, I invest for the long haul, not in the hope of a buyout offer. But the same traits that I'm looking for are also attractive to private equity groups and other large buyers -- so my portfolio is full of potential takeover candidates.

In fact, in late 2011 Statoil paid $4.4 billion for one of my holdings, Brigham Exploration, which pushed the shares up 36% overnight. And I had another portfolio holding acquired on the very same day at an even larger premium.

Bob: Besides oil and gas, what other sectors are you looking at?

Nathan: If there's a critical natural resource with limited supply and growing global demand, odds are good I'll be exploring it.

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In last month's issue of Junior Resource Advisor, for example, I explained why the stage is set for a supply shortfall in the zinc market. Before that, I zeroed in on lithium (which goes in your smartphone and tablet batteries). I've also racked up some nice gains from cobalt, palladium and molybdenum.

If you're not looking at these important raw materials, you're missing out. Right now, I'm seeing some bullish signs in a place you almost never hear about: graphite.

Bob: To what extent do the prices of raw materials play a role in the prices of the companies that dig them up?

Nathan: As you'd expect, there's usually a pretty close correlation. Sometimes they move in lockstep.

But it's important to remember that some stocks surge much higher in up markets or sink lower in down markets than their peers. Why? Because not all commodities producers are created equal.

For starters, they have different cost structures. Some natural gas producers hemorrhage cash with prices at $3 per thousand cubic feet -- while a more efficient rival can turn a healthy profit in the same environment.

Different companies also have varying degrees of operating leverage. With most of their costs fixed, increased prices for the commodities they sell can slide right to the bottom line -- so they might be able to turn a 10% increase in copper, for example, into a 20% jump in profits.

A prime example is New Gold (NYSE: NGD), which I first recommended last June. At the time, gold prices had risen about 80% over the prior four years. But the company converted that into a more powerful 267% surge in earnings.

There's also a big difference when it comes to strategy and tactics. Some companies leave their production unhedged and roll the dice -- they will fully participate in any rallies, but will also feel the sting whenever prices fall.

At the other extreme, you have a company like Linn Energy (Nasdaq: LINE), which uses swaps and other contracts to lock in guaranteed minimum floor prices for its production. In fact, every cubic foot of gas and barrel of oil through 2016 has already been sold at pre-determined prices.

By doing that, the company has completely insulated itself against commodity price swings.

One other thing I'd like to point out is that there can sometimes be irrational disconnects between commodities and equities. This happens a lot in the gold market -- I've seen times where gold bullion is moving higher but gold stocks are moving lower.

Inevitably, these situations have a tendency to self-correct -- usually with a sharp snapback in stock prices. So I look for opportunities where asset prices become decoupled with market fundamentals.

Bob: I know you keep a close watch on China because of its sway in the market for natural resources. Just how big is its influence?

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Nathan: Most analysts recognize that China is the engine that's driving the world's economy.

You have to understand that the United States has just nine cities with populations over 1 million. In China, there are more than a hundred cities with populations of a million or greater (there are 40 million in Beijing and Shanghai alone). There's been a huge migration of people moving from rural areas into urban population centers. The government is spending hundreds of billions on construction and infrastructure projects to industrialize and accommodate all those people. We're talking about roads and bridges and airports.

I read recently where China was building a new 500-foot skyscraper every five days. Just think about how much copper and steel that takes.

At the same time, China has emerged as the world's largest manufacturing hub for toys and appliances and electronics and other goods. Put it all together, and you've got an economy that is growing at three to four times the pace of the developed world -- and one that is very hungry for raw materials.

China passed the United States three years ago to become the world's top energy user, so it burns through billions of tons of coal and oil. And every day it swallows mountains of industrial metals. China accounts for nearly 40% of the 20 million tons of refined copper used globally each year. It eats up around one-quarter of the world's aluminum production and half of the world's iron ore.

And it's not just the demand side. China also dominates the supply picture. The country happens to control most of the world's strategic resources, either through domestic mines or overseas investments.

There really isn't a single commodity that isn't influenced by what's happening in China. That's why I keep a close eye on what's going on over there.

Bob: Tell us about some of the biggest shale plays and their potential.

Nathan: You've already mentioned the Eagle Ford, which already has paid off big for companies that saw the potential, such as Pioneer Natural Resources.

Another biggie is the Bakken Shale in North Dakota, which is now pumping out more than 700,000 barrels of oil per day. And there are plenty of others out there, like the Marcellus Shale in Pennsylvania and the Niobrara in Colorado.

Two other shales in particular hold promise for early investors. One is the Utica Shale in Ohio, which is looking richer and richer -- some foreign oil producers desperate to get their foot in the door have been paying $15,000 an acre. This is where Gulfport Energy, one of my portfolio holdings that you mentioned above, is staking its claim.

Another developing shale that I'm watching is the Monterey formation in Southern California. There are still a few roadblocks that need to be overcome -- but the potential is off the charts.

The latest studies put the estimated recoverable reserves at 15.4 billion barrels. That's more than the Bakken and Eagle Ford combined. There are only about 24 billion barrels in the lower 48 states -- so two-thirds of the entire total could be in the Monterey Shale.

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