Malcolm Bucholtz B.Sc, MBA Analyst

Trading Note

Potash and Iron Ore – The Hungry Asian Dragon’s Appetite Continues to Grow

At the Market Traders, we have been quite literally pounding the table of late to remind people that despite all the bleak news surrounding sub-prime mortgages and Wall Street write-downs/meltdowns, the global economy is still in the throes of a powerful, albeit volatile, “commodity supercycle” – the likes of which has never been seen before.

This so called “supercycle” is being driven by events in Asia. More specifically, China and India or “Chindia” as the region is now called is driving the economic bus. Each year in India and China, 40 million people attain “middle class status”. That’s more than the population of Canada – every year! With increased prosperity comes a greater demand for an improved diet with more vegetable and meat protein. With increased prosperity also comes demand for consumer goods like cars, stoves and fridges.

This growing industrial output has sparked a huge demand for steel. Steel requires iron ore and with 80% of the global iron ore trade dominated by 3 companies Vale, Rio Tinto and BHP Billiton, the global economy has seen a tightening of iron ore markets and a tremendous run-up in iron ore prices. In fact, China’s largest steelmaker Baosteel just negotiated a new 12 month supply deal with Brazilian based Vale that saw prices rise 65% to $79/ton. Think about it. A 65% increase – make no mistake about it…that’s some serious demand pushing prices.

But, this drive to greater prosperity has seen vast tracts of agricultural land swallowed up in order to build factories, steel mills, assembly lines, chemical plants and what have you. China has now given up so much agricultural land it is on the verge of becoming a Corn importer for the first time in its history. China is already a big importer of Soybeans which along with Corn is vital for livestock and poultry feed so that enough pork and poultry can be produced to feed the masses. Problem is, China cannot start importing all its foodstuffs. It has got to produce more and grow more from the agricultural land that remains. In India, food production has not kept pace with food demand. As well, shifting weather patterns are affecting the traditional monsoon rains that have been so vital to the Indian traditional farming methods. India too has got to squeeze more productivity out of its land. This demand for more agricultural output has seen farmers fertilizing their land with potash like never before. For readers who may not be aware of what potash is, just remember that potassium is an element found in the earth's crust. The main potash fertilizer products include potassium sulphate (K2SO4) and potassium nitrate (KNO3). This surge in demand has sparked a serious price run-up in potash markets. In March of this year, the Potash Corp of Saskatchewan inked a contract with Indian Potash Ltd for delivery at $625/tonne, a sizeable increase from $270/tonne a year earlier. Granted, these are small contracts and the real benchmark to watch is the larger contracts with China. Potash Corp fully expects to see contract prices with China hit the $495/tonne mark in 2009.

Raytec Metals – Well Positioned

Raytec Metals is a Canadian based firm that is squarely focused on this demand for iron ore and potash in “Chindia”.

On the potash front, Raytec has assembled 2 land packages in the Province of Saskatchewan. The first, KP441, comprises 198,720 acres of land near Saskatoon, Saskatchewan. KP441 is in close proximity to potash mining operations currently in operation by Agrium (TSX:AGU), Mosaic (NYSE: MOS) and Potash Corp (TSX: POT). There is historical drill data on this property and right now Raytec is having some of this historical drill material re-assayed so as to be able to calculate a 43-101 compliant resource estimate. The second property package, KP452, is situated 2 hours drive east of Regina, Saskatchewan in close proximity to operations run by Mosaic and Potash Corp.

On the iron ore front, Raytec has made some great strides. It has acquired the old El Sol Iron Mine located 75 kms north of Red Lake, Ontario. Old historical reports show that 34,000 feet of diamond drilling on 2 known zones of iron ore mineralization has identified a historical resource of 312 million tonnes grading 32.4% iron to a depth of 300 meters. What is unique about this El Sol project is that it is located about 40 kms from the nearest power. Road access to the property comes to within 2 kms. In addition, there is an old abandoned railway line that comes within 20 kms of the property. In other words, El Sol is not stranded in the middle of nowhere without infrastructure. In addition to El Sol, Raytec has also acquired the Gunflint Property near Thunder Bay, Ontario. Old historical data shows a resource of 270 million tons grading 26.29% iron.

Raytec – Do the Math

Raytec currently has 44.6 million shares outstanding. With the shares trading in the $0.90 range, this gives Raytec a market capitalization of about $40 million. Raytec has not yet completed the compilation of its potash resource on either its KP441 or KP452 properties. But, with Potash fertilizer currently selling in the marketplace at near $400 per tonne, it will not take much of a resource estimate to make the markets realize that Raytec is deserving of a higher market capitalization. Then there is the iron ore. Iron Ore is trading at about $79/ton on world markets right now. If I assign even a $1/ton nominal economic value to the contained historical iron content at the El Sol and Gunflint properties, it does not take long to see that the market capitalization of Raytec does not even come close to reflecting the economic value contained.

Accumulate Raytec (TSXv: RAY)

Raytec President Brian Thurston and his team at Raytec have moved quickly to get themselves well positioned on 2 fronts – potash and iron ore. Economic growth continues to surge ahead in “Chindia” and the world will continue to witness robust prices for commodities like potash and iron ore. At the Market Traders, we will be watching the Raytec story with great interest. We are initiating coverage of Raytec with an “accumulate” rating on the stock. Use any market volatility and short term market weakness to start building your position in Raytec. For further information, be sure to visit the Raytec website at www.raytecmetals.com.