Malcolm Bucholtz B.Sc, MBA Analyst

Trading Note

In a trading note released recently, we highlighted a Canadian company called Raytec Metals and focused on its potash exploration properties in the Province of Saskatchewan. Raytec has now released a resource estimate which has prompted this report to be written.

Recall that we noted Raytec had 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). The second property package (92,160 acres), KP452, is situated 2 hours drive east of Regina, Saskatchewan in close proximity to operations run by Mosaic and Potash Corp.

KP441 Claim Group Resources

The recently released 43-101 compliant resource estimate shows that property KP441 has an indicated resource of 148.02 million metric tonnes grading 23.44% K2O for a contained quantity of 34.7 million tonnes of K2O. There is a further inferred resource of 229.16 million metric tonnes grading 20.40% K2O for a contained inferred quantity of 46.76 million metric tonnes of K2O. Applying the standard industry deductions to adjust for mining anomalies and assuming an overall recovery of 36%, gives a net recoverable indicated resource of 12.49 million tonnes of K2O and a net recoverable inferred resource of 16.83 million tonnes K2O. The author of these calculations now has something like 45 days to post his complete Technical Report on www.sedar.com.

Raytec is currently involved in a financing that will see 10 million units (1 unit=1 share + 1 warrant exercisable at $1.60 for 2 years) sold at $1.20 along with 3,571,500 flow through shares sold at $1.40. In total, Raytec will raise $17 million from this financing.

After this financing, Raytec will have just over 58 million shares outstanding. With the shares trading in the $1.50 range, this gives Raytec a market capitalization of about $87 million (post financing).

The Potash picture in Saskatchewan was recently given a splash of clarity when mining giant BHP Billiton acquired the remaining 25% of Saskatchewan potash player Anglo Potash (TSX:AGP) that it did not already own for $284 million. Some simple math on his transaction says that BHP values extractable potash in-situ at $0.77/tonne (measured & indicated plus inferred resources). Taking just the measured and indicated resources, this BHP deal suggests in-situ measured and indicated is worth $2.37/tonne.

If we apply the figure of $2.37 to the 12.49 million tonnes of extractable indicated resource that Raytec has delineated, we see that this in-situ extractable resource is worth $29.6 million or 50 cents a share (post financing). Now, if Raytec can repeat this exercise on the other acres that comprise claim group KP441 and if it can repeat this exercise on its KP452 claim, its valuation will rise accordingly.

But, don't forget that Raytec is about more than just Potash. Raytec also has a lucrative iron ore play in the hopper too. Raytec 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. This is a definite bonus. 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. Iron Ore right now is trading at about $79/ton on world markets. If we assign even a $0.79/ton nominal economic value to the contained historical iron content at the El Sol and Gunflint properties (172 million tonnes) we arrive at a figure of $136 million or $2.34 a share (post financing).

Continue to 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 continue to watch the Raytec story with great interest. We are maintaining our coverage of Raytec with an "accumulate" rating on the stock. We feel that as of right now, Raytec has the potential to approach the $2.85 level. As further Potash resources are calculated, this target price will be adjusted upwards accordingly. Use any market volatility and short term market weakness to keep building your position in Raytec. For further information, be sure to visit the Raytec website at www.raytecmetals.com.