The roots of mining in Canada go back more than 6,000 years. First Nations people in the Lake Superior area mined and exploited copper, making tools and jewelry for trade with neighboring tribes.

Canada now exports more minerals and metals than any other country in the world. At the start of 2006, almost 200 facilities (metal, nonmetal and coal mines, including peat bogs), more than 3,000 stone quarries and sand and gravel pits and about 50 nonferrous smelters, refineries and steel mills were operating in Canada. There are more than 1,000 mining companies listed on Canadian stock exchanges, which is more than in any other country.

Canada, unusual among developed countries in the importance of natural resources and raw materials, now ranks with the world’s top five producers of 14 mineral commodities and leads in the production of uranium and potash, the scarcest of the three main raw materials of fertilizer (nitrogen, phosphates).

Its unique natural bounty could help it survive a US downturn. Between 2002 and 2006, the US share of Canadian exports fell from a peak of 84 percent to 79 percent. During the first seven months of 2007, this share declined to 76 percent.

In the five years since it gained entry to the World Trade Organization, the same period Canada-to-US trade has shrunk, China’s imports have grown substantially. It’s forecast to import nearly a trillion dollars’ worth of stuff in 2007, tripling the USD300 billion of 2002. China’s demand for natural resources has driven this rapid growth and has boosted prices for Canada’s exports of oil, gas, metals, minerals and farm products. 

Canada’s exports to China rose from CAD4 billion to nearly CAD8 billion between 2002 and 2006. And there’s every sign that trend will continue: Canada’s year-to-date exports to China are up 43 percent from the same period in 2006, a rate of growth faster than any other G-7 country.

As long as Chinese demand keeps commodity prices high, the Canadian economy and the loonie will stay aloft, and the Great White North will ride out a US slowdown.

Potash, better than any other resource, illustrates Canada’s good fortune. The country’s potash reserves, at around 75 billion tons, are among the most extensive and the richest in the world. In 2001, the country accounted for about a third of global output. The worldwide leader’s share has grown to more than 40 percent on rising demand from China and growth in biofuels production.

Canadian potash shipments to China spiked in 2005 but softened in 2006 because of protracted contract negotiations between Canpotex, a marketing and distribution company wholly owned by the Saskatchewan potash producers, and the Chinese government. China chiseled a USD25-per-ton increase this year and paid about USD100 to USD150 per ton less than other countries for its 2007 potash.  

But fertilizer prices in Asia spiked considerably in October, according to Scotiabank Economics; plantation owners in Malaysia and Indonesia accepted another USD30 hike, and JPMorgan analyst David Silver recently reported in a research note that Russia-based Silvinit made a USD450-per-metric-ton spot sale to a Southeast Asian customer, a USD50 jump in the first quarter 2008 price.

Increasing demand for potash in China is largely a result of the agricultural industry in the country, which uses 54 percent of China’s total land area. Intense farming robs the soil of nutrients, and a good fertilizer is needed to keep crops growing.

China negotiates its price at the beginning of each year and pays that price through the year. This time around, they can do their best Michael Corleone for a while, but they need potash and will put a signature on a new contract at a much higher price, perhaps as much as USD80 per ton higher.

China is likely to deal with Russian suppliers before sitting down with Canpotex, which represents Potash Corp, Mosaic Co and Agrium. But the Chinese will pay more in 2008, closer to other contract amounts and spot prices.

According to a May 2006 report on biofuel development by the International Fertilizer Association, in the 30 years between 1975 and 2005, global biofuel output rose from zero to 30 million tons–a drop in the bucket compared with consumption in 2005 of 1.5 billion tons of oil for transportation. But the biofuel growth rate is accelerating, and production is expected to exceed 80 million tons by 2015.

The biofuel drive is generating new levels of industrial demand for potash. As farmers become biofuel miners, the demand for organic fertilizer has driven up the price for potash, which is required in increasing concentrations to sustain crop yields on the shrinking supply of arable land. Three crops used to produce biofuels require large amounts of potash to boost yields: sugar cane in Brazil, palm oil in Asia and corn production in the US.

In 2006, in Brazil the price of potash jumped 55 percent to USD280 per ton. In Malaysia, the largest producer of palm oil, the potash price went up by 50 percent to USD300.

Population growth and increasing per capita income–prime characteristics of developing countries–are driving global demand. Demand, now growing at between 3 and 5 percent annually, is widely anticipated to grow faster than producers’ ability to add and expand capacity. Taking the more conservative estimate, for every succeeding year, there will be demand for up to an additional 2 million tons of potash, equivalent in volume to the start-up of a new mine.

But it’s difficult to get a new mine established and up to capacity; despite a series of expansion announcements, the industry will still be challenged to keep pace with demand.

The Saskatchewan producers will continue to benefit from rising Chinese demand and the biofuels boom. Exports so far in 2007 have already surpassed 2006 values and are on track to match the record set in 2005. And China’s imports rose 88 percent through August, according to Scotiabank.

Unfortunately, there are no potash-producing income trust. But there is Potash Corp, the biggest player, which is spending USD1.8 billion to expand the capacity of its Rocanville facility in southeastern Saskatchewan by 2 million tons a year. The project will boost companywide production capacity to 15.7 million tons annually by 2012, a 15 percent rise from current levels.
 
Potash’s third quarter output was about 25 percent higher than a year earlier, and its inventories were down more than 40 percent after falling 44 percent in the July-to-September period.

As for Agrium, it recently increased capacity at its Saskatchewan mine by 300,000 tons to 2.05 million tons and is now working on engineering studies for another 800,000 ton expansion. But the company will need up to a year to finalize plans and costs, with an eye to boosting production in 2010 at the earliest. We’ll be looking to cover these stocks in future issues of Canadian Edge.

CE Editor Roger Conrad and our colleague Yiannis Mostrous, editor of The Silk Road Investor, recently assumed co-editorship of Vital Resource Investor, a weekly advisory that covers all things resource related.

VRI is the intersection where Canada’s and the world’s energy, mineral and agriculture commodities meet the supply/demand revolution engendered by Asia’s and other emerging markets’ economic development.

Roger is known far and wide as an income investing expert, but his roots lie in “stuff;” the first stock he recommended more than 20 years ago was that of mineral producer Freeport McMoRan. And Yiannis, co-author of The Silk Road to Riches: How You Can Profit from Asia’s Newfound Prosperity (2006, Financial Times/Prentice Hall), has established himself as the go-to authority on the monumental Asian transformation that will shape the 21st century global economy.

For more on potash, other minerals, industrial metals, food and energy, check out Vital Resource Investor; and to understand Asia’s impact on the global economy and the investment opportunities it creates, there’s no better source than The Silk Road Investor.