2010 is the Year of the Tiger in the Chinese zodiac calendar. And that has been the epitome of the Chinese economy for the last decade. In particular, the Chinese have been pouncing on natural resource assets around the globe to keep their incredible growth curve intact.

One of their most recent purchases - a nickel play in Quebec - could signal an opportunity for investors in a nearby play as well.

Current Economic Context in China

Chinese real GDP climbed 10.7% in the fourth quarter of 2009 and 8.7% for the entire year.. The growth and outperformance in China over the last year has been tremendous and in stark contrast with the economic data reported in other countries. A Chinese government stimulus helped propel the economy to exceed its robust 8% growth target.

And prices are rising in China. Consumer prices climbed further in December, rising 1.9% from the previous year. For the whole year, sales of consumer goods continued to climb at approximately a 16% rate, investment grew by 30%, with a primary driver being infrastructure stimulus. Producer prices also turned positive for the first time in a year, reflecting the increase in commodity prices.

This continued growth will unlock value for sources of any component materials necessary in the production of steel. In November of last year, Chinese steel production increased by 37.4%, while the prior eleven months total was up by 12.1% to 518 million tonnes.

Demand for nickel is predominantly driven by stainless steel production, which accounts for around two-thirds of total nickel consumption. China alone now accounts for 25% of world nickel demand compared with 4% ten years ago.

Recent Activity and High Growth Potential

The Chinese appetite for nickel has been most recently been demonstrated by the Jilin Jien Nickel Industry Co., Ltd., the second largest nickel producer in China. On November 10, 2009, they completed the takeover of Canadian Royalties (TSX:CZZ) for their 21.3 million tonne Nunavik nickel deposit. This near term producer appears to be scheduled to produce a minimum 1 million tonnes of nickel a year for more than eight years, at an estimated capital cost of $450 million.

Jilin Jien paid CAD $192 million for the asset and is expected to accelerate the timeline for production in the region.

The Canadian Royalties deal demonstrates China's demand for nickel, and importantly, says they are willing to purchase and operate assets in the Raglan mining district in northern Quebec.

The area is known for high quality nickel sulfide deposits. Nickel sulfide deposits are generally rare and also relatively more attractive for investment than the more common nickel laterite deposits. Sulfide deposits are of higher grade and are less costly to process than laterite deposits

While alternative older nickel sources are being depleted, the Raglan area is one of the few remaining large underexplored and underdeveloped nickel sulfide belts in the world.

Key Takeaway

Discovering the hidden gem from this context might be Knight Resources (TSX-V:KNP). This is the last remaining exploration opportunity in the Raglan field and it could be a target to feed the Chinese dragon. Knight, and its joint-venture partner Anglo American, have been engaged in extensive exploration in the Raglan region since 2003.

The favourable tax treatment that exploration companies have received in Northern Quebec has made for a very efficient model to maximize returns via exceptionally generous provincial rebates for the company. For every $1 the joint-venture spends, they receive $0.45 back from the Quebec government.

The exploration at West Raglan has yielded some high-grade nickel intercepts for Knight Resources. For example, in November 2008, the company announced 36.43 meters of 2.66% nickel and 1.10% copper, and 8.80 metres of 4.73% nickel and 1.16% copper.

Knight and Anglo have the potential to create a lot of shareholder value in the coming 24 months if they can create an NI 43-101 compliant resource at West Raglan. With the Chinese Tiger now crouching right next door, Knight will be a play for both retail investors and Chinese industry to watch closely.

Dave Brown has worked for seven years at a national mutual fund organization where he spent the last six years on the international equities research team. He received his formal training in both geography and education from Brock University in Ontario, Canada.