groote force

Article which is on proactive investor site:

http://www.proactiveinvestors.com.au/companies/news/7871/groote-resources-aiming-to-become-major-manganese-force-7871.html

Groote Resources aiming to become "major" manganese force
by Richard Badauskas


Groote Resources is a newly minted manganese explorer / developer listed on the Australian Stock Exchange under the code GOT. The company was previously known as Western Uranium and was floated to explore uranium leases in Western Australia that were spun off by Prairie Downs (ASX: PDZ).

That endeavor garnered relatively little traction and the stock traded around 10 cents. In November of last year the company purchased Reflective Minerals which held applications for 5 mineral exploration leases and one authorization covering 1,723 square kilometers which includes the inferred down dip and strike extensions of the richest manganese mine in the world located on Groote Eylandt and operated by a joint venture between BHP Billiton (ASX:BHP, LON:BLT) and Anglo American (LON:AAL) and known as Gemco.

In 2009 this mine recorded earnings before interest taxes and depreciation of ~A$1.1 Billion from the mining of 2.3 million tonnes of high grade manganese and is known as one of the most profitable mines in Australia and the lowest cost producer of manganese in the world.

This has led to a very substantial re-rating of GOT with its diluted market cap at one stage over A$100 million but now with the very tantalizing possibility of becoming a very major player in the manganese market. Based on its current work program GOT estimates the potential for a resource of 50 million tonnes of manganese with annualized production of 2 to 3 million tonnes of high grade ore putting it into the same league as Gemco if it can fully execute its game plan.

The Geology of Groote Eylandt and the Inferred Extensions of Manganese Mineralization

The Gemco leases covered all of Groote Eylandt but only up to the shoreline and contain a resource currently measured at 160 million tonnes at a grade of 45.5% manganese located along the western and southern flank of the island. Some geological studies indicate that the total resource may be several times bigger.

Geological studies carried out by the Directors of Reflective Minerals showed a very strong possibility that the manganese deposit on the Gemco leases lay like a very large sedimentary blanket that varied in depth but averaged 3 meters and it gently dipped into the very shallow waters that they pegged along shoreline of the island.

The waters here are only about 7 meters in depth and the ground cover over the deposit is only about 3 meters deep as can be seen in photographs of the walls of the Gemco open pit. All of the cover is very soft sandy material which makes it very low cost to extract. Further physical studies on Winchelsea Island which is directly north of the main deposit clearly show an area measured as 17 square kilometers which appears to be another sedimentary blanket. Photos on the GOT website clearly show a repetition of the blanket like layers found in the Gemco pit repeating along the shoreline outcrops at a number of locations where manganese is found.

GOT holds exploration rights for six tenements covering 1,723 km2 of shallow marine terrain and two islands near Groote Eylandt in the Northern Territory of Australia. These tenements are located immediately adjacent to and contain the interpreted extensions of the world-class manganese deposits at Groote Eylandt currently being mined by GEMCO.

GOT has now also pegged new authorization applications and offshore mineral exploration licenses covering 15,439 square kilometers running south and west back to the Northern Territory coastline. These applications extend close to onshore manganese finds at Rosie Creek and Battern Creek.

Following GOTs applications for the offshore tenements on the west coast of Groote Eylandt, GEMCO immediately applied for all of the remaining offshore areas.

Management Skills

When GOT bought Reflective Minerals they picked up Alex Hewlett as a Director. Alex was the Senior Geologist who put together the research and Groote Eylandt leases backed by financier Simon Noon who also joined the Board. Simon Brown another Senior Geologist is added to the management team who will oversee the planned exploration program, drilling and resource modeling. Simon has twenty years of international experience of which a substantial part has been spent working in the Northern Territory.

Peter Waterman has also been added and is an Associate Professor and Environmental Advisor who works extensively in the Northern Territory.

Additional technical support will be provided by Barrie Bolton who is a Geological Advisor and has worked on manganese properties worldwide for thirty years.

Project Development and Planned Exploration Program

All of the various applications for exploration areas are currently pending grants and regulatory clearances. The company has been granted approval to begin discussions with the local aboriginal land council for both Connexion and Winchelsea Islands. Assuming that all of these issues are resolved then the company will be able to commence the land based phase of its exploration program.

The on shore part of the program will consist of geological mapping, sampling by way pitting and trenching and collection of surface rocks, ground gravity surveys, airborne electromagnetic surveys followed by drilling which should be very economic due to the very shallow nature of the target area.

The off shore part of the program will include a lot more aerial mapping and targeting with drilling to shallow depths completed from barges. At the completion of these two programs and assuming positive exploration results a feasibility study will be undertaken. This will be followed by funding and mine development. There is sufficient local infrastructure to support both a new mine and short transport routes by ship into growing Asian markets.

One of the keys to GOT is its surface mineable manganese deposit target containing a minimum of 50 Mt of recoverable MnO2, with potential high grade ranging between 35-50% Mn, low concentrations of Si, Al, Fe, S, P, heavy metals and contained H2O, and easily separable Mn and gangue.

Cash

GOT had $2.6 million in its kitty at March quarter end, which is sufficient to carry out a significant exploration program. In addition, GOT has issued 10.9 million options with an expiry / strike of $0.20 on 30 June 2010. Conversion of these, which seems likely with current share price well above strike price, would bring in an extra $2.1 million in cash.

Manganese Market

Manganese is traded in metric tonne units or MTUs weighing 10 kilos / 20.5 lbs which are priced by grade and currently fall into a range between $6-9 per MTU.

The price for medium to high grade manganese oxide ores is expected to remain favourable to mining companies, largely owing to steadily increasing per capita consumption of steel in the developing world. The market for stainless steels is expected to increase faster than steel in general. Further, the grade profile of ores available is shifting downwards, requiring more blending and thus higher premiums for higher grade ores.

The typical prices of manganese ores offered for China recently are lump ore with Mn 44% at US$7.85/t, chips with Mn 43% at US$7.7/t and high grade metallurgical lump ore at US$8.45/t. The contractual condition to import manganese ore has been traditionally based on FOB price, although major manganese companies have recently proposed to change it to CIF price.

Manganese is the fourth most used metal by weight after iron, aluminium and copper. There is no satisfactory substitute in its application as a hardening alloy element and de-oxidant in steel and the manganese market is highly leveraged to increases in demand for steel. Approximately 94% of manganese is used as a ferroalloy in steelmaking, 6% is used to produce dry cell batteries and aluminium cans.

The demand for manganese is driven by the production of steel which is driven by world population growth where supply of high grade manganese ore is falling behind demand. Last year the global market for manganese traded at 54 million tonnes with 90% of this consumed by the steel industry and the remaining 10% went mostly into dry cell batteries and aluminum cans. BHP Billiton is a major supplier into this market and it sees a very bright future for both steel and manganese.

If GOT is able to execute its business plan and eventually meet production targets of 2-3 million tonnes per year it will become a significant world player in the manganese market with annual revenues that reach into the low multi billions.

With the pullback in prices of explorers, GOT has not been immune from the malaise, its share price falling from a high of $1.04 to the current $0.63 and market capitalisation of circa <$60 million based on current issued capital, diluted for June 30 options. Market volatility and provides an opportunity for liquid investors to accumulate stock.

Based on the industry average EV/Resource of $43/t the potential valuation for GOT, (assuming the companys target of 50Mt is proven up), is approximately $2.1 billion: (Patersons). This compares favourably with GOTs current market capitalisation.

As this process plays out the GOT stock price will certainly reflect this progress.