When the markets are taking one step forwards and two steps back, nothing is more refreshing to the patient value-investor than a stock that rises divergently against the trend and marches to its own tune - and for once it isn't one of our country's great defensive staples like Woolworths or CSL. One company making huge steps in the right direction is Perth-based resource exploration company Groote Resources Ltd (ASX: GOT).
During the past nine months, significant developments have been accomplished in the operations of Groote Resources. To the prospective investor, their potential could not be more promising - and the company has recently enjoyed a spectacular swell in market capitalisation.
Aptly-named, Groote Resources are concentrating their operations on Groote Eylandt in the Northern Territory. Groote Eylandt is home to one of the world's largest manganese deposits, and has been mined for over 40 years by GEMCO Pty Ltd - a joint-venture operation between mining-giants BHP Billiton Ltd (ASX: BHP) and Anglo-American. The GEMCO operation is highly-profitable, and supplies more than 10% of the world's high-grade manganese ore.
Groote Resources holds the exploration rights for their six tenements covering some 1,700 km2 of shallow marine terrain and two islands surrounding Groote Eylandt. These tenements are located adjacent to the proven deposits in GEMCO's operations on the Western-side of Groote Eylandt and, as announced by the company, their tenements contain "interpreted extensions of the world-class manganese deposits currently being mined by GEMCO". According to Alex Hewlett, Chairman of Groote Resources, "Groote Resources pegged these areas only to find that within 24 hours, GEMCO had blanket-pegged everything around us".
Commencing in 2010, Groote Resources will embark on an aggressive drilling program with the aim of defining a JORC resource. And here's the interesting fact - according to Groote Resources' preliminary reports, a resource estimate of approximately 50Mt of recoverable high-grade manganese has been inferred. Even if the recoverable resource is just half of this, Groote Resources would still hold the world's 8th largest high-grade manganese deposit.
Such a significant resource would subsequently be mined and exported - either by Groote Resources or by GEMCO. Indications of an imminent takeover by GEMCO are yet to be seen and certainly too early to assume. However, it would not be improbable given the tenements close proximity to the GEMCO mine, who also own the existing infrastructure on Groote Eylandt.
While GEMCO has mined manganese on Groote Eylandt since 1965, their operations are said to be currently expanding. According to BHP Billiton, they employ "approximately 250 people plus a large number of permanent and temporary contractors" on Groote Eylandt. Their infrastructure is extensive and is currently growing. Telstra Corporation (ASX: TLS) has recently been engaged to lay additional submarine fibre-optic cables to Groote Eylandt. These cables are believed to provide a significantly increased capacity for additional communications between the mainland and GEMCO's operations. One can only wonder what they are envisaging for the future.
So what does this all mean for investors or potential investors in Groote Resources? For a start - shareholders would expect to be rewarded with an increased market capitalisation at many multiples of its current value. This would reflect the future profit generated from extracting the recoverable manganese - either by Groote Resources or potentially by GEMCO if the resource was purchased. Conservative investors should not be concerned by the company's meteoric rise from sub-10c some 18 months ago because Groote Resources has one of the tightest registers on the ASX. Their Top-20 shareholders account for almost 70% of the total shares on issue, and Groote Resources' management represent a significant percentage of holders within the Top-20.
Any individual looking to acquire large a quantity of Groote Resources shares must either do so gradually or pay up. Any company looking to acquire large volumes of stock (BHP Billiton, for example) would fail in attempting a creeping tender offer because there is simply very little free-float available. A predator would then be forced to bid in negotiations with Groote Resources management and its major shareholders, or mount a hostile takeover. Either of which would have an enormously positive impact on the company's share price. In essence, down-side risk is minimal and up-side potential is enormous.
In this current market, nothing is more painful than death by a thousand cuts. Investors appetite for risk is notably diminishing. Watching Australia's beloved dividend-paying blue-chips being hacked away by the market forces week-after-week is enough to render most long-term investors disinterested at best. But to win at this game, successful investors must play an active role in the markets and yes that means timing and picking winners. Investors should take heart that one good stock can make all the difference to your portfolio. While we can only guess at the general market trend over the next five-years, most investors can confidently anticipate the direction of Groote Resources. And its certainly the right direction.
