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Perth broker places Speculative Buy on Groote Resources

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Summary

Issued Capital: 174m
Share Price: 86c
Market Cap: 149m (fully diluted)
Cash: A$2.9m

Groote Resources (ASx: GOT) is a Western Australian-based exploration company with the potential to develop a large, surface mineable manganese deposit near Groote Eylandt in the Northern Territory. Groote has applied for prospective exploration licenses which contain the interpreted extensions of proven high-grade managanese resources owned by Groote Eylandt Mining Company Ltd (GEMCO).

The tenements under application include large offshore areas to the west of GEMCO's tenure, as well as Winchelsea Island to the north.  Groote has announced it has received government approval to negotiate with the Aboriginal Land Council for Winchelsea Island. We see the granting of these tenements as a key catalyst for Groote in CY10.

Proven Manganese deposits

At Groote Eylandt GEMCO (BHP Billiton 60% / Anglo American) operates one of the largest high-grade Mn mines in the world.  The mine has produced 50mt of ore since 1965, has total reserves of 114mt at 46.7% Mn with a 14 year mine life (3-4mtpa DSO operation - lump and fine) and currently produces more than 15% of the world's high grade manganese ore. 

Strong Earnings potential

In FY09, GEMCO's EBITDA was $1.1B for 2.3mt mined. WE note that Groote is targeting a 50mt resource (grading 35%-50% Mn) with a similar mining rate of 2-3mtpa DSO.

Strategically located

The tenements under application are along strike from GEMCO's manganese reserves, where the geology is well understood and manganese is being mined.  The resources at Groote Eyelandt are located approx. 15km from port, where GEMCO is exporting ore- an ideal location to ship ore to the rapidly expanding Asian market.

Valuation upside

Based on the industry average EV/Resources of $43/t the potential valuation for Groote (assuming the company's target of 50mt is proven up) is approx. $2.39 billion.  This compares favourably with Groote's current market capitalisation.

Building the team

Groote recently appointed Chris Catlow as non executive chairman.  He played a central role in the formation of Iluka Resources  and was a senior executive of Fortescue Metals Group from its inception. 

He was instrumental in raising more than US$4 billion to develop FMG's ore operations in the Pilbara.

Catalysts

1. Tenement grants and regulatory clearances (aboriginal/environmental), 2. exploration momentum ahead of drilling in H2 CY10, and 3. positive feasibility study.

Risks

1. The exploration licenses at Groote Eylandt have not yet been granted, 2. Groote requires approval by traditional owners and 3. environmental permitting.

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