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The micro sector generally refers to ASX-listed companies with a market capitalisation below $250 million, according to State One Stockbroking analyst John Rawicki. The sector is loaded with stocks as the market capitalisation of most companies listed on the ASX is below $250 million.

The micro caps have a keen following among investors willing to heighten their risk/reward appetite because they can make big percentage gains if they choose the right stock. An unexpected resource discovery can rapidly send up a mining explorer’s share price.

Rawicki says the micro cap sector offers high growth opportunities and leverage that usually can’t be found among the big established blue chips. “With the largest 200 companies on the ASX receiving the bulk of analyst research coverage and attention, it makes sense for the shrewd investor to examine the smaller end of town in a bid to uncover some gems tracking under the radar,” he says. “But there’s more risk. Micro caps may not post earnings for years, have unproven business strategies and weak balance sheets.”

Rawikci’s list for consideration includes what he calls “five promising small companies with high-quality resources and reputable management”. He says the stocks may contain the right ingredients to be upgraded by the market.

Australian Bauxite (ABZ)

Rawicki regards Australia’s east coast as one of the world’s finest bauxite provinces. He says Australian Bauxite has 32 tenements along the east coast, with a maiden JORC (Joint Ore Reserves Committee) resource of 47 million tonnes of high-grade bauxite and an exploration target in excess of 200 million tonnes. He says deposits are favourably located close to infrastructure. Scrip is tightly held, with only about 45 million shares on issue and a market capitalisation of about $36 million (February 16). His six-month price target is $1 a share.

Bauxite Resources (BAU)

A recently signed Heads of Agreement with China’s Yankuang Corporation to build a refinery will enable the company to process 3 million tonnes of bauxite into 1.1 million tonnes of alumina for export to China each year. Rawicki says company samples of bauxite have been sent to potential customers for review. He says Bauxite Resources holds a massive 25,000 square kilometres of tenements in Western Australia. It has $54 million in the bank and $10 million in equipment. Rawicki says the stock is trading at book value and appears heavily oversold.

Quickstep Holdings (QHL)

Quickstep has stgeloped a unique patented process for making advanced composite materials sought by aerospace and automotive manufacturers. Earlier this month, Quickstep signed an historic long-term agreement worth $700 million over 20 years to manufacture parts for the international F-35 Joint Strike Fighter program. Rawicki says the deal establishes Quickstep as a first-class composite supplier and it’s expected to lead to additional commercial contracts from other companies in the future.

Diatreme Resources (DRX)

Diatreme, a mineral sands explorer, has joined forces with Chinese company, BaoTi Group to stgelop its Cyclone project in the highly-prospective Eucla Basin in Western and South Australia. The deposit contains a high ratio of the valuable zircon mineral, enabling Diatreme to potentially earn higher than average margins on its product. “With a market capitalisation of about $24 million (February 16), we see plenty of upside,” he says.

Shaw River Resources (SRR)

A promising manganese company, Shaw River is planning to produce 270,000 tonnes at its Namibian Otjozondu Project from 2012, and double that amount in five years. Manganese is an essential element in steel production, and the company already has backing from Atlas Iron, which owns a 45 per cent stake in Shaw River. “In our view, the Otjozondu Project is worth between 30 and 40 cents a share, making the current price (25 cents on February 22) appear considerably undervalued,” Rawicki says.

 COMPANY  CODE  SHARE PRICE CLOSE
 Australian Bauxite  ABZ  79 cents
 Bauxite Resources  BAU  26 cents
 Quickstep Holdings  QHL  35 cents
 Diatreme Resources  DRX  09 cents
 Shaw River Resources  SRR  25 cents

 Price current to market close, 22 February 2011

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