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Editors' Note: This article covers a nano-cap stock. Please be aware of the risks associated with these stocks.

India Globalization Capital Inc. (IGC) is a highly speculative but potentially lucrative way to play a potential rebound in emerging market development, and particularly within China. India Globalization Capital primarily operates in the materials and infrastructure industry as a supplier of iron ore to India and China.

Despite IGC's name, the company has developed into far more of a Chinese infrastructure play than an Indian one. If Chinese growth does not fall apart, the problems that have plagued IGC and the broader iron ore business could quickly evaporate, yielding substantial returns to investors. Nonetheless, an investment in IGC is certainly a speculative and reasonably high risk one, as its diminutive size and share performance should indicate. Still, it is those very characteristics that bring the potential for substantial gains if IGC's business plan works.

Widespread concerns over slowing development in China, and particularly of a potential hard landing, have combined with declining iron ore prices to cause a perfect storm of problems for IGC and companies in the industry. Iron ore prices peaked in the first quarter of 2011, at about $187 per metric ton, fell to about $135 in the fourth quarter of 2011, and continued to decline during the first three quarters of 2012. Iron ore prices dipped below $100 per metric ton in September of 2012, but spent the next two quarters increasing, and reached nearly $155 in February of this year before again selling off. Prices have been in the mid $120s for most of the last two months. Much of the weakness in Iron ore pricing is due to fear of Chinese cooling and also a strengthening U.S. dollar, which has hit most commodity prices.

Chinese steel production continues to be strong, with total production in 2013 on pace to outstrip 2012's 711 million tons by roughly ten percent. Despite concerns over Chinese cooling and a potential hard landing, there is still continued strong growth in China, with the government remaining steadfast in its urbanization and industrialization programs that are designed to move hundreds of millions of people from rural areas towards the coast and into new cities, as well as new career paths. China has also indicated it will accelerate railway programs. Though longer-term growth rates will likely lessen, there is still substantial room for growth and Chinese iron ore demand should remain relatively strong for the foreseeable future.

All of this bodes well for IGC's future prospects. The company has been acquiring iron ore interests in Mongolia from which it intends to service Chinese demand. Acquiring iron ore assets during this period of weak pricing is likely a sensible long-term strategy. In 2011, IGC acquired Ironman (Linxi H&F Economic and Trade Co.), and subsequently acquired some Mongolian mine rights in 2012. In July of 2013, IGC announced the acquisition of a 25% interest in another Mongolian mine and beneficiation plant.

IGC is still in the early stages of its plans to service Chinese iron ore demand from Mongolia, and only made its initial test shipment from its Mongolian shipping hub to China in June of this year. Multiple purchase and sale agreements should be forthcoming regarding IGC obtaining ore in Mongolia, beneficiating it in both Mongolia and China, and selling it within China. IGC has the potential to consolidate significant ore interests in Mongolia, which is still in the process of integrating itself into the global economy.

The Mongolian government appears interested in encouraging foreign investments within Mongolia, especially if those interests are collaborative with Mongolian ones. All of this indicates IGC will likely acquire and consolidate a growing portfolio of Mongolian ore assets, which should make it a growing provider of ore to China and a possible takeover target by larger global interests. A multi-billion dollar company may be disinterested in picking up small interests in a piecemeal approach, but find an already collected portfolio of holdings a more appealing acquisition. Potential acquirers could be Chinese or global steel and iron companies, such as ArcelorMittal (MT).

Beyond Chinese demand, IGC also has its titular exposure to Indian infrastructure development. India's plans to build and modernize the nation's infrastructure are in far earlier stages than China, and though they will also likely be far less grandiose, India should still end up being a growing demand source for ore, rock aggregate and other materials. Plans will include the building of roads, airports and seaports, as well as the upgrading and international standardization of already existing ones. Last year, Prime Minister Manmohan Singh estimated $1 trillion in infrastructure spending over the next five years by both private and government projects. IGC is pre-qualified by the National Highway Authority of India and some other agencies for construction contracts, which should facilitate its participation in some of this development. Nonetheless, IGC's primary focus is the Chinese market and its continued collecting of Mongolian assets.

In July, IGC reported that its annual revenue grew by 92% during its prior fiscal year, and that the company is attempting to cut its cost structure by approximately 35 percent. Total liabilities declined to $4.27 million from $9.44 million in FYE 2012. The decrease in total liabilities was the result of the elimination of contingent cash payments and taxes from the Ironman purchase. Though the company was still operating at a loss, its GAAP loss decreased by about two-thirds compared to the prior year, from $7.75 million to $2.66 million.

A large portion of IGC's loss was due to non-cash interest charges and employee stock options. Those interest charges look likely be reduced going forward, and the stock options, though not ideal, should help align employee and investor interests. Insiders hold about 11.6% of the company and should clearly be interested in getting those shares higher.

Last week, Cliffs Natural Resources (CLF) reported stronger than expected results, and its CEO, Joseph A. Carrabba noted during the company's conference call that:

"Globally the steel making utilization rate remains strong at 79%, with China's crude steel production continuing to reach record levels. China's year-to-date iron ore import data is up slightly versus 2012 comparable period. And iron ore inventories at the ports and mills continued to be at multi-year lows."

These factors indicate there should be continued demand for iron ore in China and that low cost sources that are adjacent to China, and with correspondingly reduced costs of distribution, should become a desirable supply source and potential acquisition target. Moreover, Cliffs' better than expected results indicate that market concerns regarding Chinese iron ore and steel demand are overblown, and that market sentiment may soon swing to the other direction. ArcelorMital appreciated by over 17% in the last month and Cliffs should be expected to exhibit strength after its strong results and a recent period of weakness. Cliffs has also suffered from declining iron ore pricing. Any continued momentum by industry leaders should eventually work its way down to the more junior entities within the industry, like IGC.

If IGC services this continuing demand and reduces its costs structure in accordance with its stated goals, the company could operate at an annual profitable within its next fiscal year. Alternatively, if IGC continues to aggressively accumulate undervalued Mongolian assets, the company may continue to operate at a loss for an extended period, but also increase its asset base and make the company a more desirable takeover target. At that point, shares should be demonstrably higher. The most probable near-term catalyst will be announcements by the Chinese government of new development projects, though it is also entirely possible that the government may simply further ramp up steel production and stockpile inventories, which are presently at multi-year lows.

Despite all these potential tailwinds, investors must understand IGC is still a small and highly speculative investment that should be limited to a reasonable portion of a portfolio. If China has a hard landing, Mongolia changes the rules governing foreign investment, iron ore prices decline substantially, or some other external issue affects the industry, IGC could remain unprofitable and discover it overpaid for assets that presently appear at value prices. Nonetheless, and especially after Cliffs' surprising upside results, it is likely that a growing number of investors will begin to look at the iron ore industry and consider the smaller and more speculative investments within the industry. Of those, IGC appears one of the most undervalued future suppliers to China and a probable takeover candidate later this decade.

Source: India Globalization Capital To Benefit From Unappreciated Chinese Iron Ore Demand

Additional disclosure: I am long CLF via preferred shares (NYSE:CLV) and have a beneficial interest in an account holding shares of IGC.