No. of Recommendations: 37
A bit late I know but here is a write-up on my NFSC entry - Zanaga Iron Ore (ZIOC). But on the positive side there is a better entry price now so my tardiness may imprive your returns should you choose to invest.

Zanaga Iron Ore (ZIOC) – Iron plated investment or rust bucket – you decide

Let’s start with some numbers:

SP: Jan 1st 19.75p
SP: today 17p
Market Cap: £45.5m
Enterprise Value: £24.1m
Net Cash £35m


What Do They Do?
Ummm – not a lot really; they just own 50% (minus 1 share) of what is basically a large deposit of rust in the ground in the Republic of Congo. At present it is not being mined and so there is no income and therefore no profits. What makes this interesting is that this deposit of iron ore is huge, of very high quality and easy to get at, which would make it one of the most desirable sources of iron ore on the planet.

So why isn’t it being developed?

Well it was; ZIOC had a JV with Xtrata, who had invested about $300m in the project, when they were approached by Glencore who subsequently took them over. At this point the ZIOC SP slid steadily down to around 11p because Glencore are known to dislike large greenfield projects and the associated high level of investment required. The Xtrata plans were for a very large capital investment (around $7.5b) to develop power supplies, a pipeline to the port and the port facilities themselves. The shares seemed to be priced as if Glencore would abandon the project. But why would they do that? They may not want to develop the site themselves (at least not on their own) but surely they could either sell it on or attract other investors, and ZIOC have tag-along rights on any deal. In fact Glencore have developed a plan to start mining sooner, albeit at a lower level and with a much smaller initial capital cost ($2.5m). The JV deal with ZIOC has been modified to enable the new plan to be delivered and ZIOC have committed $17m to the development (to December 2014) this somewhat less than half their current cash. To my mind these changes make the project a much more attractive proposition for investment or sale and Mr Market agreed taking the SP from 10p to 30p shortly after the Glencore announcement; but since then the SP has drifted back down to 16p-17p on no news.

I am sure that Glencore and ZIOC are looking for an investor/buyer and that negotiations are underway with interested parties including the Chinese; in the meantime development of the site is underway and production due to start in 2015. There is unlikely to be any news until a deal is agreed and on that announcement I would expect the SP to move significantly. To give some idea of the potential the SP reached 200p early in 2011 before starting the long drift down. I’m not saying the SP would rise to these levels, making it a 12 bagger from today’s price, but I do believe there is multi-bagging potential and that the deal that would trigger this rerating is likely to be announced this year.

If all that’s true why is SP languishing around 16p?

Intelligent question – you’re brighter than I thought. Possible reasons could be:

1. Potential investors are waiting for some signs that a deal is imminent. Dangerous in my view as the SP may move very quickly once news gets out of a deal.

2. Junior resource companies, especially those with no production (and therefore no cash coming in) are out of favour. But ZIOC has limited expenses and plenty of cash to see it through to a deal/production so this shouldn’t be an issue.

3. Demand and the price for iron ore is falling. This may be true for the moment (although iron ore prices have held up quite well) but this is 30+ year resource and short-term demand and pricing are not that significant. Also this would be one of the lowest cost producers of high quality ore, able to make good profits even at very low ore prices.

4. Investors believe that a buyer will not be found, or at least one willing to pay anything like its true value. Well both Xtrata and now Glencore clearly believe this project has significant value and my money is on Glencore extracting the maximum value from the opportunity ($1b+?).

5. A mining license will not be granted (application due in Q2 ’14). Possible, but why wouldn’t the government grant Glencore a license? They want the site developed and relationships are good. Delays would just slow down the income that the government desperately needs.

6. Glencore will find a way to screw ZIOC and keep the lion’s share for themselves. Well I know the big resource companies can play dirty but the ZIOC team have played a good game so far (and are significant shareholders) and as far as I can see have covered all the angles both in their original deal with Xtrata and the modified one with Glencore.

7. Something I haven't thought of....


In Summary

ZIOC own 50% of a valuable resource. Two major mining companies have agreed that it is valuable. Glencore (who really don’t like greenfield sites) have put a new development plan together and are marketing the project to potential investors. ZIOC’s share of the value is way in excess of 17p per share, maybe over 10x more. I have a significant investment (for me) here and will just sit tight and wait for developments, so my money is where my mouth is. But infallibility is definitely not one of my traits (just ask Mrs Dinocras) so DYOR and see if you agree that ZIOC is an iron plated investment and not just a rust bucket.

Other sources of information:

http://boards.fool.co.uk/zanaga-zioc-special-situation-12864...

http://boards.fool.co.uk/glory-or-bust-12801058.aspx?sort=th...


Happy investing

Terry
Print the post  

Announcements

Paulypilot's Pub has 3 bars:
Macro Topics - wider investment issues.
Share Ideas - company analysis and discussion.
Other Stuff - what it says.

No Politics in the Pub, Please!
But you're welcome to discuss it on the Political Fools board.
Tweets about The Pub

Closure of the UK Discussion Boards
The UK Discussion Boards are now closed to new posts.