No. of Recommendations: 26
Zanaga Iron Ore (AIM: ZIOC, SP 11p, cash in bank around 9p)

I have an aversion to investing in Junior miners, primarily because I don’t feel my knowledge of the sector is developed enough to give my judgement any kind of “edge”, and their because the susceptibility to disappointments normally pushes them right out of my personal comfort zone. So why am I now going to talk at some length, about this very junior miner? 3 reasons :
1) The former Xstrata has already done all its due diligence, and spent to date around $350m on feasibility studies, after becoming ZIOC’s joint partner, to the tune of 50% plus 1 share, against ZIOC’s 50% less 1 share.
2) ZIOC is cash rich (about 9p ps cash), and at its current valuation of 11p, after stripping out its cash pile, the market has ascribed to it an enterprise value of £5m, against its 50% ownership of one of the worlds’ most significant iron ore fields. This asset has been talked about by Liberum, and other brokers, as having a Net Present Value of in excess of 6B dollars, and possibly much higher still.
3) I will explain how this remarkable disparity makes this a “special situation” further down the page, and therefore why any investment decision is really based upon game theory rather than requiring any detailed mining knowledge. Nonetheless, suffice it to know that The Zanaga project expects to deliver one of the highest quality iron ore products, at the coast of West Africa (ready to ship), for one of the lowest costs in the industry. It has one of the most attractive geological resources in the world, with an infrastructure solution that results in the project being able to deliver a high quality product at lowest cost, making it a highly attractive asset versus other operations. Obviously when Xstrata chose to invest in the project, foreseeing a cost of c. $350m for their initial investment, they would have taken into consideration all of these factors, and carried out an exacting degree of DD.

The reasons why ZIOC’s 11p SP is now barely above cash having been as high as 200p in 2011, is that Glencore’s acquisition of Xstrata, and the formers’ stated intention to take the knife to major capex spending, has signalled to the market that this project will never get developed, and that ZIOC will burn away its $40m cash pile as the years pass, ultimately fading to oblivion.

If you want a little more background as to how we got here, Investore gave us in May 2013, and excellent synopsis:
http://boards.fool.co.uk/glory-or-bust-12801058.aspx?sort=th...

As I see it, this is what ZIOC are up against; Glencore, with their 1-share majority, are largely in control, though not quite to the extent that the market is perceiving; ZIOC have an important “ace” up their sleeve, in the form of a “Texas Auction”, which confers to them the ability to force through a sale–more on that later. Having declared their dislike of major green-field projects, even IF Glencore were to surprise the market, and announce an intention to spend the necessary $7.5B capex for developing the project, they would without any doubt, rather have as their partner a third party, with bigger financial resources than ZIOC, to share in the enormous capex burden. Against this background, Glencore may be motivated to “mothball” the development, allowing time to pass, and take out ZIOC's share of the project at a lowball price, perhaps after a few more years of ZIOC cash-burn, and after a pick-up in global iron ore demand. By that time, the SP could be below even today’s cash level of 9p. There is also the potential, for unhelpful alliances involving Glencore, an external (Chinese?) partner and perhaps a sympathetic Congo government, each with their own motivations to remove ZIOC from the picture at little cost. The Government could be obstructive by initially not granting the necessary permissions for the required pipeline construction, or for the exploitation licenses. I have read somewhere that African governments are generally not very keen on pipelines as these do not provide the road or rail infrastructure which they prefer, and this could be a convenient way to eventually ease ZIOC out of the picture, in favour of a better capitalised player who is more committed to road & rail infrastructure.

Equally worrying, Glencore could find a way to allow the May 2014 deadline for the mining exploitation license submission to elapse. This could further trash the ZIOC share price, again leaving the company facing a distressed sale, either to Glencore itself, or to a Glencore “preferred partner”. The resulting project delays would be no deterrent to Glencore, as they are in no rush to develop the project, if indeed they ever do so. Clearly, time is not on the side of ZIOC, but at least there should be a “backstop” to ZiOC’s cash-burn at May 2015, and I give the rationale for this under SCENARIO B below.

Also not helpful to ZIOC, is that they may be competing for Glencore’s capex budget, with another of GLEN’s iron ore assets –Sphere Minerals. I am awaiting ZIOC’s reaction to that suggestion, and will update when I have that, but this too, is not really that material to the investment case, where I can foresee several favourable outcomes, independent of Glencore, but dependant upon finding an external funding partner in a reasonable time frame.

Assuming that Glencore does not proceed with the development, the possible outcomes I can foresee are:

Scenario A: ZIOC and/or Glencore sells out its 50% stake
ZIOC and Glencore each sell their 50% stakes, measured against current project NPV, to a deep-pocketed partner. This may prove difficult in the current climate for big-ticket projects, and an unfavourable industry backdrop. Any purchaser would have to be in a position to take on the entire $7.5B capex burden themselves, which is a tall order considering the huge investment needed, as well as the attendant need to dilute Glencore and ZIOC’s shares, at an economic valuation of NPV, which was estimated at circa $3B each by Liberum (at a time when Iron ore spot price CIF China was $100/t, against over $130/t currently!). Even if the project is sold at a deep discount to NPV, the potential upside to ZIOC’s paltry enterprise value is enormous.
-OUTCOME EXCELLENT.

SCENARIO B: Glencore kills the project forever
There is a “Use it or Lose it” term in Congo Governments’ granting of “Mining Exploitation Licenses”. After completion of the DFS (ETA May 2014), the JV vehicle Jumelles has 3 months to submit the Mining Exploitation License Application, under pain of forfeit. Once granted, they then have up to 12 months to start the development work, in the absence of which, this vital license can be revoked. So it is clear that, unless work has started by May 2015 by someone, the Government will reclaim the project, and sell it then to the highest bidder. In this “worst case scenario, I would expect that ZIOC would then go into a voluntary liquidation following nearly 2 further years of burning cash, and return cash to shareholders of around 7.5p ps. I would expect the SP at this point to trade perhaps 0.5p under this, so my personal downside risk on the SP is 7p. It is always possible, that the major shareholders could look for an entirely new project at that time, embarking upon a new set of fundraisings, but I see this as very unlikely –the two major shareholders (non-execs.) hold 73% of the Company, and they will want to get their cash out, and get on with the rest of their lives. –OUTCOME POOR, downside on today’s SP -36%. That said, I consider this outcome very unlikely – why would Glencore allow this highly valuable project to simply “die”?

SCENARIO C: Glencore mothballs the project UNTIL COMPLETION OF THE DFS (MAY 2014), but announces an INTENTION to sell it on:
News of this on its own is likely to be very positive for the ZIOC SP, (Both ZIOC and GLEN have contracted “tag along” rights in the event that either of them sells more than half of their holdings to a 3rd party (–cf. AIM Admission Document). I doubt that Glencore’s Ivan Glasenberg will give away a $6B NPV project for a trivial amount!
-OUTCOME GOOD, on announcement, or
-OUTCOME EXCELLENT if a buyer is identified and announced, either at the time, or later on.

SCENARIO D: The “Texas Auction”
This is where things get really interesting. "Following the change in control at Xstrata, ZIOC has the right to trigger the Texas auction at the end of the Definitive Faesibility Study, or DFS” (which is expected in May 2014).
Subject to finding a substantial 3rd party backer (Chinese or other), ZIOC could bid for Glencore’s 50% at a level which would need to be at a sufficiently compelling discount to NPV, to interest any ultimate owner of the stake. If ZIOC cant find a backer for the auction at around the time of the DFS, we are back to the gloomy scenario B outcome, BUT ASSUMING THEY DO:

1) IF Glencore accepts the bid, Glencore’s 50% would be “passed through” to the backer. The backer ends up replacing Glencore as ZIOC’s partner, but would have to take on the whole $7.5B capex burden themselves. ZIOC would want assurances from the backer, before the Texas Auction is triggered, that they have the means and the desire to take on the whole capex, (or else they will be in nearly the same position as before – being a 50% shareholder in a zombie project). OUTCOME EXCELLENT

2) If Glencore rejects the bid, then it, (Glencore) become obliged to buy ZIOC’s 50% stake on the offered terms, and ZIOC walks away contented! Presumably, the backer would have to be financially compensated by ZIOC, for having facilitated the bid without gaining anything for their trouble. -OUTCOME EXCELLENT

All the EXCELLENT outcomes for ZIOC hinge upon their finding a buyer or backer with substantial financial resources before May 2014 (after completion of the DFS, and when the deadline passes for submission of Exploitation Licenses applications), who is prepared to either buy out ZIOC directly, or buy out Glencore, through the Texas Auction, or buy out both of them. I would be astonished if both Glencore and ZIOC are not working very hard behind the scenes, jointly and/or individually, to find a buyer. It is also inconceivable that such a prized asset will be allowed to escape. Even if neither of them succeeds in finding this buyer, the pressure will surely be back on Glencore NOT to abandon the $6B asset, upon which they have already invested $350m, and to start stumping up some of the capex spend to at least keep their asset alive and eventually saleable.

Glencore will probably update the markets on their intentions for their XSTRATA-acquired projects at an investor presentation on Sept 10th. At around that time, Scenarios B or C could play out. It is also possible they defer their decision by a few months to around May 2014, on the assumption that with the DFS being then completed, they could have a stronger hand on the pricing of a sale.

SCENARIOS A or D could play out probably only after the DFS has been completed in May 2014, (as no backer/purchaser would be likely to commit before its results are known).

Conclusion:
My downside risk is to circa 7p (36%), but quite unlikely to play out.
Potential upside on ANY of the more favourable outcomes: In view of the NPV numbers involved, well, think of a sensible number, and then multiply it to a surprisingly higher number. Even a “fire-sale” of this asset should represent many multiples of ZIOC’s current £5m enterprise value. I don’t think that one needs anything more than a modest investment here, for a chance to lose a little, or to make a hugely disproportionate gain. As always, no exhortation for anyone to invest here –this is simply how I see things. As always, DYOR.

If anyone with greater experience than I in junior miners has seen this kind of scenario before, I would love to hear if there are any “banana skins” lurking that I may not have thought of. For that reason, I am cross-posting this on the mining board, but suggest that any responses are posted here at the Pub.
Freddie
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No. of Recommendations: 14
Nice idea. But.

Iron ore will be in structural oversupply for a long time. The industry has effectively killed itself with it's pricing policy. Using annual contracts rather than allowing the spot market to determine pricing created excessive profits and allowed marginal projects to get funded. A lot of those projects are coming on-line in the next few years and there will be massive oversupply. It's going to last a long time and it's going to be ugly.

All the majors know this and it's highly unlikely that a project like this one will be developed in the foreseeable future. For that reason it's essentially worthless despite being huge. An accurate NPV given the state of the Iron ore market is probably negative. Glencore will most likely just find a way to hand back the keys and walk away.

I would be very surprised if you get anything other than outcome B. But worse.

It is likely the management of Zanaga are well aware the project will never happen. AIM mining companies are very good at one thing in particular, mining shareholders for cash. They will likely look to "diversify" by taking a stake in one or two other projects. This way, management can continue to get paid until all the cash runs out (or they can raise a bit more with a placing or two). Small Aim miners can play this game for years. Passing from one "too good to be true" deposit to another, Iron ore this year, gold the next etc etc.

Your downside protection is probably nearer to 100% than 36%. It might still be an interesting punt at that risk reward ratio but for me the Iron ore market is the problem.

B4T
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No. of Recommendations: 11
B4T, it is obviously a personal judgement as to the downside risk here, mine is 7p, others may agree with you that we could go to zero. I dont know that the 2 major shareholders owning 73% of the company would fritter away $40m in cash, of which $30m is attributed to them, for the sake of playing mining musical chairs, and paying themselves a relatively modest salary until the music stops, and the money is gone. Would you? I would personally take the cash in 2 years. Alternatively, if they do succeed in a trade sale, then everybody laughs on the way to the bank. The NPV's were determined on the basis of a $100/tonne China cost. Despite the decimation in that market, spot prices are still well above that level.

I also believe that the cycle will turn as they always do. Chinese demand has slowed, but not died. When demand picks up, as it will at some point, the mood will change. I dont believe that sovereign governments, particularly the Chinese, will lose their appetite for cheap and high grade iron ore. Zanaga's is absolutely at the bottom of the cost curve, and towards the top end of the grade of material. If you say that this project has a negative NPV, then should we infer that there is no economic basis for any iron ore industry at all, anywhere?
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No. of Recommendations: 14
B4T's reasoning has far larger implications than just ZIOC. One might conclude, that enduring over supply and weak demand for iron-ore, will doom not just Zanaga, but the entire West-African iron-ore proposition. In actual fact, the iron-ore price has held up well to date, China seems to be re-stocking and due to internal problems, India has removed ~100mt/a from the the global export supply. We might also recall how the iron-ore price strength at the turn of year-12/13, caught many pundits out. Perhaps we should reflect for a moment on the fallibility of prophets (bears/bulls), who place so much faith in their own rhetoric, they fail to notice that the world turns?

I would suggest, that in the absence of any clear direction (on Zanaga) from Ivan Glasenberg, one company to watch is Sundance Resources (Mbalam-Nabeba project). It would appear that post the Hanlong setback, there is still some ambition there. Personally, I do not believe that West-African iron-ore is doomed. It is just too important for both the countries concerned and those significant demand-side interests, that wish to own assets and thereby moderate their own supply-side dependence on Australian mines.

In general, the West-African 'Pilbara' will likely have low production costs, so a falling iron-ore price is not necessarily that much of an obstacle. Clearly, there is political risk, but even Australia is not immune to risk (rising taxes, regulations and/or labour disputes pushing up costs). The immediate big problem in West-Africa is infrastructure (lack thereof). Massive investment is required. However, this is not just about the miners, it is also about governments. The refurbishment of the Sena rail in Mozambique was for example, largely funded by the World Bank. In West-Africa, which governments can similarly tap international funds, and/or attract direct state (chinese) investment? They are in competition with each other. Which brings me back to Sundance Resources.

http://allafrica.com/stories/201308081016.html
http://video.cnbc.com/gallery/?video=3000188407

The Sundance project is in the RoC, but will use a spur rail-link to export via Cameroon rail and port. That new infrastucture might then enable a number of other projects in that region, so there is scope for sharing the massive construction costs. However, that infrastructure investment largely benefits the Cameroon. You have to wonder how the RoC government feels about that. In that sense, Zanaga is a competing project. Is it possible that both regions might get developed, but also that one may necessarily lose out to the other. This should be a serious issue for the RoC government. Lets hope they are being suitably proactive. I imagine that both Ivan and the Chinese will play hardball to maximize whatever concessions are on offer from both governments.

To conclude, I think West-African iron-ore development will continue (ignore the doom sayers), but there will be losers. Not every project is going to get the necessary infrastructure investment. Ironically, if Sundance progress over the next 6 months, the odd for Zanaga may actually lengthen. It would be really useful, if Ivan would update the market this month (90 days post merger) on his intentions in the RoC. Unfortunately, a $300m investment by Xstrata in Zanaga, is vanishingly small in the greater Glenstrata scheme of things. So don't hold your breath. Still... you never know... :o)
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No. of Recommendations: 12
KatyLied,
A very illuminating post –thanks.
My expectation is that the RoC Congo Government would be more supportive of Zanaga’s project rather than Sundance’s, largely for economic and logistic reasons.

The Australia-owned Sundance project will necessitate construction of a 560Km railway, through difficult terrain, and with the pre-feasibility studies carried out 2-3 years ago, it is likely that capex costs are underprovided for and are likely to suffer overruns, together with the complications of dealing with two different governments, and the need to pay multiple royalties/taxes. Although Sundance has “early mover” advantage , and has recently gone out to tender for the various components, it would be surprising if such a multi-faceted and complex project can be put together in a reasonable time frame, and remain competitive vis a vis the much cheaper and simpler Zanaga 350km pipeline project. It is likely that RoC would benefit economically far more from Zanaga than from Sundance, whilst the infrastructure benefits of Sundance will pass to Cameroon rather than RoC. Once you start building infrastructure that has to be shared between multiple governments and projects, who will also have to share tax revenues/profits/costs, you have a recipe for disputes, cost escalation and uncertainty. I doubt Sundance will come about because of its complexity. Assuming it does though, as Katy suggested, the two projects are not mutually exclusive. If Sundance gets through against all these odds, then RoC will also be keen to realize its revenues from the bigger, simpler, cheaper Zanaga project with its more compelling economics.

Zanaga has, (as I mentioned in my original post), to compete with Xstrata’s “Sphere Minerals” project for Glencore’s capex budget. Both projects are of comparable size, with similar overall NPV’s, although Sphere’s covers 3 separate sub-areas, (the initial phase of which is only half of Zanaga’s), whereas Zanaga is ONE huge 45Km project. Sphere offers, like Zanaga, ore of high quality, though not considered to be quite as good, but it does have two big advantages in that the railway infrastructure is already in place, together with the deep-water port, as well as perhaps a 2-3 year head start over Zanaga. There is however a complex “conflict of interests” between the Mauritanian Government which is all at once, Sphere’s JV partner (for some of the 3 sites), Sphere’s infrastructure owner, and when product gets sold, they also have to compete with a Government-owned company, upon deciding who buys their material. This leaves Sphere potentially “at a greater mercy” to the government, with greater susceptibility to costs escalation. Ironically, the project is in a desert area, so again a (short) pipeline has to be constructed to pump up-stream de-salinated water for the plants’ operations. There is also a very real “country risk” as this all resides in Mauritania, near the hotspot of Mali, both of which suffer from significant political risk. There is a Foreign Office “no visit” warning against travel to the area. So pros and cons all around.

Spot prices are currently $133/t, providing comfort to the NPV estimates, which were based on $100/t. There may be a falling back in the second half, as Chinese mills typically de-stock for maintenance. The Chinese steel mills apparently are preferring the “pellet feed” highly ground type of ore which Zanaga will offer, with its 68% Fe content, and are gearing mills up for this. Pellet feed consumption, (as is produced from Chinese mines at costs 0f $100/t, Vs. ZIOC’s $40/t delivered China), is expected to grow at over 23% over the next 5 years, compared with single digit growth of the traditional sinter fines 62% Fe benchmark, as produced by Rio Tinto and BHP Billiton ex. Australia. The ZIOC 68% material is cheaper to mill, reducing significantly the amount of coking coal consumed in the process. For this reason, it is expected that ZIOC’s product will trade at a premium to the benchmark 62% products, and Glencore themselves have been quoted as saying that they will never have a problem placing this product. In the light of all this, it is not hard to appreciate why the Chinese would have an interest in reducing their dependence on Australian product, by securing long-term proprietorial rights to the kind of ore they seem to prefer, and at a cost-saving of $60/t to that which they can produce locally in China. If they did secure this in West Africa, one can expect their own mines to at a stroke become uneconomic, and shut down, further assuring long term demand for W. African ores.

So clearly, the situation is complex and nebulous, and can go several ways, leading the market to take fright, and pricing ZIOC’s shares as though the asset will never be developed. I remain hopeful that it will, by someone (almost certainly not Glencore, and quite probably Chinese) who will see inherent value in the scale and quality of the Zanaga product (as Xstrata already has!), and the longterm independence it can provide.
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No. of Recommendations: 3
Spot prices are currently $133/t, providing comfort to the NPV estimates, which were based on $100/t. There may be a falling back in the second half, as Chinese mills typically de-stock for maintenance.

The issue for Glencore isn't what the spot prices are today or next year but what they will be in 2018-2025. With a supply surplus predicted by 2015 and the supply/demand cycle diverging (i.e supply will be growing at an increasing percentage while demand grows at a decreasing percentage) the outlook for pricing past 2018 looks weak. Glencore will need to decide what to do given that highly uncertain backdrop. IMO it's far worse than most commodities cycles and yes it is a bit different this time. As I said above, the Iron ore producers have had an oligopoly over the last decade and have gorged on inflated profits. Those profits have been fed into questionable projects and M&A. The result looks likely to be significant surpluses for the years following 2015 for as far as the eye can see. This is why the majors are so wary of greenfield projects at the moment. They might spend billions in development only to come on-line at exactly the wrong point in the cycle. Every new project just exacerbates the problem, especially the big ones.

I think the majors will only look at the very best located, (politically and geographically) and most economic options. Which is why Rio is planning to expand Pilbara rather than look elsewhere. Even that plan has been met with concern by investors who are worried about the cost at this point in the cycle.

I think long term prices nearer to $80 are much more likely than the majors would like to admit in public.

http://www.bloomberg.com/news/2013-08-12/iron-ore-gluts-seen...

B4T
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No. of Recommendations: 5
Hi B4T,
As I said above, the Iron ore producers have had an oligopoly over the last decade and have gorged on inflated profits. Those profits have been fed into questionable projects and M&A. The result looks likely to be significant surpluses for the years following 2015 for as far as the eye can see.

Agreed. There will be a lot of slack on the supply side from those questionable projects. The market will fix this over time. Prices will come down, as they already have, and the projects which are uneconomic at the lower prices will die. The first projects to die will be the ones at the wrong end of the costs curve, such as the Chinese local miners, where costs already range between $65-100/t. The market will, over years, weed out the weaker projects. As these projects fall away from the supply side, the pendulum will start to swing the other way. Initially, prices will stabilize, and eventually they will start to recover. Indian production is already falling away for this reason, China perhaps next, and the projects that will be safe, are those at the good end of the cost curve. With cash costs of $20-23/t delivered to port W. Africa, and $40/t delivered China, I would include in the “safe” category Zanaga and others in W. Africa, and Anglo American amongst others in Brazil. When the demand side picks up again, which of course it will sometime, there will be more upward pressure on prices. There are already tangible signs of global industry recovery, and stabilization in iron prices.

That said, this is still all theory, and although the theory gives support to the cause of the low costs producers, I am wary of paying too much attention to medium/long term forecasts which are fickle, and don’t have a brilliant track record of success. Just 12 months ago many pundits were calling Gold at over $2000/oz, from the then $1600. Instead of which, just 12 months later, the metal has reversed by some 20%. My point is not to compare Iron ore with gold, (of course the latter is not a metal used widely in industry, and is subject to different tensions), but rather that the forecasts are just opinions, with some basis in theory, but where the theory often lets them down in practice. The models cannot predict the imponderables, which eventually move the goalposts.

I think long term prices nearer to $80 are much more likely than the majors would like to admit in public.

Who knows, you may be right, but I don’t rate my own powers of forecasting highly enough to make that call. But, assuming you are right (and you are absolutely at the most bearish end of every commentator I have seen), I don’t think you will be right for too long. The market will fix that. I also draw comfort from the fact that by Liberum’s calculations, even at prices of $80/t the ZIOC’s share in the Zanaga project is given an NPV of $2.2bn using a WACC of 8%. Against a background of interest rates being at record lows now and for a few more years to come, perhaps the majors will take the view that major projects should be funded now, not in 5 or 10 years, with the proviso that they are economically in the “safe” zone.
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No. of Recommendations: 6
When the demand side picks up again, which of course it will sometime, there will be more upward pressure on prices. There are already tangible signs of global industry recovery, and stabilization in iron prices.

My bold.

FWIW I don't disagree with t a lot of what you say. Ultimately commodities are cyclical. The problem is in the length of each part of the cycle. There is also a paradigm shift in the nature of the demand for Iron ore. How long will China continue to binge on infrastructure development ? As the economy in China moves towards a domestic consumption model just how much demand will there be for the massive infrastructure projects of the last 20 years ?

I don't know the answer but what I do know is there will be a significant surplus in Iron ore production from 2015 and the outlook for demand is complex. It's a reasonable probability that demand growth will not return to previous levels as China is unlikely to return to 10% growth. It's also a reasonable guess that China will slow infrastructure investment going forward. Neither of those things is good for Iron ore prices given the increase in supply. Iron ore is unique amongst commodities in that it requires such massive capex to bring new supply on line. It can't be turned on and off very easily. It's likely that a lot of new production coming to market from 2015 may end up delivering ore at around the marginal cost of production for a long time. IMO The party is over for the majors. We could easily see 10 or even 20 years of lower iron ore prices.

perhaps the majors will take the view that major projects should be funded now, not in 5 or 10 years, with the proviso that they are economically in the “safe” zone.

I know for a fact that is not what the majors are thinking. They are thinking about preserving cash and not much else. Have a read through the latest reports from all of them. It's all about capital preservation, divestment of non core, reduced capex, portfolio simplification. etc etc. Nowhere do any of them mention big new greenfield plans. In that environment and against the above backdrop, it would be a very brave CEO who would sanction a multi billion dollar greenfield site.

Consider the following chart. The mean revisionist in me says $80t is about $40t too much. It was under supply and rapid demand growth that made the graph look like that. What do you think over supply and demand weakness might do ?

http://www.indexmundi.com/commodities/?commodity=iron-ore&am...

B4T
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No. of Recommendations: 2
Reversion to mean sounds good, question is the period one chooses for that mean. I would choose the recent years of high consumption, which would take us into the well over $100/t for this particular mean. China may not be growing at 10% now, but at 7-8%, they are a very long way from stagnating. But, as I said, I dont rate my powers of clairvoyance, so instead I will focus on the compelling economics of individual projects such as Zanaga.

Meanwhile, looks like the Chinese are not shirking away from major capex spending when they see a big picture in their interests:-

http://www.bloomberg.com/news/2013-08-13/china-said-to-mull-...

Freddie
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No. of Recommendations: 11
There is also a paradigm shift in the nature of the demand for Iron ore. How long will China continue to binge on infrastructure development ? As the economy in China moves towards a domestic consumption model just how much demand will there be for the massive infrastructure projects of the last 20 years ?

That's an interesting line B4T and certainly one that I've seen expressed in many other places as well.

However, I do wonder if people are becoming just a little too fixated on China. What about the massive growth of the other "emerging" economies?

Looking at demographics, we have very rapid growth in the likes of India, Indonesia and especially many African countries. This later point is what has caught my imagination with regard to (very) long term drivers but is encapsulated very well in the following piece from Washington Post:

http://www.washingtonpost.com/blogs/worldviews/wp/2013/07/16...

Many people are, wrongly I feel, writing off Africa as a political basket case but what is interesting is what you can find when you dig beneath the surface. Tremendous growth in many countries (Eastern Africa is especially intriguing).

So whilst we may well see some slackening of the infrastructure demand from China, I think that there is likely to be more than enough of a driver from the "next wave" of countries - many of course already have ready access to iron ore on their doorsteps.

Sorry for being a little off topic - the markets are asleep and at times like this my mind tends to wander on to my favoured themes for tomorrow.

Regards

Darron
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No. of Recommendations: 1
fredahad - "Zanaga has, (as I mentioned in my original post), to compete with Xstrata’s “Sphere Minerals” project for Glencore’s capex budget. Both projects are of comparable size, with similar overall NPV’s, although Sphere’s covers 3 separate sub-areas, (the initial phase of which is only half of Zanaga’s), whereas Zanaga is ONE huge 45Km project. Sphere offers, like Zanaga, ore of high quality, though not considered to be quite as good, but it does have two big advantages in that the railway infrastructure is already in place, together with the deep-water port, as well as perhaps a 2-3 year head start over Zanaga..."

Yes, I would not disagree with anything you have written about Sphere. There is however another angle to these 'competing' projects. Both Sphere(100%?) and Zanaga(50%) are Xstrata 'greenfield mining projects'. Glencore's name has already been loosely linked with Sundance as an advisor (during the Hanlong episode and possibly still ongoing) and now that various parts of the Sundance project are up for tender, it would not be that much of a surprise, if Glenstrata remained interested in the iron-ore output. In simple terms, it is fair to say that while Ivan Glastenburg craves a piece of the global iron-ore supply, he is less keen on the actual (greenfield) mines themselves. That was certainly true of Glencore (before the merger) and Ivan's rhetoric hasn't changed much.

In the back of my mind, I had the sense that Glencore had more involvement with Congo iron-ore than just what they had inherited from Xstrata. The pieces fell into place when I was reminded, that they were already a stake-holder in 'Core Mining'. Core is a privately owned company, so news flow is rather limited. When Glencore bought in, it was described as flollows...

GLENCORE INVESTS IN CORE MINING - Core Mining, a private company incorporated in the British Virgin Islands and focused on the exploration, development and operation of large scale iron ore projects in Central and Western Africa, is pleased to announce that Glencore International AG has made an investment in the Company. In conjunction, Glencore will act as marketing agent for supply to Core Mining's customers for initial volumes of iron ore produced by the company’s projects. Both Core Mining and Glencore have agreed to pursue future co-operation in a number of areas relating to the development of the Avima iron ore project.

There is a cute video of the AVIMA project = http://www.coremining.com/index.php?option=com_content&v...
There is also a MOU with Sundance Resources regarding infrastructure cooperation...

Core Mining Limited (“Core” or the “Company”) is pleased to announce that it has entered into a Memorandum of Understanding (“MoU”) with Sundance Resources Limited (“Sundance”) relating to the provision and use of future infrastructure facilities. The MoU will enable Core to pursue opportunities to jointly develop and share the required rail infrastructure to service Core’s world class iron ore project, Avima, as well as Sundance’s Mbalam/Nabeba projects (the “Sundance Project”)...

A couple of observations. (1) The relationship between Glencore & Core is very much 'Ivan style' (as opposed to having sole financial responsibility for the project). (2) The 'Sundance project' might be seen as an 'enabling' project for the 'Core project' (hence Glencore's advisory role), since it is Sundance that will issue the main tenders for infrastructure development.

All this means, that Glenstrata 'needs' neither Sphere nor Zanaga to retain some (albeit reduced) interest in West African Iron ore. The retained interest (pieces of Core and possibly Sundance) would be far more in line with Ivan's distrust of greenfield finance. So the question I am wondering about, is - Could there be an outcome for Zanaga along similar lines? Rather than walking away, might Glenstrata look to replace its controlling 50%+1 share interest, with an arrangement more like to that of 'Core Mining'? That way Zanaga would retain Xstrata's mining expertise, while more potential bidders (depth of pockets) might qualify as buyers. Not so sure however, that any such arrangement could ever suit the Chinese state...

Admittedly, how any of that might affect ZIOC would seem to remain as opaque as ever... :o)
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Katy, I think that your last post illustrates very well, that there are different ways in which the various protagonists can bring viable projects to fruition, whilst still serving their interests. In the case of Glencore, it is a "given" that they dont want to stump vast amounts for infrastructure. They would like for someone else to fork out for the lions' share, for which they will cede the majority of theirs (and ZIOC's) ownership, whilst largely retaining marketing rights to the output. There are many ways to skin this cat, which can still provide value for all parties -GLEN, ZIOC, RoC Govnmnt. and the project financiers. The Core/Glencore/Sundace menage a trois shows a reluctance to simply let valuable mineral assets die. Another scenario which has not been discussed in my original post, or the developing thread, is one where Zanaga is developed as a substantially cut back project, targeting for instance, a shorter pipeline, or even no pipeline, but instead a surface operation, with trucking. They could even trans-ship rather than build the port. All of these would dramatically reduce capex, at the expense of increasing opex. The point is that if we accept that the project has great merit, and that it will not simply be allowed to expire, then a way will be found to crystallise some or all of that value. I cant see how, when all the horse-trading is done, that ZIOC's enterprise value will not be substantially revised from today's £7.5m, whichever way the cat is skinned.
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and that it will not simply be allowed to expire,

but isn't it in the interest of all/most interested parties -- other than ZIOC -- to let it expire, along with its onerous conditions, and just renegotiate from a clean slate a new deal with the RoC with conditions matching current circumstances?
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Have not looked into this company but so many factors to consider with these commodity stocks i always feel. Fenner seems like a great company but nobody has cared whilst the price of coal keeps falling.
I seem to remember Buffett admitting buying Connoco Phillips whilst oil was at a high was a mistake.

The commodity driven aussie dollar has fallen like a steel girder since May, so that doesnt strike me as a positive. The USD plays a part, and not sure where thats going.
Talk of iron ore gluts and Goldman Sachs bearish on the metal.

The BRICS countries are where iron ore bulls hope the demand will come from but are also the biggest producers of iron ore.

Chanos bearish on both iron ore and China earlier in the year ;

http://www.moneymorning.com.au/20130202/why-jim-chanos-is-st...

The copper spot price (an economic indicator as its used in everything) has seemed to follow the Shanghai Composite very closely in its downtrend over the last 3 years and iron ore stocks like CLF seemed to have followed whilst the s&p has been off to the races during the same period ;

http://stockcharts.com/h-sc/ui?s=$COPPER&p=W&b=5&...

I think i'd like to see the iron ore players spring to life before having any sort of opinion.

http://stockcharts.com/public/1109839/chartbook/189107467
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but isn't it in the interest of all/most interested parties -- other than ZIOC -- to let it expire, along with its onerous conditions, and just renegotiate from a clean slate a new deal with the RoC with conditions matching current circumstances?
Anything is possible, and I alluded to this in my OP, but I think this is unlikely. It would entail a Machiavellian cooperation between GLENCORE and/or an external party with the RoC Govmnt, a vital part of which would mean GLENCORE having first to "give up" it's proprietorial rights, by allowing vital deadlines to pass, in the hope, that they will later be "allowed" back in. They would also set themselves up for legal action by those being cut out. This kind of dirty dealing can happen, but at huge commercial risk, and the prospect of reputational damage. Admittedly, corporate governance issues are not always paramount, ENRC coming to mind as a good example, but I very much doubt that pattern would be followed by Glencore.
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It would entail a Machiavellian cooperation between GLENCORE and/or an external party with the RoC Govmnt, a vital part of which would mean GLENCORE having first to "give up" it's proprietorial rights, by allowing vital deadlines to pass, in the hope, that they will later be "allowed" back in.

I doubt anything Machiavellian is required. it could be that the opportunity cost, to Glencore within the current context of their portfolio and capital fire power, of the conditions takes the NPV of the project to below zero. if so, it's in their purely rational interest to let it expire if they can't find anyone else who sees positive values here, and then rebid, or not, later on at conditions that take it above zero. if some others bid higher, so be it, there will be other opportunities elsewhere. your scenario works out if the project with its current conditions is of positive value to Glencore, which is possible but not a given.

you mentioned sunk costs earlier, but they are irrelevant to forward analysis, unless they are unusually emotional/incompetent, which seems doubtful. it's similar to us as investors, we don't use past PNL to make forward decisions on portfolio changes, because a company's future fortune is never linked to our personal entry point.
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The DFS would belong to Jumelles though. Might be difficult to abandon Jumelles (ie. ZIOC), only to rebid at a later date. To proceed the project, a DFS would be needed. Why waste time and money doing the whole thing all over again? If the intention is to rebid, better to own the DFS (ZIOC buyout), otherwise plenty of scope for a future protracted lawsuit...
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No. of Recommendations: 15
Volte face alert :-)

I bought shares in Zioc yesterday and today.

It's been nagging at me since this thread started. The number one rule I have for resource companies is that the resource has to be world class. This one clearly is. Generally World class resources get developed AT SOME POINT.

I went over the agreement with Xtrata from the listing document and tried to figure out how I think it will play out. I also had a look through Glencore's announcement yesterday to get a feel for what they are doing.

So here's what I think.

My position hasn't changed with regard to Glencore developing the deposit. I put the chance of that at about 5%. But I think someone else will.

It won't be any of the other majors as they are all greenfield averse at the moment so it will likely be sovereign wealth/state funded.

Given the license lapse clauses over the next two years, whoever steps in now will do so with the intention of taking the project forward. No-one can buy this project to mothball it for later. To some extent that makes this very much a buyers market.

The "Xtrata offer" clause is dead in the water if Glencore have no intention of developing. The Texas auction is also not really a realistic outcome as the backer for Zioc would need to be ready to develop the mine, anyone wanting to do that would be better served by trying to buy the whole project before the BFS is finished.

I think the most likely outcome is that Glencore have decided (or will) that they don't want it and will try to extract some value by selling it outright as soon as possible. Sooner is better as the amount of time left for starting development is short by mining standards. Zioc wins with it's tag along clause.

However, Glencore may decide they want to keep an option on the project and apply for an extension to the development timetable. This will leave ZIOC shareholders in limbo for a couple of years. The end result is still sale or development. Short term boring long term good.

I think If Glencore don't want to develop they need to sell as quickly as possible to realise the most value. The main risk for ZIOC shareholders in this case is that Glencore sell just under half their share in order to retain an interest, If they sell less than 50% there is no tag along clause. I'm not sure how likely that is but it's a possibility.

It's also unknown what the terms of any sale might be. Mining companies like to do asset swaps and such like. It may be that it isn't a cash deal which could make the tag along complex. However, it doesn't matter to me as by then the SP would already have done enough.

Whichever way I look at it I can only see a sale by Glencore, Ivan is a good dealer so I bought a punt sized position.

B4T
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B4T,
I think that is a good summing up as to where we are, and it is good to get your (cautious) "seal of approval". Your initial negative comments were very well received by me, as it does force one to really re-examine the logic used to justify the investment decision. I did do so, and am as comfortable now, as one can ever be, especially given the asymmetry between the risk and reward. Todays' price action seems to indicate that more people are buying into the logic, so hopefully we will all, in time, get a favourable outcome. A stabilising iron ore price ($137/t), and Glencore's (to me at least) clear intention to either develop or more likely sell on, the project will also help. Reason I say this, as a friend pointed out to me today, is if there were NO intention to do one of these two things, then logically Glencore should have by now downed tools on the DFS, and offered half of the outstanding costs of $50m to ZIOC, to obtain a release under that obligation. Had they done so, ZIOC would probably have bitten their arm off in taking the money, and started the process of a voluntary liquidation and return of cash.

Freddie
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BT4 - "The main risk for ZIOC shareholders in this case is that Glencore sell just under half their share in order to retain an interest, If they sell less than 50% there is no tag along clause. I'm not sure how likely that is but it's a possibility..."

I can see where you are coming from, GX may well prefer a smaller share holding to focus more on product marketing, less so on mine and infrastructure development. That would be more in line with Ivan's MO. To maintain control over Jumelles, GX and the new partner(s) would then have to operate as a block (against ZIOC) which could lead to some tricky concert-party scenarios. I just think that if you are going to bring new deep pockets, it might be alot simpler to remove ZIOC (buyout) from the picture. The opportunity to do that (option) is already in the JVA, the only question being the cost. ZIOC (without their own rich partner) will have a weak negotiating position...
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Zanaga is given a "conviction buy" rating in September issue of SB Magazine

http://bit.ly/16MHoD8
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Glencore's Investor Day summary, announced today:
I have found nothing Zanaga-specific so far in the GLEN announcement. All the xStrata projects except Bamba copper and another one, are "under review" for divestment (yes please!) or curtailment (highly unlikely for Zanaga - too inherently valuable to discard). So, expect now they will press on with the DFS, whilst looking for buyers behind the scenes. This would be why the former XStrata head of Iron Ore was kept on by Glen -to oversee completion of DFS -May 2014- and the likely pursuant divestment. A divestment deal could still theoretically be concluded in advance of the DFS, but where the price agreed would be subject to variations according to precise DFS outcomes. If G*D forbid a "curtailment" is decided for Zanaga, then I expect at the very least, tools to be downed on the DFS, and the remaining costs to be split in half, half to be offered to ZIOC as consideration for discharge of Glencore from their obligation to completing the DFS study. Still find this to be the least likely outcome, but would be far from a disaster for ZIOC as even that relatively small sum would represent a significant part of its market cap.
Freddie
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I sold most of my punt for a free carry in the last few days.

I'm listening to the investor presentation at the moment. Ivan has pretty much said what I expected and they have no interest at all in greenfield. None. Zip. Nada. He presents very well and I'm going to have a good look at an Investment in Glenstrata after hearing the longer term plans.

The capex plans make It clear to me that they will sell this project. I don't see how it falls into the "maintain optionality" category.

The only question now is when and how much.

B4T
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Zanaga the new landscape:
What follows is my take on Friday’s developments:
Xstrata designed the original project, with a “gung ho” attitude to capex. They simply wanted the biggest, cheapest production cost “Rolls-Royce” project, with little concern over the attendant capex costs. Glencore (Gx), in keeping with their well-publicized distaste for expensive greenfield projects, have been creative and split it into two phases, P1 and P2, at production costs of $40/t & $30/t respectively, plus $40/t shipped CIF China. The “Gx way” of phased development is capital conservative, and breaks the project into “bite-sized” chunks, the scale and economics of which make it more palatable to Chinese debt/equity providers, and to Chinese construction expertise. It is now far more marketable than before and brings forward the “time to market”. The Gx ethos is that by the time that P1 is up and running, its own cash flows and a more highly developed country infrastructure, will minimize and partially finance the P2 Capex requirements, which are likely to be comparable to those of P1.

P1:
running from likely 2015 with a 3 year construction period. - designed to deliver, a still cheap to produce ($40/t) pellet-feed material (the type increasingly favoured by the Chinese steel mills), of high quality 66% Fe (original project cost $23/t at 68% Fe), but with the necessary capex being reduced from $7.5Bn to $2.5-3.0Bn. The marginally lower purity of 66% will still command a premium over benchmark 62% material, of $12/t in China. The ore will now be delivered at an output of 12+2 Mt pa, vs. 30Mtpa formerly. The capex reduction is being delivered using a combination of existing rail, road and port infrastructure, trucking, trans-shipment, and a smaller bore pipeline. In so doing the capital cost intensity is brought down from $245/t pa to $200/t pa). When P2 is implemented, upgrading the pipeline will be relatively inexpensive, as most of the pipeline costs are incurred initially in acquiring use of land rights, clearing the terrain and burying the pipeline.
Question to self: why not put in the larger pipe in the first place?
<<I understand this would necessitate large incremental capex in additional pumping stations and dedicated power plants, whereas the smaller pipe will use existing power grid, less pumping and less processing plants. P1 targets only hematite ore, whereas P2 will target magnetite as well, so necessitating two independent processing plants>>.

Significantly, DSO ore (Direct Shipping Ore) represents the “2” of the
“12 + 2” Mt pa annual output. It is near the surface, and should provide much nearer – term cash-flows since it requires minimal to no processing, and is virtually ready for trucking straight to local port for trans-shipment.

P2:
When P2 is developed, it will produce at lower cost ($30/t, vs. $40/t) and slightly purer material than P1 (68% Fe vs. 66%).

Size of the revised project: -Enormous, and well defined by Xstrata’s original studies, using the most rigorous standards) as being a 6.8Bt Resource with a 2.5Bt Reserve, targeted from both phases. (“RESERVE” being the proportion of the “RESOURCE” that is so far actually available as defined by the economic viability of its extraction. P1 on its own delivers 500mt (P2 a further 2Bt), which makes it the largest single reserve in Africa (Sphere project in Mauritania has 460Mt, and Sundance in Cameroon/RoC has 500Mt). The project has at least a 30-year lifetime, with additional currently indeterminate though huge expandability. P1 on its own confers a 20-year + life of mine.

Changes to JV terms –why?
On the original Xstrata project, Glencore would probably have binned it, but with their creativity, it is now palatable, economic, and marketable. The original JV agreement was “fit for purpose” then but not now, as several goalposts have moved, not least ZIOC’s partner now being GX, with their altered agenda from that of XStrata.

GLENCORE’s CALL-OPTION had to go: Gx’s call-option on ZIOC’s share would have been obstructive to ZIOC obtaining 3rd party funding –say ZIOC found a Chinese steel mill ready to provide debt funding in order to secure their ore requirements for 20 years, why would they risk an investment when Gx could call in ZIOC’s 50% and claim for themselves the marketing rights to the output?

ZIOC’s TEXAS AUCTION RIGHTS had to go: The Texas Auction was in reality rapidly becoming meaningless to ZIOC with only their meagre $40m backing to support it. With the previous May 2014 deadline looming, there would have been insufficient time for ZIOC to find external support to take out the entire $7.5Bn project away from original JV. Gx are now providing cash to keep the project alive for a further period to the end of 2014 (vs. previously to March 2014). This time-extension is designed to deliver the DFS and Mining Application License, and crucially, to buy more time for Gx/ZIOC to jointly bring in external debt/equity partners. The quid-pro-quo from ZIOC is that they have to make a $17m contribution to the extended work program costs, which keep the project going to the end of 2014.

The TAG-ALONG rights for ZIOC still apply, if Gx independently find a buyer for their stake, and “Dilution at NPV” rights remain in place.

ZIOC cannot be “cash-called” by Gx –all future spending will now be subject to joint signing-off, documented in a new “shareholder reserved matters agreement”. Under this, ZIOC’s undercapitalization relative to Gx makes for this being a shared problem, not just ZIOC’s.

Next Steps & Can a deal get done by end of 2014?
Gx & ZIOC have now committed to funding project to end 2014. The DFS will be delivered Mar 2014, though there is nothing stopping them from talking to 3rd parties even now, on an “indicative basis”. The Mining License Application will be submitted in May 2014, taking perhaps 3-6 (?) months for granting. Now that Gx have demonstrated their commitment to developing ZANAGA Mk.ll (they RNS’d it at the same time as ZIOC), we now have a marketable, bite-size and still hugely attractive world class project, managed by two cooperating partners, whom, with the mighty Glencore on-side, will give gravitas and credibility to the project, and a vastly improved prospect of finding external capital. Glencore now being partner as opposed to passenger, and a rapidly improving SP, will increasingly add weight to the perception of the project by 3rd parties, who can view it with credibility. Typically, big deals in China can take up to 2 years to complete, but with the slashing of capex by 2/3rds from $7.5Bn to $2.5Bn , the number of potential suitors must be far larger. ZIOC have on their BOD, a Mandarin-speaking NED, based in Shanghai, and they are now free to “beat the drum” unconstrained. The landscape now is entirely different to before, when their hands were tied by Gx’s perceived dis-interest.

In the now, (in my view very unlikely) event that the JV cannot attract external partners by end 2014, I believe that Gx would ultimately be prepared to carry it forward on their own. They would “only” have to stump up $2.5Bn over the 3-year construction period, which at say $800m pa (less the early proceeds from the low-hanging fruit of the DSO ores) should be palatable to them.

I am raising my exposure in ZIOC following these positive developments, as I believe that if this was investible a month ago, it should be moreso today. The project has now been dramatically de-risked, time-extended, had extra cash committed, and crucially, been embraced by Glencore. Leaving to the side possible near term volatility, I see substantial upside from current SP levels if one takes a 12 month view.
Freddie
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Does anyone know how the two major shareholders got their hands on the asset? I have looked about a bit and they seem fairly clean but the way they swapped their holdings into a public company seemed very strange. Kabila has a pretty bad reputation for this stuff and they appeared to be very stretched with the shareholder loans to the company, repaid by the xstrata stuff and presumably the IPO. I can't think of any reason why they would want to bring this public that doesn't call into question other parts of their story...I suspect that the mystery would be solved by looking at MPD Congo...

I also note that a lot of diamond mining has been done in the area, I am new to the company but haven't been able to find much about this elsewhere.

Finally, what is the end game in the bull case? It seems the upside is that glencore buys after the FS?
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Ha, I just went through the last few releases so cancel that last one. That opens things up considerably I think...

And it should be Nguesso, not Kabila.
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For any out there who are viewing Zanaga as an INVESTMENT rather than as the (very profitable) one month trade, you may be interested to attend the Proactive Investor Event at the Chesterfield Hotel in Mayfair, this coming Thursday 10 October, where ZIOC will be making a presentation about the current state of play, alongside 3 other companies. Details and booking online at:
http://www.proactiveinvestors.co.uk/register/event_details/2...

Freddie (still long ZIOC)
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