Update on Zanaga Iron Ore (ZIOC)

Readers of Spread Bet Magazine will be familiar with the case for Zanaga Iron Ore (ZIOC) shares, as it was our new Conviction Buy pick in the latest edition of our magazine (see pages 8-16 here – http://issuu.com/spreadbetmagazine/docs/spreadbet_mag_v20_generic).

We believe that the announcements made on 13 Sep 2013 were game-changers for ZIOC and materially de-risked the stock. Until that point, it was widely assumed that Xstrata’s project with ZIOC in the Republic of Congo would probably be disposed of by Glencore, following their acquisition of Xstrata. 

However, in a joint announcement by Glencore and ZIOC, the project now appears to be progressing on a staged basis. This has enabled the partners to drastically reduce the capex cost of the project by almost two thirds, from $7.4bn to between $2.5 to $3.0bn – and which now makes the project far more readily financeable. 

Glencore and ZIOC are now actively jointly seeking finance for the project. This is likely to lead to some dilution of ZIOC’s almost 50% share in the project but, importantly, ZIOC cannot be cash called under their agreement with Glencore, beyond the $17m that ZIOC has committed to inject (around half ZIOC’s existing cash pile). So both companies are incentivised to co-operate in reaching a financing solution. 

The most likely outcome is probably that ZIOC end up with a free carry on a reduced percentage of this massive project, or indeed are bought out completely. 

So how much is ZIOC now worth? With 279.8m shares in issue, and a share price of 28.5p, its market cap is now circa £80m. However, as relayed in our update Friday, instead of being a ‘call’ option on the possibility that this project might go ahead, ZIOC shares are now the (almost) 50% owner of a huge, world-class iron ore project – the call’s delta has moved towards 1. 

The scale of prospect is immense, as the area which has been drilled in “high definition” is over 47km wide. This project has literally billions of tonnes of iron ore in the ground, at the low end of the cost curve, some of which can pretty much be scraped off the surface & put in trucks (the so-called “DSO” part of the project). Therefore initial production could begin as early as 2015, and increase in stages thereafter. This means that the DCF calculations will have a lower WACC and a higher PV as the production profile is much closer than initially thought. 

We understand that Glencore and ZIOC will be jointly seeking project financing soon, and that ZIOC will be moving its financial PR into top gear now that it has reasonable certainty over where the project is heading. 

ZIOC’s house broker now values their shares at between 114p and over 200p, and we feel this is entirely realistic.

We believe we are now in the classic phase of the transfer of stock from hot moey hands to the more patient and secure. After a run from 11p to over 30p in 2 months it is not unsurprising that there is profit taking, however, to us, we believe the investment case is now more compelling at 30p on an adjustd risk/reward basis than it was at 12p. Looking at the chart below we target 50-70p in the months ahead. 

Clear disclosure: Titan Funds hold long positions in ZIOC, as do SBM editorial staff.