Zanaga Iron Ore & Co SBM Conviction Buy update

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A welter of RNS’s out this morning in relation to our recent Conviction Buy pick ZIOC. 

Zanaga Iron Ore Project advances on Staged Development basis

Glencore Xstrata (“Glencore”) and Zanaga Iron Ore Company (“ZIOC”) (AIM:ZIOC) are pleased to announce a revised scope for the Zanaga Iron Ore Project (“the Project”), changed budgetary arrangements and the commencement of efforts to finance possible project implementation.

The Project Feasibility Study is now being advanced on the basis of a staged development, substantially reducing the initial capital requirement and including the potential for initial production using existing infrastructure.

The Project is working closely with the Republic of Congo Government to advance its development and support the Government’s objectives for infrastructure and mining development in the country. The Feasibility Study will be completed in 2Q 2014, and will then form the basis for an application to the Republic of Congo Government for a Mining Exploitation Licence. Any investment decision for the Project would follow the conclusion of the Feasibility Study.

The decision to proceed in a staged manner significantly enhances the financeability of the Project. As a result ZIOC has agreed to contribute to the budget and work programme which has been extended to Dec 2014.

Glencore and ZIOC have also agreed to jointly explore funding options with a view to attracting third party debt and equity financing for potential project implementation.

SBM’s Take – In essence, the probability of the Congo iron ore mine ultimately being developed has increased materially with this announcement. It looks like both Glencore and ZIOC are shopping the project around development partners and ZIOC’s contribution of $17m towards the staged development, although decreasing their cash reserves by around 50%, is a show of faith we guess to Glencore on ZIOC’s managements part in the project’s value.

The cancellation of the Call option on Glencore’s part (which was at the valuation NPV of the project) also illustrates, we believe, ZIOC’s managements belief in the end value, ie they are not wanting to come out early stage after the feasibility study completion.

In our magazine piece here on page 8 – – we compared the stock to a call option. The delta on this option has moved towards 1 today and we would not be surprised to see the stock motor towards 50p as the analyst presentations progress over the next week.

We expect to catch up with Andrew Trahar, IR head of ZIOC later for some comment and will update accordingly. In the interim, here’s broker Liberum’s take – 

Our crude first pass DCF based on the conceptual numbers of the revised Stage 1 (10% Real WACC) derives a $1.15bn NPV for the project (100% equity), or $536m (£1.23/share) for ZIOC’s component. Using a 10% nominal WACC (3% inflation), increases the valuation to $2.4bn or £2.77 per share.”

CLEAR DISCLOSURE – Titan Investment Partners and editorial staff hold positions in ZIOC

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