Zanaga Iron Ore revisited – awaiting the catalyst of the project equity component news

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We covered ZIOC back in 2013 in the September edition of this magazine and the buy case at that time can be seen on pages 8 – 16 HERE

Like the rest of the mining spectrum in recent weeks, in particular the junior plays, ZIOC has been veritably battered by the perfect storm of weak equity markets, a falling iron ore price and continued poor sentiment within the sector. However, following a discussion with IR head Andrew Trahar last week I personally believe that the time is ripe for a re-look at the stock, particularly given the stabilisation in the iron ore price in recent weeks, finding a floor around $80/t and rebounding at the time of writing to $83/t.

For many industry observers, it seems that a new normal of sub $100/t for Iron Ore is now being planned in investment profiles and this is likely to create a sea change in many projects that are presently sitting on the drawing board. Thankfully, in ZIOC’s case, the project in the Republic of Congo sits right at the very bottom of the cost curve as the chart below illustrates

One analyst accurately models the company’s landed cost assuming $25 of freight/shipping costs at around $55/tonne. Only Vale presently delivers iron ore cheaper and this is likely to be a big bargaining point in the project consortia negotiations.

The recent change in the project (ZIOC’s partner being mining giant Glencore) to that of a staged development process is a positive and greatly increases the probability of the mine coming to fruition. With licenses in place, the completion of the Pre-Feasibility study and the Congolese Government also coming to the party in enhancing the attractiveness of the project through very attractive tax breaks such as a 5 year tax holiday and then a low 15% rate thereafter, the investment profile sits squarely at the top of the pile on a global Iron Ore project basis. It is fair to say that the Republic of Congo also view this as a very important project.

Usefully, Edison have modelled an equity value for ZIOC based upon various iron ore prices and a range of discount rates as we can see in the table below.

Their assumptions work on a 10% discount rate and a long term $90/tonne iron ore price. If one is even more conservative and assumes an $80/tonne IO price and a discount rate of 12.5% then the equity value that pops out is $619m (highlighted green square). Based on current FX rates this equates to circa £400m. The current market cap of ZIOC is just over £37m. That is quite a buffer zone in our opinion. Should iron ore prices actually recover back over $100/t then the NPV and uplift element to the ZIOC equity should the project complete becomes eye watering.

In my discussion with Andrew Trahar last week he relayed that the company is looking at multiple scenarios to ensure that the NPV of the project is ultimately delivered to shareholders: from an outright sale of the project by ZIOC & Glencore to a third party to a variant of either increased stake sale or dilution in exchange for future royalties. My question was posed “is it not time to look to exit the project completely?” and the retort was that the major shareholders who hold 72% of ZIOC Plc’s equity believe that even with a healthy premium of 100-200% to the current market value being offered that this does not come even close to what the real value of the project is and hence no appetite for exit at this critical stage in the venture.

From a stock price perspective, the seller that was prevalent in 2013 (circled below) seems to no longer be around (certainly the volume does not show this out and there have been no RNS of holding movements in months) and the feeling from the company is that the weakness in the price has been a mixture of jaded and forced retail investor selling and market makers marking down the stock in sympathy with other IO plays.


Our game here at Titan is to buy low but with a large buffer zone built into a stock price and, ideally also when a stock has been overlooked or beaten down unjustifiably. To us, the metrics of ZIOC now have become even more compelling with the news flow this year, in particular the staged development basis and, given its position on the global IO cost curve, our expectation that the equity and debt funding package is highly likely to be successfully completed during the next year.

One important element that was made public in the most recent analyst note however is that the company is currently taking to a variety of equity participants in the project and there is a decent likelihood of news on this being concluded before the year is out. That means weeks given the date today of 19 October, should this occur, we expect to see a very material re-rating of the stock given the near 90-95% discount to NPV on even conservative IO price forecasts.

There are presently a number of stocks in the littered landscape that is the mining and oil E&P sector that presently hold out the promise of being potential ten baggers. If ZIOC successfully conclude the equity and debt package and move this project towards production in in the next 3 years then we believe the odds of the company delivering these types of returns will shorten dramatically as news flow is released into 2015.

We remain resolutely long ZIOC and believe this to be another fantastic asymmetric risk/reward offering in the mining space.

CLEAR DISCLOSURE: EXPOSURE TO ZANAGA IRON ORE SHARES IS HELD BY RICHARD JENNINGS AND TITAN INVESMENT PARTNERS FUNDS. This piece should not be taken as an advocation to buy (or sell) shares in this company and you should always take independent financial advice in relation to your own circumstances.

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