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Zanaga Iron Ore: Buy into market weakness starting at 11p

By Doc Holiday | Saturday 29 June 2013


Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from ShareProphets). I have no business relationship with any company whose stock is mentioned in this article.


Firstly I have to hold my hands up on Zanaga (ZIOC) as I offered up a speculative buy at 18p on 11th April. The shares are now 11.25p. Although my belief in the company has not changed clearly sentiment towards Zanaga and small cap resource stocks has been truly dire.

 

My first (premature) buy note can be read here

The price of iron ore has retreated somewhat (although not unexpectedly) and the merger between Xstrata and Glencore has left some questions to be asked of Zanaga. This, coupled with Black Rock selling down its position and the general loathing of small cap resource plays has seen the shares tank. However: look at the fundamental positives.

 

·  Current cash position year end 2012 as announced last week was $40m or £26.3m

·  Market Cap  £30m

·  Shares in issue 278.777m

·  72.89% of shares in issue not held in public hands (End Jan 2013)

·  Net assets £144m

Operationally the company made material progress during 2012. Notably

 

-    Substantial increase and upgrade in Mineral Resource

-    57% increase in overall Mineral Resource to 6.8Bt at an average grade of 32.0% Fe

-    74% increase in Measured and Indicated resource category to 4.69Bt with an average grade of 32.5% Fe

·    Maiden Ore Reserve Statement of 2.5Bt at 34% Fe

·    Feasibility Study drilling programme complete

·    Extension of Mining Exploration Licences to August 2014

·    Pipeline PFS successfully completed on schedule with positive results

-    Production of 30 million dry tonnes per annum over 30 year life of mine

-    Slurry pipeline identified as optimal transportation solution - >US$1 billion capital expenditure saving on direct costs compared to rail

-    Premium product of 68% Fe, with low impurities, expected to receive above benchmark pricing

-    Forecast competitive operating costs - in industry bottom quartile

-    Capital expenditure of US$7.4 billion, in line with previous estimates

-    Significant expansion potential

 

The real question will be when small cap equity markets eventually hit the rock bottom and the cyclical trend changes! Where will the clever cash go? It's my honest belief that those with a strong case will be the first to see the early bulls through the door.

 

I expect the iron ore price to improve in the coming months as the mills still need feed whatever the gyrations of the stock market.  Zanaga’s ore forecast is just about as good as it can get however the final decision on who will take Zanaga on will ultimately come from Glencore-Xstrata.

 

Meanwhile I understand that Black Rock’s position clearing is at an end. An artificial depressant on the share price has been removed.

 

Let’s not forget the PFS cost hundreds of million dollars and is not a fag packet equations generated from a shoe string study as seems to be the case far too often on AIM these days.  Zanaga has a strong cash position and a real asset. That is far from priced in.

 

Doc Holiday is a seeker of value among small caps. You can follow him on twitter at https://twitter.com/DDS_Doc_Holiday or see more of his work on his own blog at http://docslaymanschatter.blogspot.com/



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