SMALL CAP IDEA: Why Zanaga Iron Ore is a £48m company with multi-billion pound assets

In the short term the market is a voting machine, but in the long term it is a weighing machine, says Benjamin Graham, the father of value investing.

By mangling this analogy, the AIM (Alternative Investment Market) is as electorally reliable as Russia and as accurate as the luggage scales of low-cost airlines.

Graham’s claim depends on the market being a reasonably efficient assimilator of information, which hasn’t been the case for the UK junior stock market for some time.

The past two years of stagnation, caused by economic and political turmoil, have only exacerbated this trend.

This context is crucial when discussing Zanaga iron orea £48 million company with multi-billion pound assets.

The company has attracted $350 million in investment for technical studies and drilling, has full consent and a leading investor. These qualities are typical of a promising junior in the field of natural resources.

However, Zanaga’s journey was not easy.

The sheer size of the Zanaga Iron Ore Project, its location and financing needs have all presented significant challenges.

For thorough due diligence, potential investors should delve into Zanaga’s history, which reveals a company that has faced numerous obstacles during its 14 years of existence.

Yet these historical issues are less relevant to where the company stands today, on the brink of a significant value inflection point, a reality that the market has largely overlooked.

Just under two months ago, Zanaga, occasionally referred to by the stock ticker ZIOC, published an updated feasibility study on its iron ore project in the Republic of Congo.

This update, evaluated through the lens of Chinese contractors, known for their cost-efficiency in large-scale mining operations, revealed that capital expenditure estimates have been reduced.

The first phase, aimed at producing 12 million tonnes per annum (Mtpa) of premium pelletizable iron ore concentrate, is now valued at $1.94 billion, with a further $1.87 billion needed to expand to 30 Mtpa.

This investment projects a net present value (NPV) of $3.68 billion, increasing to $7.36 billion at full build-out.

The updated feasibility study offers potential strategic investors a wealth of new information.

Several companies are reportedly interested, ranging from those considering a consortium stake to those looking to fully acquire Zanaga.

Although there is no formal deadline, a deal is expected within months, according to an insider.

Zanaga’s trump card has many similarities Rio Tintos gigantic Simandou operation, initially developed by the same team. Management believes Zanaga could even outperform Simandou due to reduced infrastructure risk and improved economics.

With an ore reserve of 2.1 billion tonnes, based on a 27 kilometer ore body drilled to a depth of 150 metres, the project has sufficient to support phases I and II for 30 years.

The length of the strike is 47 kilometers, with the ore extending to a depth of 450 meters, indicating an even greater potential resource.

The mineral resource base stands at an impressive 6.9 billion tonnes, enough to support an even larger operation, which could become one of the largest iron ore mines in the world.

The potential quality of the product is also noteworthy: in the first phase, the pellet feed is expected to contain 66% iron (Fe), comparable to Brazil’s best ore, which commands a higher price.

Production in phase two is expected to yield 68.5% Fe, ideal for low-carbon steel production, further increasing its market appeal.

Despite these promising prospects, the market has not yet responded. This could be a signal for a company on the cusp of a value crystallization event.

Has the market not priced this in, or is it still influenced by past events beyond management’s control?

Whatever the reason, Zanaga’s current share price does not appear to reflect its future potential, presenting an opportunity for investors. However, substantial returns come with the risk that potential strategic partners may not materialize.

This scenario embodies the classic risk-reward balance, rather than a risk-free investment.

For all your latest small cap news, visit www.proactiveinvestors.com