Zanaga Iron Ore: Upgrade Could Help Lift Stock's Value

Zanaga Iron Ore (ZIOC.L) announced an upgrade in JORC-compliant mineral resource for the Zanaga iron ore project (ZIOP), with the overall tonnage rising 57% to 6.8bn at 32% Fe grade. The implied Fe content has therefore risen by 52% to 2.2bn tonnes of contained metal. Importantly, the share of measured resource was increased from 3% to 35%, or 2.4bn tonnes at 34% Fe. Following the resource upgrade the stock trades at EV/Resource multiple of just US$0.19/t compared to the peer group weighted average of US$0.51/t. Despite the recent drop in the spot iron ore price, which weighs on the sector’s valuation, our ZIOC NPV-derived un-risked value remains unchanged at £3.8/share as it is based on the conservative long-term iron ore price of US$70/t. We look forward to the pipeline PFS study results, due in September, which should underpin the project’s strong economics and support the ZIOC share price.

Resource upgrade: From 4bn to 7bn tonnes
ZIOC announced a 57% increase in the overall mineral JORC-compliant resource to 6.8bn tonnes (32% Fe grade) at its 50%-owned Zanaga iron ore project in Congo (Brazzaville). Some 35% of the overall tonnage is now accounted for by the measured mineral resource, with indicated and inferred categories representing 34% and 31% of total, respectively. This 35/34/31% breakdown compares favourably to the 3/59/38% distribution of the project’s mineral resource announced in October 2011. The latest resource estimate is based on 176,109 metres (1,213 holes) drilled to date with some 49,125 metres of drilling carried out since the previous resource announcement. Importantly, the upgraded resource is based on drilling to the average depth of 145m (compared to the theoretical opencastable depth of 250m) and only 25km of the overall defined 47km ore body.

Valuation: Awaiting for catalysts
Based on the new attributable resource estimate, ZIOC trades at EV/Resource of US$0.19/t compared to the sector weighted average of US$0.51/t. The sector remains under pressure as falling iron prices weigh on valuations. While we leave our NPV valuation of Zanaga unchanged at £3.8/share, as we believe we are using conservative commodity price assumptions, we note that a 10% reduction in our long-term iron ore price of US$70/t lowers ZIOC’s attributable value by c 25%. ZIOP’s execution and potential delays due to the iron ore market weakness remain the biggest sensitivities for the company’s valuation. That said, ZIOP’s strong economics, which should be underpinned by the upcoming pipeline study results, suggest it has high a chance of success. Any future sale of ZIOC’s stake to the strategic investor would be a key catalyst for the stock.

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