In the short run, the market is a voting machine but in the long run, it is a weighing machine, so said Benjamin Graham, the father of value investing.
Mangling that analogy, the AIM (Alternative Investment Market) is about as electorally reliable as Russia and as accurate as budget airline luggage scales.
Graham’s claim hinges on the market being a reasonably efficient long-term assimilator of information, which has not been the case for the UK’s junior bourse for some time.
The last two years of stagnation, driven by economic and political turmoil, have only exacerbated this trend.
Context is everything
This context is crucial when discussing Zanaga Iron Ore Co Ltd (AIM:ZIOC), a £48 million company with a multi-billion-pound asset.
The company has attracted $350 million in investment for technical studies and drilling, is fully permitted, and boasts a blue-chip cornerstone investor.
However, Zanaga’s journey has not been straightforward.
The sheer scale of the Zanaga Iron Ore Project, its location, and its financing needs have all posed significant challenges.
For thorough due diligence, potential investors should delve into Zanaga’s history, which reveals a company that has faced numerous obstacles over its 14-year existence.
Value inflexion point
Yet, these historical issues are less relevant to where the company stands today, on the brink of a significant value inflexion point, a reality that the market has largely overlooked.
Just under two months ago, Zanaga, occasionally referred to by its stock market 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, noted for their cost-efficiency in large-scale mining operations, revealed that capital expenditure estimates have been reduced.
Stage one, aiming to produce 12 million tonnes per annum (Mtpa) of premium 'pelletisable' iron ore concentrate, is now estimated at $1.94 billion, with an additional $1.87 billion needed to expand to 30 Mtpa.
This investment projects a net present value (NPV) of $3.68 billion, rising to $7.36 billion upon full build-out.
Wealth of information
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 others looking to acquire Zanaga entirely. It is understood that discussions are at an early stage.
Zanaga’s asset bears many similarities to Rio Tinto’s giant Simandou operation, initially developed by the same team. Management believes Zanaga might even surpass Simandou through reduced infrastructure risk and enhanced economics.
With a 2.1 billion tonne ore reserve based on a 27-kilometre ore body drilled to a depth of 150 metres, the project has enough to sustain phases I and II for 30 years.
The strike length is 47 kilometres, with ore extending to a depth of 450 metres, hinting at an even larger potential resource.
The mineral resource base stands at an impressive 6.9 billion tonnes, enough to support an even larger operation, capable of becoming one of the largest iron ore mines in the world.
Grade and scale
The product's potential grade is also notable, with stage-one pellet feed expected to be 66% iron (Fe), comparable to Brazil’s best ore, which commands a premium price.
Stage-two production is anticipated to yield 68.5% Fe, ideal for low-carbon steel production, further enhancing its market appeal.
Despite these promising prospects, the market has yet to respond. This could signal a company on the cusp of a value crystallisation event.
Has the market failed to price this in, or is it still influenced by past events beyond management’s control?
Whatever the reason, Zanaga's current share price does not seem to reflect its future potential, presenting an opportunity for investors. However, substantial returns come with the risk that potential strategic partners might not materialise.
This scenario epitomises the classic risk-reward balance, rather than a risk-free investment.