The market didn’t enjoy the latest set of results from Zanaga (LON:ZIOC), marking the company’s shares down by 23% to 2.1p on the back of a US$110mln impairment charge and losses of US$164mln.
The numbers themselves don’t tell the whole story, though.
The market is spooked because Zanaga’s key asset is 50% less one share of the huge Zanaga iron ore project in the Republic of Congo, and iron ore is very much out of favour at the moment, having halved in price over the past year or so.
But inside Zanaga, there’s still an air of quiet confidence.
That’s partly because the company had US$12 million as at the end of December, which should be enough to take it through two more years of development and fine-tuning work, if required.
And it’s also because the quality of the Zanaga product is much higher than that for most normal mines, meaning that margins should be very healthy indeed.
As Zanaga’s Andrew Trahar points out, it will cost the company just US$31 to get each tonne of product onto a ship, and with freight rates round the world now significantly lower, just US$13 to ship to China.
That puts overall costs at around the US$45 mark, which is not far off the costs of the likes of Australian rivals Fortescue (ASX:FMG).
But whereas Fortescue sells at around US$50 per tonne and has been bleating loudly about squeezed margins and cartels, Zanaga’s premium product is likely to sell at around US$75 per tonne, allowing for significant margin even in these depressed markets.
“It’s all about cash margin per tonne,” says Trahar.
He also points out that notwithstanding the weak iron ore price, the Chinese are still investing.
“They’ve put US$4bn into Vale’s (NYSE:VALE) S11D iron ore project, and also recently bought the Tonkolili mine in Sierra Leone.”
Even so, it may take a while yet before investors wake up to the fact that there are still quality projects out there.
In the meantime, Zanaga has cut costs and trimmed its sails accordingly.