Zanaga Iron Ore Company Ltd (Price: 23.6p | Target: 25.0p | Rec: Hold) Zanaga Iron Ore Company (“Zanaga”) last month announced a revised scope for its Zanaga iron ore project in the Republic of Congo, which is being advanced in a joint venture with Glencore (GLEN.L, not rated).

The JV is looking at a staged development that significantly reduces the expected capex, relative to earlier plans.

This should enhance the ability to finance the project and both parties have agreed to explore funding options, in order to attract third party debt and equity finance. * The development plans for the Zanaga project have changed significantly over the past three years as the feasibility studies have advanced, progressing from a 45mtpa railway-transported option to a potential 30mtpa pipeline (both options requiring c.$7.5bn capex) and now to staged development, starting with a 12mtpa pipeline option, supplemented by 1-2mtpa of DSO, at a more palatable capital cost of $2.5-3.0bn.

The feasibility study is due to be completed by 2Q14, and to then form the basis for a mining application. * The Zanaga share price has performed well recently, presumably reflecting increased market belief that the project can be developed under the revised scenario, since Glencore had frequently indicated that it was averse to large greenfield developments.

While the revised capital requirements are still demanding for a 12mtpa operation, presenting financing risk, it does deliver a positive NPV at our long-term iron-ore price of US$95/t (62% Fe fines, CFR China) and offers significant valuation leverage at higher prices. * We derive a valuation for the company of $109m (25p per share), after risking the project to 30% of its NPV to reflect its pre-feasibility status.

This forms the basis of our target price and we maintain our recommendation accordingly, while noting that an investment in Zanaga remains very much reliant on Glencore’s actions.

Our unrisked valuation would be $333m or 76p per share.
To access the full note please click here Analyst: Hunter Hillcoat
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