Zanaga FS: Through fresh eyes
Having delivered a robust feasibility study followed by the award of a Mining Licence and the favourable Mining Convention, the main focus now shifts to securing a strategic equity investor with an aim to finalise project funding by end-2015. While market fundamentals remain tough, Zanaga Iron Ore Co Ltd (LONDON:ZIOC) has all the prerequisites of an investable greenfield iron ore project that is scalable and has competitive capex intensity and opex. Funding progress is the main catalyst for the stock, which continues to offer visible upside.
Phased development leads to better financeability
Under the staged development approach, ZIOP’s initial funding requirement has been reduced to US$2.2bn for a 12Mtpa operation, with the expansion capex delayed to later years. The subsequent expansion to 30Mtpa could be largely financed from the project’s internal cash flow.
Low opex despite visible reduction in capex
With an estimated pre-royalty opex of US$30/t for Stage 1, ZIOP’s operating cost will be maintained at a very competitive level, placing the project at the bottom of the global iron ore cost curve. This is achieved despite a visible reduction in the project’s overall capex intensity to US$157/t versus US$245/t at the PFS level.
Funding: Strategic equity partner and debt
The project will be debt and equity financed, with ZIOC and Glencore potentially diluting to allow a new strategic equity investor to come alongside them. We believe that the overall equity cheque will be US$0.8-1.0bn, with the remaining funds coming in the form of infrastructure and EPCM related debt such as export credit financing. The company expects to source credit finance from multiple jurisdictions on attractive terms that normally pertain to infrastructure backed funding.
Valuation: Funding is key to realise full value
ZIOC was not immune to the recent deterioration in the iron ore pricing, having given up almost all share price gains achieved ahead of the feasibility study (FS) release. Having delivered robust FS results followed by the award of a Mining Licence and the favourable Mining Convention, the main focus for the JV partners now shifts on to securing a strategic equity investor with an aim to finalise the funding package by end-2015. Any progress on this front should have a positive impact on the stock, helping it to close the existing gap between ZIOP’s market and intrinsic valuations. Our updated NPV of ZIOP is US$1.6bn on an attributable basis, using a 10% discount rate and a US$90/t benchmark iron ore price.
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