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We covered ZIOC back in 2013 in the September edition of this magazine and the buy case at that time can be seen on pages 8 – 16 HERE
Like the rest of the mining spectrum in recent weeks, in particular the junior plays, ZIOC has been veritably battered by the perfect storm of weak equity markets, a falling iron ore price and continued poor sentiment within the sector. However, following a discussion with IR head Andrew Trahar last week I personally believe that the time is ripe for a re-look at the stock, particularly given the stabilisation in the iron ore price in recent weeks, finding a floor around $80/t and rebounding at the time of writing to $83/t.
For many industry observers, it seems that a new normal of sub $100/t for Iron Ore is now being planned in investment profiles and this is likely to create a sea change in many projects that are presently sitting on the drawing board. Thankfully, in ZIOC’s case, the project in the Republic of Congo sits right at the very bottom of the cost curve as the chart below illustrates.
One analyst accurately models the company’s landed cost assuming $25 of freight/shipping costs at around $55/tonne. Only Vale presently delivers iron ore cheaper and this is likely to be a big bargaining point in the project consortia negotiations.
The recent change in the project (ZIOC’s partner being mining giant Glencore) to that of a staged development process is a positive and greatly increases the probability of the mine coming to fruition. With licenses in place, the completion of the Pre-Feasibility study and the Congolese Government also coming to the party in enhancing the attractiveness of the project through very attractive tax breaks such as a 5 year tax holiday and then a low 15% rate thereafter, the investment profile sits squarely at the top of the pile on a global Iron Ore project basis. It is fair to say that the Republic of Congo also view this as a very important project.
Usefully, Edison have modelled an equity value for ZIOC based upon various iron ore prices and a range of discount rates as we can see in the table below.
Their assumptions work on a 10% discount rate and a long term $90/tonne iron ore price. If one is even more conservative and assumes an $80/tonne IO price and a discount rate of 12.5% then the equity value that pops out is $619m (highlighted green square). Based on current FX rates this equates to circa £400m. The current market cap of ZIOC is just over £37m. That is quite a buffer zone in our opinion. Should iron ore prices actually recover back over $100/t then the NPV and uplift element to the ZIOC equity should the project complete becomes eye watering.
In my discussion with Andrew Trahar last week he relayed that the company is looking at multiple scenarios to ensure that the NPV of the project is ultimately delivered to shareholders: from an outright sale of the project by ZIOC & Glencore to a third party to a variant of either increased stake sale or dilution in exchange for future royalties. My question was posed “is it not time to look to exit the project completely?” and the retort was that the major shareholders who hold 72% of ZIOC Plc’s equity believe that even with a healthy premium of 100-200% to the current market value being offered that this does not come even close to what the real value of the project is and hence no appetite for exit at this critical stage in the venture.
From a stock price perspective, the seller that was prevalent in 2013 (circled below) seems to no longer be around (certainly the volume does not show this out and there have been no RNS of holding movements in months) and the feeling from the company is that the weakness in the price has been a mixture of jaded and forced retail investor selling and market makers marking down the stock in sympathy with other IO plays.
ZIOC 2 YR WEEKLY CHART
Our game here at Titan is to buy low but with a large buffer zone built into a stock price and, ideally also when a stock has been overlooked or beaten down unjustifiably. To us, the metrics of ZIOC now have become even more compelling with the news flow this year, in particular the staged development basis and, given its position on the global IO cost curve, our expectation that the equity and debt funding package is highly likely to be successfully completed during the next year.
One important element that was made public in the most recent analyst note however is that the company is currently taking to a variety of equity participants in the project and there is a decent likelihood of news on this being concluded before the year is out. That means weeks given the date today of 19 October, should this occur, we expect to see a very material re-rating of the stock given the near 90-95% discount to NPV on even conservative IO price forecasts.
There are presently a number of stocks in the littered landscape that is the mining and oil E&P sector that presently hold out the promise of being potential ten baggers. If ZIOC successfully conclude the equity and debt package and move this project towards production in in the next 3 years then we believe the odds of the company delivering these types of returns will shorten dramatically as news flow is released into 2015.
We remain resolutely long ZIOC and believe this to be another fantastic asymmetric risk/reward offering in the mining space.
CLEAR DISCLOSURE: EXPOSURE TO ZANAGA IRON ORE SHARES IS HELD BY RICHARD JENNINGS AND TITAN INVESMENT PARTNERS FUNDS. This piece should not be taken as an advocation to buy (or sell) shares in this company and you should always take independent financial advice in relation to your own circumstances.
Zak Mir discusses the FTSE 100, Shire, Quindell, Banacora Minerals, Plus500, SolGold and Boxhill Technologies on TipTV
Zak Mir discusses the FTSE 100, Shire, Quindell, Banacora Minerals, Plus500, SolGold and Boxhill Technologies on TipTV
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I thought it worth revisiting set-top box manufacturer Amino Technologies (AMO), after the firm said in a recent trading update that it expects profit before tax to be ahead of market expectations for the current financial year. It also said that revenue has returned to the traditional second half weighting and, as such, expects to report revenue for the year ended 30th November 2014 in line with market expectations.
Amino is a market-leading operator in the rapidly growing internet TV market, providing complete hardware and software solutions which enable the delivery of television content to viewers via a broadband internet connection. The core set-top box business caters to IPTV (internet protocol TV) service providers, while there is also a nascent product line aimed at the OTT “over the top” market, which enables the delivery of video content from the open internet by both IPTV providers and satellite or cable service providers.
The latter is a huge growth market estimated to be worth $20 billion by the end of 2014, according to research from MRG. Importantly, the heavy lifting of the product investment stage appears to be complete, enabling older IPTV products to be phased out while existing customers are encouraged to migrate to the new boxes. Furthermore, the initial discounts on the OTT products will be phased out, thus pointing to future margin progression.
Much of Amino’s attention has lately been focused on broadening its product offering to cater for the latest developments within the home media space. The industry-wide move towards Internet Protocol (IP) as the means of delivering content between devices and around the connected home is opening up new opportunities for the company in its existing and adjacent markets.
Many home media operators are in the process of (or considering) extending their service offerings to encompass greater functionality and sophistication. In response, a wider solutions-based portfolio has been created to provide operators with a more diverse range of products to help drive new revenues and retain existing customers. While this new portfolio is expected to contribute to revenues from 2015, encouraging progress is under way with new set-top box products benefiting from enhanced performance, improved user experiences and value-added features.
Amino has made particular progress in identifying different types of markets and tailoring its products to fit them. For example, where market demand is for a lower specification device - for example in Latin America and Eastern Europe - Amino provides a highly cost-competitive and robust solution which has gained good traction with existing and new customers. Meanwhile, where customers require a more feature-rich, high performance device for specific customer segments, Amino has likewise introduced the new Live Advanced Media Platform to meet these needs and the growing demand for multiscreen delivery around the home. At the same time, a new mainstream device - the A150: targeted at Amino’s established customer base - was commercially launched into the European market during the first half of FY14. This includes improved System on Chip (SoC) performance, integrated apps and enhanced user experience capabilities.
Further out, and with a view to enabling operators to drive additional Average Revenue Per User (ARPU) from their customers, a new service layer based around home monitoring and control is to launch in the second half of the year in North America. Called Amino Home Reach, this new solution is easily integrated into both existing and recently launched set-top devices. Feedback from customer trials is said to have been encouraging, particularly in North America, where similar offerings from major operators and new solution providers are gaining traction and validating the market as a whole.
What’s it worth?
Following the recent strong contract momentum broker Northland has assumed a 10% outperformance against its existing forecasts, which would push adjusted pre-tax profit to £4.1 million resulting in adjusted EPS of 7.7p for 2014, translating into a PE ratio of 12.1 times. The broker has also put through similar upgrades to its FY15 forecasts.
And then there’s the elephant in the room - the cash pile. At the end of May, net cash stood at £19.7 million, which is roughly equal to 40% of the current market cap. Furthermore, at the time of the interims, management announced an extension to the progressive dividend policy, “with an expectation that the dividend will grow by no less than 10% per cent per annum for a further two years up to and including the year ending November 2016.” With the firm expected to return to top-line growth next year, it will be interesting to see how management dispose of the cash pile.
Zak Mir Video Blog On Bulletin Board Heroes: Clontarf Energy, Monitise, Sunrise Resources on Stellar Diamonds
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Spreadbet Magazine editor Zak Mir takes a look at the technical position of some of the bulletin board stocks of the moment amongst private investors.
Here are the key points from today’s video:
Clontarf Energy (CLON)
The shares are displaying the aftermath of a May bear trap rebound from below 0.5p.
While there is no end of day close back below the 200 day line at 0.97p one would be looking to a journey to the top of May price channel at 2p by the end of next month.
Only cautious traders would wait on any dips towards the 200 day line before taking the plunge on the long side.
Monitise shares have been delivering a possible extended base over the past month.
The latest price action is a bear trap rebound from below the former September support at 26.25p.
While there is no end of day close back below the 20 day moving average at 29p the upside for Monitise should be towards the June price channel top / 50 day moving average at 37p over the next 4-6 weeks.
Sunrise Resources (SRES)
The shares look to have finally rebounded off the floor of a rising trend channel from this time last year at 0.4p for the start of this month.
The best way forward now is probably to look to buy into any weakness towards the one year uptrend line.
Only an end of week close back below the 2014 price channel floor would delay the prospect of a rebound to as high as the 0.8p plus zone over the next 1-2 months.
Stellar Diamonds (STEL)
The latest bounce comes off a bear trap gap reversal to back within a rising 2013 price channel based at 1.35p.
Only cautious traders would wait on an end of day close back above the 1.5p resistance zone of October to date.
The eventual target on a weekly close clearance of the 1.5p zone is a retest of the early 2014 resistance towards 2.5p on a 1-2 month timeframe.
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