The Zanaga Iron Ore Company Ltd (LON: ZIOC) is down a little over 11% even as the iron ore price itself rises. This is proof that for junior miners the devil is in the details – it’s also what shows them to be such tempting speculative positions. Zanaga, like other plays on future mining projects, can move in mysterious ways.
The iron ore price itself is driven by Chinese demand for the material. Much of the rich world makes its needed steel from scrap of the things we’re demolishing or throwing away. When you’re building out a society for the first time you can’t do this – you need iron ore to make the steel to build with. This demand is so overwhelming that it determines the global basic iron ore price.
That iron ore price is half what it was in the summer but this past week and 10 days has been rising. So, we’d expect iron ore miners to be also rising right now, even if down on the summer. This isn’t happening to Zanaga Iron Ore so why not?
One reason is that the project is to produce pellet rather than fines, this being something more used by European rather than Chinese furnaces. So, the Chinese influence is lower. The real base reason though is that the project is some years away from production. It’s in the Republic of Congo that’s the Brazzaville one, not the DRC) and is, as yet, more a set of plans to do something than an operation. Which is fine, every mine does start that way.
Even so, the claimed production costs of the iron ore – in the mid $20s – stack up nicely against the current $100 per tonne general market price.
What matters here is that the risks of the project are so great that the product price has very little, influence. There are those risks of operating in Africa, obviously, but also of just being able to complete the project. Given capital requirements into the couple of billions, there’s also clearly a risk of just not being able to gain the financial steam to complete.
All of this means that the final price of the company’s putative production in some to many years' time just isn’t the determining factor behind the share price. What matters far more is the probability of bringing the project to completion – something that might vary with the tides.
This is not wholly and entirely so of course. Really significant moves in that iron ore price – like the $200 of earlier this year – do affect the Zanaga share price. Equally, an entire collapse down to below likely production costs would crater that share price.
What becomes the interesting speculation is opinion on completion probability within certain boundaries of the iron ore price, with that commodity price becoming the price determinant at the extremes. This is in contrast to the established producers who tend to move in tandem with – even if geared to – that iron ore price itself.
Zanaga shares are traded on the London stock exchange's AIM market (the alternative investment market), which is the submarket specifically for smaller companies. AIM stocks are attractive to investors as they have tax advantages and smaller companies have the potential to benefit from rapid growth. But are ZIOC shares the best buy? Our stock market analysts regularly review the market and share their picks for high growth companies
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Tim Worstall is a freelance writer specialising in economics and the financial markets.