THE fortunes of mining companies rise and fall with the price of whatever they dig up. For iron ore producers, these have been a torrid few months.
In September, the price of the raw material for steel hit rock bottom at about $87 a tonne. Since then it has staged a roaring comeback, closing last week at $150.
Chinese steel mills, the biggest buyers of the ore, finally started to rebuild their stockpiles after happily riding the downward slide. The turnaround has opened a window.
In the past three weeks, three iron ore producers have received takeover bids. Hanlong Group of China offered $1.3bn (£810m) for Sundance Resources, which owns a project in west Africa; Zamin Ferrous bought Anglo American’s Brazilian mine, Amapa; and Afferro Mining, a London-listed developer, received an offer from rival IMIC.
Admittedly, the credibility of the latter is questionable — IMIC is one-fifth the size of Afferro. The point, however, is no less valid — iron ore deals abound. Which brings us to Zanaga Iron Ore.
The £74m company has one asset — a large deposit in the Democratic Republic of Congo. Its short life as a public company has been a horror show. Since the shares reached a high of 212p in January 2011 — just two months after its float — they have lost nearly 90%. They closed on Friday at 27p.
Clearly, iron’s rally has done nothing for the company’s long-suffering shareholders. That is because Zanaga is a special situation. Half its flagship project is owned by Xstrata, the FTSE 100 miner soon to be enveloped in a takeover by Glencore, the world’s biggest commodities trader.
Ivan Glasenberg, Glencore’s chief executive, is no fan of big greenfield projects like Zanaga’s. The company estimates that the mine is worth at least $3bn, but it will require $3bn to be built. The chances that Glasenberg will stump up his half of the cash are slim to none. Two possibilities are far more likely. Glencore could sell its stake or bring in a strategic partner to take the lead — and much of the cost — on the development while it retains the rights to sell the output.
Either outcome should be a boost for investors. Charles Bendon of Liberum Capital, Zanaga’s broker, said: “Glencore has never sold anything for less than it is worth.”
Zanaga is chaired by Clifford Elphick, chief executive of Gem Diamonds. He is also a big shareholder through a trust called Guata Minerals, which owns 32%, and through his part-ownership of Strata Capital, a private vehicle backed by a clutch of canny natural resource investors including Jan Kulczyk, Poland’s richest man; Michael Haworth, chairman of Ncondezi Coal; and Lloyd Pengilly, the former JP Morgan mining banker.
Zanaga’s market value is less than a tenth of the theoretical $1.5bn value of its half of the Congo mine. It’s worth a punt.
And it is not the only little iron ore developer that could be put into play. London Mining and African Minerals are both in the middle of developing large deposits in Sierra Leone. Like Zanaga, they have yet to benefit fully from the recovery in the price of iron ore.
The companies, worth £215m and £1.1bn respectively, trade at discounts because of the market’s lack of faith in the ability of smaller, scrappy companies to bring projects to fruition in foreign lands.
The commodities boom means that bigger rivals have cash to spare and a plethora of bargains before them. For those eager to secure big new sources of iron — like any number of Chinese state-owned giants — these are interesting times.
danny.fortson@sunday-times.co.uk
