Good morning! There is game-changing news from Zanaga Iron Ore Co (LON:ZIOC) this morning, from a series of announcements stating that, suprisingly, Glencore appear to be progressing the Congo iron ore project which ZIOC jointly owns. The market had priced these shares as if the project was worth nothing, when I bought in at around 11p, so this is seriously good news, and the shares have already more than doubled before today's news.
Their shares are up 30% pre-opening, and in my view, depending on the precise terms of the renegotiated agreement between ZIOC and Glencore, and the likely extent of future dilution to fund the capex of this project (which is massive, it was projected to cost around $7bn), then there could be considerably more upside on ZIOC shares. It's going to be a pleasant day for me anyway!
I don't normally cover resource sector companies, especially junior exploration companies (as so many are such poor quality propositions - the proverbial "liar standing next to a hole in the ground"!) but Zanaga is a special case - where the project is world class in both size and quality, it has high quality management with good reputations, and it had cash in the Bank similar to the market cap at my entry point, with little cash burn. So it was a special situation that I was happy to buy into, and has worked very well indeed.
Also, I'm starting to like the gloomy sentiment surrounding the resources sector, which means it is more likely to contain the odd bargain, amongst all the rubbish. So careful research, and leaning on the knowledge & experience of sector experts in my network, mean that selectively I will look at the best value situations in the resources sector.
After all that excitement, I've looked at the list of announcements this morning, and it's very quiet, even for a Friday. The biggest faller of the day, down 29% to 39.75p is Redhall (LON:RHL). Checking back to our archive here, I've only mentioned it once, on 6 Feb 2013, when I said:
"Engineering company Redhall (LON:RHL) puts out an AGM trading statement which doesn't contain anything that sparks my interest. They state that this year will be H2 weighted, which can often be a precursor to a profits warning, so I tend to steer clear of that type of situation. Much better to pay a little more for a strong recent trading update, in my opinion."
That looks to have been a sensible view, as they today warn on H2 performance, with profits "below market consensus". Exceptional restructuring costs have been incurred to downsize the business, and it sounds like working capital is stretched, with HSBC remaining supportive apparently. I tend to avoid any situation where the goodwill of the Bank Manager is necessary, although they are within existing facilities. It just looks messy, and the Balance Sheet has pretty much zero net tangible assets, so it fails my financial strength test, and in any case has wafer thin operating profit margins, so altogether much too high risk for me. It reminds me a bit of Silverdell - in that things can unravel fast at a company with low margins & too much debt, if something goes wrong.
I'm impressed with strong interims from Northbridge Industrial Services (LON:NBI). It's an equipment hire business. EPS has risen 88% to 12.6p. It appears to be an H2-weighted trading year, so bearing that in mind it looks to me as if they should comfortably achieve or surpass broker consensus forecast for this year of 31.4p. So at 405p currently, the shares are on a PER of roughly 13, which looks about right to me.
For someone prepared to take a long term view, on the benefits to earnings from a cyclical economic recovery, then this share could still make sense, even after having almost doubled in price over the last year. The forecast dividend yield is not brilliant though, at only 1.5%.
That's it for today & this week, I have more meetings this afternoon, been a mega-busy week. Also I'm hoping to drop in to see Zanaga Iron Ore Co (LON:ZIOC) later this afternoon, to go through today's announcements with them in a bit more detail, so will report back next week.
Have a smashing weekend all & see you on Monday morning.
Also, a reminder that the next "Mello" event is being held on Monday, 16 Sept at "Sea Salt" restaurant, round the corner from Beckenham Junction railway station. It's filling up fast, with over 50 investors already booked in I am told, for an evening of 2 presentations (one of which is Netplay TV, the other is me!), drinks & networking, and a 3-course meal. These really are excellent events, so if you would like to join us, then please contact David Stredder via www.freesharedata.co.uk/mello .
(of the companies mentioned today, Paul has a long position in ZIOC and NPT.
A Small Caps Fund to which Paul provides research services, also has a long position in ZIOC)