Small Cap Value Report (15 Aug 2014) - ZIOC, SRG, TUNG

Good morning! This is my last report from Paxos, as I'll be back in sunny England on Sunday. Even first thing in the morning it's too hot to sit in direct sunlight, so I've parked myself on the verandah in the shade of one of the vast number of olive trees on the island. It's a quiet day for news, with only a few things catching my eye today, as follows.

Zanaga Iron Ore (LON:ZIOC)

Share price: 18.5p
No. shares: 278.78
Market Cap: £51.6m

The announcements from this company are always a model of clarity, as well as giving a useful background summary on the company. It's been mentioned here a lot before. The company is developing a joint venture (with mining giant Glencore) iron ore mining project in the Republic of Congo (the smaller & politically stable of the two Congos).

Despite the iron ore price being under pressure, this project appears to be going ahead, because it has a number of key advantages - the most important being that it will be a very low cost iron ore mine, hence is economically viable even at the depressed iron ore prices pertaining at the moment. Secondly, the iron ore is high grade, and low in impurities, which means it will command a price premium, and be sought after by China in particular, where pollution from low grade iron ore processing is a big issue.

The main risk with the project is that financing for the $2.6bn initial capex has not yet been secured, so until that happens this share must be seen as high risk. However it's also potentially high reward, with the economics of the project being compelling. The company believes that most of the funding for capex can be secured through debt packages, and of course having Glencore as your JV partner makes this project entirely credible - i.e. if Glencore wants it to go ahead, it will go ahead.

Today's announcement from ZIOC concerns the granting of the mining licence, and mining convention (I'm not sure what the difference is, perhaps a reader could explain in the comments below). It details the terms agreed with the RoC Govt, which look favourable to me, although I'm not a sector expert.

So that ticks one remaining box, with the only other one being project financing. My understanding is that representatives from Glencore and Zanaga have formed a project financing team, and are looking at various options. So we'll have to see what happens on that front in due course. Although so far so good, the project seems to be progressing as hoped for.

I'm not sure whether today's news will trigger much of a price movement, because it was largely a formality - there was never any doubt about ZIOC being granted a mining licence, as the project is so important to the economic development of the RoC. However, the terms of the deal (taxes, etc) look good to me, so that might trigger a rally in the share price, who knows?

I've attended several meetings with this company to discuss developments, over the last year, and what has impressed me is that the company does what it says it's going to do - i.e. expectations are kept grounded, there's no hype, just facts & figures. Announcements (so far) have been in line with the company's stated aims. I like that, it's reassuring particularly for someone like me who never normally goes near resource sector shares.

Security Research (LON:SRG)

Share price: 55p
No. shares: 19.3m
Market Cap: £10.6m

This is a potentially interesting micro cap. It has a peculiar mix of activities, in electronics, packaging, and legal services for property transactions. The company secured a remarkably lucrative contract to make devices for detecting hidden bombs (IEDs) in Afghanistan, but that has come to an end now I think, and some of the one-off profits were returned to shareholders.

The company has today announced the result of a strategic review, to decide whether to keep its property legal services company;

In light of the strong trading in PSG and across its franchise network, the Board has concluded that it is in the best interests of SRG and itshareholders for PSG to continue focussing on the development of its businessas a wholly owned subsidiary of SRG.

So that sounds positive. I'm flagging up the share as one that might be worthy of further research. I don't hold any personally, and am not intending to buy any, as it's too illiquid and I don't have time to do the thorough research ncessary to be certain that the shares are good value or not. However what I can say is that it's been on my radar for some time, and looked potentially interesting last time I looked at it. As usual, this is not a recommendation, I'm just throwing the idea out there to anyone who has the time & inclination to research it properly.

Tungsten (LON:TUNG)

Share price: 293p
No. shares: 100m
Market Cap: £293m

In my view this company is guilty of over-announcing - i.e. putting out anything & everything as an RNS. The trouble with that is that it dilutes the impact of important announcements, and it makes some investors worry that management are ramping the share price ahead of a fundraising (which is sometimes the case).

Today's announcement is a good example of that. It is entitled "update on debt financing", but doesn't really say anything much, other than that they are continuing to seek debt financing! If anything I think this announcement is negative, as it makes the company sound a bit desperate, and maybe struggling to raise debt financing?

I hold shares in the company, but am not impressed at all with today's announcement.

There's nothing else of interest today, so I shall sign off. Also t'internet is being unreliable here, cutting out & back in again randomly, so better quit whilst I'm ahead!

Have a smashing weekend, and see you back in Blighty on Monday!

Regards, Paul.

(of the companies mentioned today, Paul has long positions in ZIOC and TUNG, and no short positions)