Small Cap Value Report (13 Sep) - ZIOC, RHL, NBI

13th Sep '13 by Paul Scott

10 comments 13401 reads

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…

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Gostevie

13th Sep '13

Hi Paul,

I was wondering if you had any thoughts on yesterday's final results for Centaur Media (LON:CAU) as I know you have reported on this company before and held shares briefly.

I still hold and am showing a 28% profit since first buying back in May when it was your daily report that first brought the company to my attention, so a sincere thank you from another satisfied reader.

Steve

shauniekent

This is THE news we thought we would'nt hear on Zanaga - the outside chance it would go ahead. Doubled holding at the open - i'm thinking this will finish the day a lot higher. ;-)

ChangFai

For a man that doesn't do resource stocks .....

lewilewilewi

Hi Paul,
Any thoughts coming up to French Connection (LON:FCCN) reporting next week? I know you were long-term bullish on this, but given your background is there anything else you could share about the company/sector?

Thanks

jraitt

If looking at resource stocks look at Stratex. £15m in cash plus 45% Altintepe at no cost 6 months after forestry permit plus good exploration prospects.

Paul Scott

Hi lewilewilewi,

I'm not long-term bullish on French Connection (LON:FCCN) as such. I hold shares in it, but have no strong view on whether they will succeed in turning the company around or not, I just don't know & will have to wait and see.

The reason I hold the shares, is that in my opinion they represent a favourable price on a risk/reward basis - i.e. the upside is much larger than the downside. If the odds are say 50:50 that they turn the company around, then on the downside case I might lose say half my money (as I intend selling if the next trading statement is badly negative), but if a turnaround happens then I would expect to make say 3 to 5 times my money in profit.

The key thing with FCCN is that the Balance Sheet is so strong, that it probably gives them sufficient time to turn the company around, and underpins the current valuation. So the business is in for free, yet the wholesale & brand licensing part of the business has big value, it's just being dragged down by the heavy losses on the UK/Europe retail side. If they fix the latter, then the valuation could soar from here.

Cheers, Paul.

Ah I see, thanks for clarifying.

loudenr

Hi Paul

You mention the resources sector. One company that you commented on a while back is Goldplat. It is one I have looked at closely and my opinion is that it is potentially a good pick in the gold mining sector. My main concern about investing now is that they have stated that EBITDA is going to be lower than forecast and it might be better to wait for FY results. Do you have thoughts or feedback from sector experts.

many thanks
Ric

trufflehunter

I agree with your comments on how to pick bargains in the resource sector. There are many companies that will go bust because their cash burn is out of line with their funding (and raising new funding is nearly impossible these days).

for me the following stand out:
Northern Petroleum...producing, net cash, 3 legs to the business with each one potentially worth the current price.
Cadogan Petroleum...discount to cash (lovely!) and substantial upside on a liquidation basis (see below)
Aug-12 Breakup Breakup Comments
$ m $ m p/share
Assets
Intangible Exploration & Evaluation Assets 71.7 19.5 5.6 2.6m bboe @$7.5 per b, assume no value for others
PP&E 107.9 5.0 1.4 Kraznozayarska processing plant, assume 20% of original cost, other PP&E assumed at zero
Other Financial Assets 0.0 0.0 0.0
Total Non Current Assets 179.6 24.5 7.1

Inventories 6.5 1.3 0.4 Assume 20%
Trade & Other Receivables 58.5 24.7 7.1 $24.7 by ENI for disposals…assume 100% collected
Cash & Cash Equivalents 51.3 69.7 20.1 Nov 12 was at $42.7m, GPS $29.7M now received
Total Current Assets 116.2 95.7 27.6

Total Assets 295.8 120.2 34.7

Liabilities
Trade & Other Payables 7.1 7.1 2.1 Assume 100%
Current Provisions 0.5 0.5 0.2 Assume 100%
Total Current Liabilities 7.7 7.7 2.2

Deferred Tax 11.6 11.6 3.3 Assume 100%
Long-term Provisions 0.6 8.6 2.5 Additional $8m liquidation costs
12.2 20.2 5.8

Total Liabilities 19.8 27.8 8.0

Net Assets 276.0 92.4 26.7

FX Rate £/$ 1.5
No of Shares (m) 231

Current Share Price (p) 16 67%
upside

Market Cap 37
Tangible Book Value 136
Market to Tangible Book 0.27
Copper Development Corporation...minimal cash burn, discount to cash....could fly if the Philippines/Chinese resolve their disputes

Damian Cannon

Hi Paul,

I'm enjoying your news round-up very much; hardly any waffle!

However I was wondering if you could expand on your comments regarding trading being H2-weighted and that being a good or bad sign. With Redhall you identified this as possibly foretelling a profit warning, and so a negative, while with Northbridge you take this as a sign that they could beat broker forecasts, and so a positive.

Is the difference, for you, as simple as whether the H1 trading has been better than expected (and this might continue in H2) or worse (and the company is trying to imply that they know how to fix it if only you'll trust them)?

Thanks.

Small Cap Value Report (13 Sep) - ZIOC, RHL, NBI

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Paul Scott

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