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Why I’d consider Zanaga Iron Ore Co Ltd after almost four-bagging in a year

Image: BHP Billiton, fair use, cropped

Shares in Zanaga Iron Ore (LSE: ZIOC) have exploded higher over the past four weeks, making the stock one of the market’s best performers during this period. 

Since mid-October, the shares have gained 350%, and since the beginning of October, the stock has surged by 420%. Even after this rally, I believe there’s more upside on offer for shareholders in the months ahead. 

Building the business

Zanaga’s rally started at the end of September when the firm announced alongside its half-year results that it is continuing to assessthe opportunity for a small-scale early production start-up project.” Such a project has been under consideration for several months, and the company is planning to be able to inform shareholders of the details towards the end of the year. 

If this start-up project goes ahead, it would be a significant development for it, turning the business from an exploration company, into a fully functioning iron ore miner. Funds generated could then be used to progress the development of the rest of the Zanaga Iron Ore Project, one of the most significant iron ore deposits in Africa. 

The second piece of good news for shareholders arrived on November 8. Management announced that the company had been awarded an Environmental Permit by the Ministry of Environment of the Republic of Congo. This permit “covers the Zanaga Project’s first phase of development pursuant to its Mining Licence granted in August 2014.

This approval is a huge step forward for the company. With the permission in place, outside investors should be willing to commit capital, and the firm can start to move forward with other plans. 

Plenty of risks ahead

It might be sitting on one of Africa’s most significant natural resource deposits, but the firm still has an enormous amount of work to do before it reaches the production stage and cash is in short supply. 

At the end of August, the business reported a cash balance of $4.2m. The company only used $434,000 of cash in the first half, so it can keep the lights on for some time yet, but it’s likely Zanaga will have to seek funding shortly if it wants to start a small project. 

It’s worth noting that it has been trying to develop its resource for many years and so far, there’s little to show for it. The last time I covered the business in 2014, the share price was still just under 19p. 

Nonetheless, the awarding of the environmental permit could be the catalyst that the company needs to get started developing its operations.  This is why I’m positive on the firm’s outlook. Even though it will probably be several more years before the business is generating a profit for investors, Zanaga’s outlook is now much improved. 

Not suitable for all 

Zanaga could still make you rich, but that does not mean that you should wager all of your wealth on this one business. The chances of survival are 50/50, so it is prudent to hold the company as part of a well-diversified portfolio. 

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Rupert Hargreaves does not own any share mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.