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One bargain dividend stock I’d consider before Zanaga Iron Ore Co Ltd

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There have been some dramatic reversals of fortune in the mining sector over the past few years. Not only has there been an unexpected whipsaw in commodity prices, but we’ve also seen some formerly out-of-favour mining stocks stage a stunning comeback.

And even as commodity prices have started to trade sideways in recent months, we’re still seeing some spectacular gains of late. Republic of Congo-focused miner Zanaga Iron Ore (LSE: ZIOC) is one such example as shares in the small-cap iron exploration and development company have more than quadrupled in the last month alone.

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Promising prospects

The miner has benefitted from a string of positive news these past few weeks, which showed the company closer to bringing its flagship Zanaga Iron Ore asset into production than previously thought. Glencore, which owns a controlling stake in the project, is assessing the opportunity for a small-scale early production start-up project.

Such a project has been under consideration for several months and would determine the economic feasibility of ramping-up production. It’s difficult to make predictions before the results come out, but initial indications have been promising, showing the project to be cost-effective even in an iron ore low-price environment.

And with an expected peak production output of 30m tonnes per annum (mtpa), the Zanaga project could be one of most significant iron ore discoveries in Africa, potentially bringing in huge returns for the £50m company. That said, there’s still a very long way to go before it generates meaningful profits and there are a lot of execution risks on the horizon.

Safer way to invest in the sector

That’s why I prefer Anglo Pacific Group (LSE: APF). As a mining royalties outfit, it earns stable royalties connected with the mining of natural resources. It’s a business which is less exposed to operational risks and commodity price volatility. This makes it a much safer way to invest in the mining sector, allowing investors to earn a stable income regularly.

Now, natural resources royalty companies are much more common in Canada and the US, but their business model is relatively easy to understand. They essentially invest in a diversified portfolio of claims on different projects, earning them revenue on the production of a whole range of commodities, which include coal, iron, copper and precious metals. And because these companies don’t have to put up cash for capex, they don’t have the same risks and expenses that traditional producers have.

Still, Anglo Pacific is not completely immune to commodity prices and changes in production output, because royalty income is variable. Earnings and dividends still remain well below 2012 levels, although revenues have perked up quite a bit recently, with royalty income up 89% to £8.9m in its most recent quarter.

Dividends

High margins and strong free cash flows enable the firm to pay impressive dividends to its shareholders. Shares in Anglo Pacific currently yield 4.3%, and City analysts have high expectations about future growth — they expect dividends per share will grow in the mid-double-digits over the next two years, giving its shares a prospective yield of 5.4% in 2019.

Obviously, the risk/return trade-off means Anglo Pacific can’t promise the opportunity Zanaga has to offer, but on the upside, it’s unlikely that an investment in the firm could lead to a huge capital loss either.

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Jack Tang has no position in any shares mentioned. The Motley Fool UK owns shares of Anglo Pacific. 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.

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