One small-cap stock I’d consider with Zanaga Iron Ore Co Ltd

Can Zanaga Iron Ore Co Ltd (LON:ZIOC) climb further or should you consider this potential alternative?

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Investors in African miner Zanaga Iron Ore Co Ltd (LSE: ZIOC) have already seen the value of their shares climb by 200% over the last three months.

For those who spotted a bargain buying opportunity as the mining market started to recover last year, this is a great result.

For shareholders who bought into the story of Zanaga’s Republic of Congo iron ore deposit asset before the mining downturn, there’s less to celebrate. The shares are still worth 55% less than they were five years ago.

What comes next?

In my view, the outlook for investors in Zanaga is quite evenly balanced following recent share price gains. The company is no longer trying to head straight into the development of a very large mine. Instead it’s investigating the viability of a “small-scale early production start-up project”.

However, I suspect that the firm’s management doesn’t have much choice in its strategy. The group’s stake in the Zanaga asset is 49.99%. The remaining 50% plus one share is owned by FTSE 100 firm Glencore, which agreed to provide a budget for 2017 of up to $1.7m.

Given that Glencore is expected to report a net profit of $5,414m this year, the small size of this budget suggests to me that the larger firm is in no rush to develop Zanaga.

The dilemma facing would-be iron ore producers was made clear in its recent half-year results. Although global demand for iron ore has been “stronger than expected” this year, several large producers have increased their output. Stock levels at Chinese ports are said to remain high.

This could be a 2018 turnaround buy

It’s unclear to me how much value Zanaga shares are likely to offer. That’s why I’m inclined to favour an investment in Pressure Technologies (LSE: PRES).

This specialist engineering firm makes precision machined parts and high pressure gas cylinders for the defence, oil and gas and biogas energy sectors. It’s suffered in the oil downturn, but shares in the group rose by up to 13% this morning after management reported improved results for the year ended 30 September.

Revenue rose by 7.3% to £38.4m, while the group’s adjusted operating profit rose to £1.1m, more than reversing last year’s loss of £0.4m. Adjusted after-tax earnings also moved back into the black, rising to 6.3p per share, compared to a loss of 2.6p per share last year.

Although restructuring and acquisition costs meant that Pressure Technologies’ statutory (unadjusted) results still showed a loss, the firm does seem to have made some progress. I believe it should benefit further if the recent recovery in the oil price is maintained into 2018.

Follow the smart money?

Interestingly, the company reports that it was recently “approached by institutional investors” who wanted to make an additional investment in the group. Chairman Alan Wilson believes this reflects a widening view “that the oil and gas market is about to rebound”. The firm took advantage of this approach to raise £5m, strengthening its balance sheet.

It’s also worth noting that chief executive John Hayward has a 5.39% shareholding in the firm. I believe it’s fair to assume that his interests are closely aligned with those of private shareholders.

In my view, this stock has the potential to perform well and may be worth a closer look.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be considered so you should consider taking independent financial advice.

Roland Head has no position in any of the shares 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.

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