Zinc firm has potential to grow quickly

By Graeme Dickson
Updated: 12:17 EDT, 16 February 2011

It is not often when you get a company which has almost as much cash as its market capitalisation, attributing very little to the prospects of the existing business, but that is what we have identified in the form of ZincOx Resources (ZOX):

The company recently disposed of a non-core asset, bringing up its cash balances to $69.2 million (£42.9 million) against a market capitalisation of £46.7 million. ZincOx currently has no debt.

Its flagship zinc project is the Korean Recycling Plant (KRP), near P'ohang, which is currently in development.

In fact the site was previously a hillside, in which the hard graft workers from South Korea completely flattened out as can be seen from the picture on the right.

ZincOx purchased a Rotary Hearth Furnace (RHF) from Severstal at a rumoured $5 million, saving ZincOx $20-$25 million in the process.

The company then took the furnace apart, flat-packed it in crude terms and has since shipped it over from Detroit to South Korea ready for re-assembling.

Using RHF technology for Zinc extraction is very successful with less than three per cent of Zinc being wasted in the process compared to four to eight per cent loss using more conventional methods.

The quality of the zinc is high and the RHF methodology requires no subsidy under ZincOx's business model compared to a more conventional method of extracting Zinc from steel waste.

South Korea is a very friendly towards foreign investment and ZincOx's site is situated in a Foreign Investment Zone in which the first five years of operation are tax free and years six and seven at just 11 per cent tax.

The company forecasts that in year one of the project it will be producing 46,000 tonnes of zinc in concentrate per annum.

Phase two of the KRP should double that production. If this works, the company aims to roll-out its technology/process across the globe with the aim of being the world's largest zinc recycler.

Just on Phase One of its KRP, it should be up and running by the first quarter of 2012 with an EBITDA forecast to come in at $29 million (circa £18 million).

Ambrian, its house broker has a buy note and a 104p price target but also noted that if the company goes ahead with both phases one & two in South Korea and was to receive the same price to earnings multiple as some of its competitors such as Horsehead (ZINC: NASDAQ), then ZincOx's share price could go as high as 493p, some 720 per cent above yesterday's closing price of 60p.

Execution of the plan is essential and so too is the zinc price, currently trading at around $2,500 per tonne.

There will also be some political risk thrown in, just in case South Korea goes to war with its Northern neighbours.

Update

Pendragon (PDG) - tipped as a buy at 23p, it closed at 23.75p. Sit tight as we await results scheduled for 23 February while the talk of a bid will not do any harm (except attract 'hot money' that inevitably dumps on any disappointment).

Cyan Holdings (CYAN) – suggested to buy at 1.325p, the stock closed at 1.33p – keep holding for now as we await contract developments.

GB Group (GBG) – suggested to buy at 36.75p, the stock closed yesterday at 37.38p. The company issued a strong trading statement last week stating that revenues were up 17 per cent and cash balance up 22 per cent to £5 million. The shares traded as high as 39.5p before paring the gains. Hold for now.

Europa Oil & Gas (EOG) – suggested to buy at 30.25p, the shares closed yesterday at 32.75p. The shares have drifted after the initial excitement last week. Hold for now.

SocialGo (SGO) – suggested to buy at 3.55p, the shares have drifted to 3.1p. I met the management a few weeks ago ahead of a fund-raising. It was looking to raise just £500,000 to fund version two's development and marketing costs: however the institutions really liked the story and in the end it raised £1.3 million at 2.95p, including an order from Optiva Securities the firm I work for. If the company can obtain a 20 per cent improvement in performance, which it hopes to do so over the next 12 months, the profits could be huge for the company and shareholders alike.

EMED (EMED) – suggested to buy at 12.25p, the stock closed yesterday at 15.75p. The company is still waiting for approval from the Junta regarding the transfer of mineral rights, which seems to be dragging on. Continue to hold but keep the stop at 13p to ensure profits.

Active Energy (AEG) – suggested to buy at 6.13p, the stock closed yesterday at 4.25p. This is very disappointing given the positive news about recent contract wins. I will do some further research to see if this is still worth holding.

Bango (BGO) – suggested to buy at 142.5p, the stock closed yesterday at 139.5. The shares have taken a sudden turn for the worse – this behaviour is akin to a company that are about to embark on a fund raising, but given it has just raised £2.4 million in December I would hope not. Sit tight for now but f it closes below 120p cut the position.

Edenville (EDL) – mentioned as a buy at 1.195p, the stock closed yesterday at 1.675p. Having already suggested to sell one's investment stake out at 2.51p, investors should now be enjoying a 'free ride' for those that followed this course of action. Hold the balance for now.

Weatherly International (WTI) – suggested to buy at 8.1p, the shares closed yesterday at 12.625p. The stock has traded out of kilter with the copper price but traded pretty much in-line with other small cap resource stocks, which may not necessarily be warranted given the company's close-to-production profile and enticing prospects. Watch out for a note from its corporate broker Ambrian anytime soon.

Toumaz Holdings (TMZ) – tipped as a buy at 8.625p, the stock closed at 7.875p. Last week the company announced that Dr. Patrick Soon-Shiong used his investment vehicle, California Capital Equity LLC to buy a 2.46 per cent stake at a premium to the stock market price of 8.83p a share. Continue to hold.

Renewable Holdings (REH) – tipped as a buy idea at 16.25p, it closed yesterday at 18p. The stock has at last woken up after investors finally digested the fact that Weiss Asset Management had upped its stake to 21.2 per cent. Continue to hold as the stock slowly grinds to a narrower discount to its Net Asset Value.

Bowleven (BLVN) – tipped as a buy at 177.25p, the stock closed at 326.25p yesterday. Suggested seven weeks ago to sell half after an initial 102.8 per cent gain, the balance should be retained as we await further progress from its Sapele-1 drilling campaign and the Etinde permit.

Tissue Regenix (TRX) – suggested as a buy at 16p, the stock has picked up from its lows and is now trading at 11.375p. Keep holding as we await trial results from its NHS trials and further product developments.

The material for this report comes from Sharescope, a corporate presentation by ZincOx and an Ambrian research note.

The writer does not hold any shares or derivatives in the above mentioned companies except EMED and Weatherly International. Some clients of Optiva Securities may hold shares in the above named mentioned companies.