Champion Iron Ltd (TSX: CIA) is a Canadian company that specializes in the exploration and development of iron ore assets. Mine Site, Exploration and Evaluation, and Corporate are the company's operating segments. The Mine Site sector provides the most revenue. Fire Lake North, Powderhorn/Gullbridge, Moire, Quinto Claims, Harvey Tuttle, O'keefe-Purdy, and others are among the company's projects. 

Investment Rationales

• Decent Q2 2022 performance: The company reported decent performance in the Q2 2021, with revenue surged by 6% to CAD 331 million, against CAD 310.9 million on a YoY basis, while the gross profit rose by 5% to CAD 210.6 million against CAD 199.9 million and net income also rose to CAD 114.5 million compared to CAD 112.1 million in the previous corresponding period. The healthy performance was driven by improved average commodity prices.

Source: Company, Analysis by Kalkine group

• Iron Ore Concentrate Price a key driver: Iron ore prices and high-grade iron ore premiums saw considerable volatility in the three months ending September 30, 2021. Despite domestic crude steel output limits in China, the global crude steel production reduction was offset by a strong recovery outside of China in the same period. Since it has no fixed pricing contracts in place and the Bloom Lake Mine is not subject to royalties, the Company believes it is well positioned to benefit from iron ore prices that continue to offer an attractive operating margin.

Source: Company

• Healthy cash flows: Due to excellent operational performance, the business generated robust cash flow from operating operations during the reported period, which increased to CAD 374.1 million, against CAD 131.4 million in the previous corresponding period. An increase was mainly attributable to the higher EBITDA, which resulted primarily from a higher net average realized selling price and higher tonnes of iron ore concentrate shipped.

• Industry beating margins: Despite the turmoiled period due to Covid-19 Pandemic, the Company maintained its pace and witnessed spirited performance across its margin matrix. In addition, the management’s solid determination helped them leap the industry median margins on many fronts in Q2 2022, which exhibits the competitive advantage of the company within the industry. The chart below gives a glimpse of this. 

Source: Refinitiv, Analysis by Kalkine group

• Implementing artificial intelligence based Advanced Drilling Technologies: The business recently announced that it has inked an agreement with Caterpillar Inc. (NYSE: CAT) to use artificial intelligence-based Advanced Drilling Technologies on CAT equipment at its Bloom Lake Mine ("Bloom Lake"). Caterpillar's integrated technology will support Champion's ability to assess the status of machines, technologies. We believe that this will enhance mine-to-plant workflow, resulting in a more efficient end-to-end enterprise process that produces more consistent raw material to meet final product specifications.
  

• Bloom Lake Phase II Expansion Project: By completing the construction of the second plant, which was partially completed by the mine's prior owner, the Phase II project seeks to double Bloom Lake's nameplate capacity to 15 Mtpa of 66.2 percent Fe iron ore concentrate. The Phase II project is anticipated to be finished by mid-2022, and is moving forward as planned, with more than 400 people actively working on it. The firm has spent a total of CAD 388.2 million so far, with an expected capex of CAD 201.6 million yet to be spent.

Source: Company

• Robust liquidity: As on September 30, 2021, the Company held CAD 576.5 million in cash on hand and restricted cash along available and undrawn loans of USD 220 million. We believe the Company is well positioned to fund all its cash requirements for the next 12 months with its existing cash balance, which is appreciable.

Risks associated with an investment

The company is exposed to a variety of risks and uncertainties, including the changes in the assumptions used to prepare feasibility studies, project delay, general economic conditions, the demand of iron ore, foreign exchange rate, etc. Although the most crucial risk is the volatility in the prices of iron ore and steep rise in the freight cost, which could impact the margins and cash flows of the company. 

Financial overview of Q2 2022 (Expressed in thousands of CAD)

Source: Company

• Increase in revenue: In Q2 2022, the company posted higher revenues at CAD 331.0 million compared to CAD 310.9 million in the previous corresponding period. An increase in revenue was primarily driven by improved average commodity prices.
• Higher gross profit: The gross profit in the reported period increased to CAD 210.6 million against CAD 199.9 million in the pcp. Although it’s cost of sales as a % to revenue increased by 50 bsp to 33.5% V/s 33% in Q2 2021.
• Steady operating income: An operating income in Q2 2022, stood at CAD 190.3 million compared to CAD 189.4 million in pcp.
• On the back of above discussed rationales the company’s net income in Q2 2022 stood at CAD 114.5 million against CAD 112.1 in pcp, partially supported by lower finance expenses.
  

Top-10 Shareholders

The top 10 shareholders have been highlighted in the table, which forms around 41.47% of the total shareholding. O'Keeffe (William Michael), Ltd. and Investissement Québec hold the company's maximum interests at 8.89% and 8.59%, respectively. The company's institutional ownership stood at 32.45%, and ownership of the strategic entities stood at 38.08%.

Source: Refinitiv

Valuation Methodology (Illustrative): EV to Sales based Valuation Metrics

Note: Premium (discount) is based on our assessment of the company’s growth drivers, economic moat, competitive advantage, stock’s current and historical multiple against peer group average/median and investment risks. 

Stock recommendation

The Company delivered another robust operational and financial quarterly result and continues to demonstrate its agility and motivation as it completed several critical work programs in challenging times for the Phase II expansion project, which is expected to double the capacity at Bloom Lake. We believe the firm is well positioned to profit from rising underlying commodity prices and end FY2022 in good financial shape. Furthermore, the ongoing worldwide economic recovery is anticipated to be attributable to the acceleration in global steel demand, resulting in favorable iron ore pricing momentum. As a result, strong global steel output had a direct impact on iron ore demand, which would be positive for the company. Therefore, based on the above rationale and valuation, we recommend a "Buy" rating at the closing price of CAD 3.80 on November 18, 2021. We have considered Trevali Mining Corp, Capstone Mining Corp, Hudbay Minerals Inc, etc. as the comparison's peer group.

*Depending upon the risk tolerance, investors may consider unwinding their positions in a respective stock once the estimated target price is reached.

Technical Analysis Summary

One-Year Technical Price Chart (as on November 18, 2021). Source: REFINITIV, Analysis by Kalkine Group

*The reference data in this report has been partly sourced from REFINITIV.

*Recommendation is valid on November 19, 2021, price as well.

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