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 Rationale

• Robust Q1 2022 performance: The company reported decent performance in the Q1 2022, with revenue surged by 123% to CAD 545.4 million, against USD 244.6 million on a YoY basis, while the operating income elevated enormously by 237% to CAD 400.0 million against CAD 118.8 million. Net income also rose to CAD 224.3 million compared to CAD 75.6 million in the previous corresponding period. The healthy performance was driven by improved average commodity prices and higher tonnages of iron ore concentrate being sold.

• Improving operating matrix: Given the strength of a business over the past number of quarters, the Company maintained its pace and witnessed spirited performance across its gross margin, operating margin and net margin. The Company is continuously working to grow its profile, and the higher average realization cost of the metal has also been supported, which is appreciable.

• Iron Ore Concentrate Price, a key driver: Iron ore prices and high-grade premiums hit new highs in the three months ending June 30, 2021. The ongoing worldwide economic recovery, which is contributing to the acceleration in global steel demand, is most likely responsible for the positive iron ore pricing trend. Strong global steel output had a direct impact on iron ore demand. Steel output increased 17.4% YoY in the quarter, according to the World Steel Association. The P65 price for high-grade iron ore varied from a low of USD196.7/dmt to a high of USD264.2/dmt for the three-month period ending June 30, 2021.

• Implementing artificial intelligence-based Advanced Drilling Technologies: The business recently announced that it had inked an agreement with Caterpillar Inc. to use artificial intelligence-based Advanced Drilling Technologies on CAT equipment at its Bloom Lake Mine ("Bloom Lake"). Caterpillar's integrated technology would support Champion's ability to assess the status of machines, technologies, and materials using real-time data, artificial intelligence, and analytics to enable more timely and accurate operational decisions and consistent execution across Champion's entire mining value chain. We believe that this would 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.

• Healthy cash flows: Due to excellent operational performance, the business generated robust cash flow from operations before changes in working capital during the reported period, which increased to CAD 248.4 million, against CAD 82.5 million in the previous corresponding period. The 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 Q1 2022, which exhibits the competitive advantage of the company within the industry. The chart below gives a glimpse of this.

• Commanding higher net average realized selling price, cash operating margin and cash profit margin: Despite a scheduled semi-annual maintenance program, the company's strong operational results and continuous improvements enabling improved mill productivity have put the organization in a strong position where it can command higher net average realized selling price, cash operating margin, and cash profit margin, which is a key positive.
  

• 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. Based on the new optimized mine plan, the Bloom Lake mining rate would also be increased to accelerate the supply of ore to the expanded facilities, while maintaining a life of mine ("LoM") of 20 years. The project is anticipated to be finished by mid-2022, and is moving forward as planned, with more than 300 people actively working on it. In the most recent quarter, the business invested an additional CAD 118.3 million, including CAD 25 million in deposits. The firm has spent a total of CAD 263.6 million so far, with an expected capex of CAD 326.2 million yet to be spent.

Source: Company

 

• Robust liquidity: As on June 30, 2021, the Company held CAD 466.7 million in cash on hand and restricted cash along available and undrawn loans of CAD 410.6 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.
  

• Bullish technical indicators: On the weekly chart, CIA prices are trading above the upward sloping trend line support level of CAD 5.07 and taking support of the same. Currently, price is trading in the upward trajectory, forming a series of higher tops and higher bottoms. Moreover, the prices are trading above the trend-following indicator 50-period SMA, which may act as a crucial support level for the prices. The leading indicator RSI (14-Period) is trading at ~45.52 levels, with a bullish bias.

Technical Price Chart (as on September 2, 2021). Source: REFINITIV, Analysis by Kalkine Group

• Risks associated with the 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. 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 Q1 2022 (Expressed in thousands of CAD)

Source: Company

• In Q1 2022, the company sold 1,974,700 tonnes of high-grade iron ore concentrate at the CFR China gross average realized price of USD 228.3 /dmt, before provisional sales adjustments and shipping costs.
• The Company’s 1,974,700 tonnes of iron ore concentrate were shipped to 6 customers located in China, Japan and South Korea.
• The gross average realized selling price of USD 228.3 /dmt represents a premium of 14.2% over the benchmark IODEX 62% Fe CFR China Index ("P62") price, compared to a premium of 15.5% for the same period in 2020.
• In Q1 2022, the company posted higher revenues at CAD 545.4 million compared to CAD 244.6 million in the previous corresponding period. The increase in revenue was primarily driven by improved average commodity prices and higher tonnages of iron ore concentrate being sold.
• The gross profit in the reported period stood elevated at 414.6 million against CAD 128.3 million in the pcp. The company witnessed lower cost of sales as a % to revenue.
• During the three-month period ended June 30, 2021, the global economic recovery, rising fuel prices and decreased vessel availability contributed to the rising sea freight index, when compared to the previous quarter. As a result, the Company paid higher freight costs in the reported period compared to the previous corresponding period.
• Operating income in Q1 2022, stood at CAD 400.0 million compared to CAD 118.7 million in pcp.
• On the back of above discussed rationales the company’s net income in Q1 2022 stood at CAD 224.3 million against CAD 75.6 in pcp, although it witnessed higher finance expenses and higher income and mining tax.

Top-10 Shareholders

The top 10 shareholders have been highlighted in the table, which forms around 41.37% 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 31.28%, and ownership of the strategic entities stood at 38.07%.

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 posted excellent financial results in Q1 2022 due to a combination of increased output, lower costs, and a higher average realized the cost of metal. It is profiting from Bloom Lake's high-grade iron ore's growing demand and premium pricing, which is a significant plus. The current increase in commodity prices is benefiting the firm, and we can observe a major influence of this movement on the balance sheet of the industrial metal mining company. As prices rise, average realization prices for miners rise as well, resulting in a better margin profile and larger free cash flow generation.  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. Strong global steel output had a direct impact on iron ore demand, which would be positive for the company.

Given the strength of a business over the past number of quarters, the company maintained its pace and witnessed the spirited performance across its operating matrix and is also leaping the industry median margins on many fronts, which exhibits the competitive advantage of the company within the industry. Additionally, with the support of Caterpillar Inc., the business is implementing artificial intelligence-based Advanced Drilling Technologies. We believe that this would improve mine-to-plant workflow, resulting in a more efficient end-to-end enterprise process that produces more consistent raw material for final product specification needs, boosting the company's output and cash flow.

Moreover, technical indicators are suggesting a potential up move in the stock.

Therefore, based on the above rationale and valuation, we recommend a "Buy" rating on the stock at the closing price of CAD 5.42 on September 2, 2021.  

*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 Price Chart (as on September 2, 2021). Source: REFINITIV, Analysis by Kalkine Group

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

*Recommendation is valid at September 3, 2021 price as well.

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