Champion Iron Ltd 

Champion Iron Ltd (TSX: CIA) operates in the exploration and development of iron ore properties in Quebec, Canada. The company's operating segments include Mine Site, Exploration and Evaluation, and Corporate. 

Key Updates:

• Favorable macros:Iron ore is widely used for the manufacturing of steel, while the demand for steel has remained elevated in the recent past due to its usage for meeting the carbon emission norms. Notably, in the last two decades, the share of steel has increased from 5% to 8% and is expected to increase in the coming days. The above is likely to push the iron ore demand in the coming days, leaving enough room for expansion for the company.

• Strong margins:The company commands strong profitability margins, as compared to the industry median, which indicates improved operational efficiencies. In Q2FY22, EBITDA margin and operating margin was recorded at 62.5% and 57.2%, respectively, as compared to the industry median of 8.9% and 9%, respectively. Moreover, the group reported its net margin at 34.6% in Q2FY22, significantly higher than the industry median of 6.5%.
• Capacity expansion to support upcoming performance: In order to cater to the growing demand, the company is on focusing capacity expansion and is conducting construction activities across the major tie-in between Phase I and Phase II, which is expected to be completed by mid of 2022. The above is likely to support the company’s upcoming production growth, which is a key positive.

Q2FY22 Financial Highlights:  

• CIA declared its quarterly results, wherein the company posted revenue of CAD 006 million, jumped from CAD 310.994 million in the previous corresponding period (pcp). The surge in revenue was primarily due to an improved net average realized selling price. 
• Gross profit stood higher at CAD 685 million, as compared to CAD 199.909 million in Q2FY21, supported by strong revenue growth, while a slightly higher cost of sales stood as a drag.  
• The group reported an operating income of CAD 372 million, stood slightly higher than CAD 189.483 million in pcp. The quarter was marked by higher general and administrative expenses, an increase in Share-based payments, coupled with a surge in product research and development expenses. 
• The group reported a net income of CAD 596 million, as compared to CAD 112.164 million in Q2FY21.     

Q2FY22 Income Statement Highlights (Source: Company Report)

Risks: The corporation’s performance would be impacted by the volatility in the international iron ore prices and would subsequently dampen the company’s margin in the foreseeable future.  

Valuation Methodology (Illustrative): Price to CF based 

Stock Recommendation:

The stock of CIA closed above its 20-days and 50-days simple moving average, indicating a bullish trend. We have valued the stock using the P/CF-based relative valuation method and have arrived at a double-digit (in percentage terms) upside. For the said purposes, we have considered peers like Ero Copper Corp, Capstone Mining Corp etc. Considering the aforesaid facts, we recommend a ‘Buy’ rating on the stock of CIA at the last traded price of CAD 4.14 on December 10, 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 Technical Price Chart (as on December 10, 2021). Analysis by Kalkine Group

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

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