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 segment include Mine Site, Exploration and Evaluation, and Corporate.

Key Updates:

• Technical showing a price revival: On account of a correction in the international commodity prices, the stock of CIA corrected ~22% in the last one month. Currently, the CIA stock is trading near the lower band of its 20-days Bollinger band, which indicates an expected price recovery in the coming days from the current level of CAD 4.25.

One-Year Technical Price Chart (as on September 30, 2021). Source: REFINITIV, Analysis by Kalkine Group 

• Robust margins: The company commands strong profitability margins as compared to its peers, which is a key positive. Gross profit margin and operating margin was recorded at 76.4% and 73.3%, respectively, in Q1FY22 as compared to the industry median of 12.8% and 11.5%, respectively. Moreover, the group reported its net margin at 41.1% in Q1FY22, higher than the industry median of 9.0%.
• 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.

Source: Company Presentation

Q1FY22 Financial Highlights:

• CIA declared its quarterly results, wherein the company posted revenue of CAD 545.408 million, jumped from CAD 244.574 million in the previous corresponding period (pcp). The surge in revenue was primarily due to strong growth from the Iron ore revenue.
• Gross profit stood significantly higher at CAD 414.603 million, as compared to CAD 128.296 million in Q1FY21, supported by strong revenue growth, while a slightly higher cost of sales stood as a drag.
• The group reported operating income pf CAD 400.043 million, stood considerably higher than CAD 118.755 million in pcp. The quarter was marked by higher general and administrative expenses, increase in Share-based payments coupled with inclusion of product research and development expenses amounting CAD 1.353 million.
• The group reported a net income of CAD 224.339 million, as compared to CAD 75.556 million in Q1FY21.

Q1FY22 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 Recommendations:

The company is efficiently managing its short-term capital and reported quick ratio and current ratio of 2.85x and 3.12x, respectively in Q1FY22, significantly higher than the industry median of 0.59x and 1.07x. The above implies that the company is well managing its working capital. The company reported a constant growth in its cash operating margin/tonne, supported by improved margins from the elevated commodity prices. Notably, cash operating margins/tonne stood at the highest in the last seven quarters, which is encouraging.  We have valued the stock using the Price to CF-based relative valuation method and have arrived at a double-digit upside (in percentage terms). For the said purposes, we have considered industry (Metal & Mining) median on an NTM basis etc. Considering the aforesaid facts, we recommend a ‘Buy’ rating on the stock at the last traded price of CAD 4.37 on September 30, 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 September 30, 2021). Analysis by Kalkine Group

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

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