Champion Iron Ltd

Champion Iron Ltd (TSX: CIA) is engaged 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.

Q1FY21 Financial highlights: CIA announced its first-quarter results for the period ended June 30, 2020, wherein, the company posted revenue of CAD 244.574 million, lower than CAD 277.914 million in the previous corresponding period (pcp). The decline was primarily attributed to halting in the operations as per the directives by the Government. Gross profit stood at CAD 128.296 million, lower than CAD 170.693 million in pcp, due to a lower income and a higher depreciation. Furthermore, the company posted a higher cash cost of CAD 58.4/dmt, against CAD 54.3/dmt in pcp, due to higher costs related to social distancing protocols and due to certain fixed costs. EBITDA stood at CAD 127.7 million for the quarter ended June 30, 2020, as compared to an EBITDA of CAD 166.9 million in pcp. Despite a slowdown in the overall production, iron ore prices remained robust throughout the first quarter of the FY21 fiscal year, which resulted in an EBITDA margin of ~52%. The company impresses with its bottom-line and posted a net income of CAD 75.556 million, as compared to CAD 74.241 million in pcp, partially supported by net finance income of CAD 1.322 million, as compared to a net finance cost of CAD 29.052 million in pcp.

Q1FY21 Income statement highlights (Source: Company Reports)

Risks: The company is exposed to a variety of risks and uncertainties, including the changes in the assumptions used to prepare feasibility studies; project delays; continued availability of capital and financing and general economic, market or business conditions; general economic, competitive, political and social uncertainties; future prices of iron ore; failure of plant, equipment or processes to operate as anticipated.

Valuation Methodology: Price to CF Based (Illustrative)

Note: All the forecasted figures are taken from Thomson Reuters, NTM: Next Twelve Months

Stock Recommendation: The stock of CIA appreciated ~113% in the last six months. Despite a slowdown in the overall economy, the company reported an average realized price of CAD 139.1 million, marginally lower than CAD 145.7 million in pcp, which is impressive. Further, the company reported re-opening of its production facilities, which augurs well for improved production. Further, the company is expanding its Bloom Lake's Phase II project, which proposes to double the capacity to 15 Mtpa. The Group has increased its capital spending CAD 68 million for its Phase II-related budget. The management has positioned the company for additional growth opportunities by increasing its exploration mineral rights adjacent to the Bloom Lake mining lease by over 175%, following the acquisition of 152 claims (38 km2), and staking of 127 claims (31.75 km), directly North of Bloom Lake's operations. In order to improve its working capital, CIA participated in the temporary tax relief program in response to COVID-19 as announced by the Federal and Provincial Governments in Canada, which allows for the deferral in payment of income and mining taxes until the third quarter of FY20. We have valued the stock using the Price to CF based relative valuation approach and arrived at a target price, which suggests a single-digit upside potential (in % terms). For the said purpose, we have considered peers like Altius Minerals Corp, Capstone Mining Corp etc. Hence, considering the aforesaid facts, we recommend a 'Hold' rating on the stock at the closing market price of CAD 2.84 on October 2, 2020.

CIA Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

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