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. 

Why Should Investors Book Profit?

• Lengthy cash conversion period: The company’s cash cycle days stood significantly higher at 106.6 days in Q2FY22, versus the industry median of 51.7 days. The above indicates that the group is struggling to convert its investments in inventory and other resources into cash flows and is an indication of poor operational efficiency.

• Volatility in commodity prices: In Q3FY21, we have seen a major correction in the Iron Ore Fines prices due to the restrictions in crude steel production as imposed by the government of China as power rationing tools. The continuation of the above trend might dampen the company margins, as majority of the company’s income are interrelated with the ongoing Iron Ore Fines prices. Notably, EBITDA margin stood lower at 60% in Q3FY21, as compared to 64% recorded in pcp.

Source: Company Report

• Lower cash balance: At the end of Q2FY22, CIA posted its cash on hand of CAD 522.921 million, which is 18% lower than CAD 636.516 million in Q4FY21. A lower cash balance might impact the overall liquidity position of the firm.

Valuation Methodology (Illustrative): Price to CF based

Stock Recommendation:

The reported a higher D/E ratio of 0.26x in Q3FY21, as compared to the industry median of 0.14x. Moreover, long term debt to total assets stood significantly higher at 18.1% during the quarter, as compared to the industry median of 6.2%. The above indicates higher balance-sheet risk as compared to the industry median. The14-days RSI of the CIA stock is hovering at an overbought zone of 72.52, which indicates a possible correction in the coming trading sessions. We have valued the stock using the Price to CF-based relative valuation method and have arrived at a double-digit downside (in percentage terms).   For the said purposes, we have considered peers like Trevali Mining Corp, Copper Mountain Mining Corp etc. Considering the aforesaid facts, we recommend a ‘Sell’ rating on the stock of CIA at the last traded price of CAD 5.59 on January 20, 2022.

One-Year Technical Price Chart (as on January 20, 2022). Analysis by Kalkine Group

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

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