Champion Iron Limited 

Champion Iron Limited (TSX: CIA) is an iron ore exploration and development company. The group’s major projects are located in Canada’s largest iron ore producing region. The company is a high-grade iron ore producer with its flagship asset, the Bloom Lake iron ore mine, a long-life, large-scale open pit operation located in northern Quebec.

The Company lowered its operations at Bloom Lake to tailings management, water treatment and overall maintenance on March 2020 following the government’s directive. However, during the latter part of April 2020, CIA started its normal course of operations at Bloom Lake as the services categorized as priority services.

FY20 Financial Highlights: CIA declared its full-year results, wherein the company reported a decent top-line growth, aided by higher average price realization of CAD 103.6/ dmt, as compared to CAD 91.9/dmt in FY19. The group reported its revenue of CAD 785.08 million, higher than CAD 655.13 million in FY19. CIA reported its gross profit at CAD 363.71 million, as compared to CAD 288.63 million in pcp. Cash operating margin improved to CAD 40.9/dmt against CAD 36.1/dmt. Operating income of the company stood significantly higher at CAD 326.54 million, as compared to CAD 263.62 million, thanks to a higher gross profit, while the company reported a higher share-based payment, higher general and administrative expenses and an increase in sustainability and other community expenses. Net income stood at CAD 121.05 million, lower from CAD 147.60 million in pcp. The Company exited the quarter with cash and cash equivalent of CAD 281.36 million, increased from CAD 135.42 million in FY19 while total assets were reported at CAD 882.60 million.

FY20 Income Statement Highlights (Source: Company Reports)

Valuation Methodology: EV/EBITDA Based Relative Valuation (Illustrative)

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

Stock Recommendation: The stock of CIA stood resilient in the recent past amidst a drastic correction in the broader market. The stock generated ~18% return to the investors during the last nine months, which is significantly higher than the index return. Notably, the stock is trading above its 200-days simple moving average (SMA) of CAD 1.99, indicating a bullish trend. During the fourth quarter of FY20, CIA improved its average recovery rate to 82.3% versus 80.4% in the previous corresponding period, and the increase in recovery rate is attributable to better throughput stability driven by operational innovations. In the recent past, prices of iron-ore improved on account of continued demand from several parts of the world, especially from China. We believe the demand to further improve as several countries are easing restrictions from industrial and manufacturing activities. We have valued the stock using EV/EBITDA based relative valuation method and have arrived at a target upside of double-digit (in percentage terms). For the said purposes, we have considered peers like Altius Minerals Corp, Capstone Mining Corp, Copper Mountain Mining Corp etc. Hence, we recommend a ‘Buy’ rating on the stock at the current market price of CAD 2.40 on May 27, 2020.  

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

Labrador Iron Ore Royalty Corporation

Labrador Iron Ore Royalty Corporation (TSX: LIF) is a Canadian corporation. The company derives its revenue from its equity investment in Iron Ore Company of Canada, (IOC) and its IOC royalty and commission interests. The company holds a 15.10% equity interest in IOC and receives a 7% gross overriding royalty. The group also enjoys a commission on all IOC’s iron ore products which is 10 cents per tonne.

Q1FY20 Financial Highlights: Labrador Iron Ore impresses with its quarterly results, wherein the company reported revenue of CAD 48.29 million, higher than CAD 39.21 million in Q1FY19, driven by a surge in IOC royalties. The company reported Income before equity earnings and income taxes of CAD 36.59 million, as compared to CAD 29.13 million in Q1FY19, aided by higher income, while the increase in newfoundland royalty taxes remained a drag. Income before income taxes stood at CAD 61.26 million, significantly higher than CAD 51.54 million, primarily attributed by higher Equity earnings in IOC. Net income for the period grew modestly to CAD 46.65 million, as compared to CAD 39.349 million in pcp. The group exited the quarter with cash and short-term investment of CAD 21.31 million and a total asset of CAD 721.1 million. During the quarter, the company paid dividend amounting to CAD 67.2 million.

Q1FY20 Income Statement Highlights (Source: Company Reports) 

Valuation Methodology: Price to CF Based Relative Valuation (Illustrative)

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

Stock Recommendation: The stock corrected ~25% and ~7% in the last one year and nine months, respectively. The Company has reaffirmed its production guidance and expects it to be in the range of 17.9 million tonnes to 20.4 million tonnes. The international prices of iron ore concentrate remain attractive and benefited by stable demand from China and supply shortage, mainly from Brazil where heavy rains have reduced output. The stock of LIF has gained ~9% in one month and is trading above its 20-days Simple Moving Average (SMA). Further, the Company remained well-positioned to be benefited from higher royalty revenues and equity investments in IOC. We have valued the stock using P/CF based relative valuation method and have arrived at a target upside of double-digit (in percentage terms). For the said purposes, we have considered peers like Cameco Corp (TSX: CCO), Teck Resources Ltd (TSX: TECKb), First Quantum Minerals Ltd (TSX: FM) and so on. Hence, we recommend a ‘Buy’ rating on the stock at the closing price of CAD 21.47 on May 27, 2020. 

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

Disclaimer

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