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. T

The Board of Directors paid a quarterly cash dividend of CAD 0.25 per common share, payable July 25, 2020. The company further announced a special dividend of CAD 0.20 per common share.

Q1FY20 Financial Highlights: For the period ended March 31, 2020, LIF reported an exuberant growth in royalty income. Income, during the first quarter of FY20, stood at CAD 48.29 million, as compared to CAD 39.21 million in Q1FY19. Income before equity earnings and income taxes stood at CAD 36.59 million, as compared to CAD 29.13 million, a year ago. The increase was underpinned by an elevated 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. The company reported net income of CAD 46.65 million, against CAD 39.349 million in pcp, supported by higher income. 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)

Risks: The company’s revenue is correlated to the demand and prices of iron ore. Any event which may impact the demand or price of iron ore is likely to affect the group’s performance adversely.

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 has generated a return of 2% so far this year and outperformed the benchmark index by !14%. The revenue of the group is directly co-related with the international prices of iron ore and the recent surge in commodity prices has resulted in positive investor’s sentiment on the stock. We expect the iron ore prices to remain elevated on account of an increase in demand from China, followed by supply constraints. Further, the demand for iron is likely to remain stable as the industrial activities are resuming following the easing in restrictions by the government. The stock of LIF has gained ~19% and ~62%, respectively in one month and three months and is trading above the 20-days and 50-days Simple Moving Average (SMA) of CAD 23.33 and CAD 21.17, respectively, suggesting a bullish pattern. Further, the Company remained well-positioned to be benefited from higher royalty revenues and equity investments in IOC. The stock is offering a dividend yield of ~4.04%, which is decent, considering the current interest rate environment. 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 24.93 on June 24, 2020.

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

Champion Iron Ltd

Champion Iron Limited (TSX: CIA) is a mining company, which is engaged in the business of exploring and developing iron ore properties in the Canadian region of Quebec. The Group’s project portfolio includes Gullbridge Property, Powderhorn Lake Project, Snelgrove Lake Project and Fire Lake North Project.

Financial Highlights – Financial Year 2020 (31^st March 2020, CAD, Thousand)

(Source: Annual Report, Company Website)

For the financial year ending 31^st March 2020, driven by higher iron ore revenue for the period, the revenue increased to CAD 785,086 thousand as against CAD 655,129 thousand in FY2019. The Gross profit stood at CAD 363,717 thousand in FY2020 versus CAD 288,632 thousand in the financial year 2019. The Group’s operating income stood at CAD 326,539 thousand in the financial year 2020 versus an operating income of CAD 263,621 thousand in FY2019. The profit before income tax and mining tax stood at CAD 241,188 thousand in the financial year 2020 versus a profit before income tax and mining tax of CAD 213,611 thousand in the financial year 2019. Due to an increase in the income tax and mining tax for the current period, the net income declined to CAD 121,050 thousand in FY2020 from a net income of CAD 147,599 thousand in the financial year 2019. The net income attributable to shareholders stood at CAD 89,426 thousand in FY2020 versus CAD 83,046 thousand in the financial year 2019. The basic earnings per share stood at C$0.20, while the diluted earnings per share stood at C$0.19 for the period. The cash balance as on 31^st March 2020 stood at CAD 281,363 thousand versus CAD 135,424 thousand as on 31^st March 2019.

Share Price Performance

Daily Chart as of 24 June 2020, after the market closed (Source: Refinitiv, Thomson Reuters)

Champion Iron Ltd shares closed at CAD 2.72 at the time of writing after the market close on 24 June 2020. Stock's 52 weeks High is CAD 2.90 and Low is CAD 0.96.

Conclusion

The Group introduced new technologies and techniques to upgrade its portfolio of services and products to meet the requirements of the faster pace commodity market. The Company is well-positioned to take benefits from growth trends across the energy and industrial markets. Any change in regulations and government policies could affect the overall business of the Company. Liquidity and interest rate risks could also affect the operations of the Company. In FY2020, the top-line performance has improved, while the bottom-line performance has declined. The liquidity position of the company remained strong with the well-positioned balance sheet. The Group’s EBITDA has increased with an increase in the operating cash flow per share for the period. CIA is focused on the expansion of its Bloom Lake Phase II project and has deployed a maximum share of budgeted capital expenditure. The Company also acquired 36.8 per cent equity interest of RQ in QIO to become the sole owner of Bloom Lake. The Group operations are impacted by the outbreak of covid-19 pandemic and have been focusing on strengthening its balance sheet and return with capital discipline and reducing its costs to preserve cash. The commodity market is extremely volatile, and on the lower side, and the Company has taken additional measures to improve the business’s long-term sustainability.

Based on the above rationale, we have given a “Hold” recommendation at the closing price of CAD 2.72 (as on 24 June 2020).

Disclaimer

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