Champion Iron Ltd

Champion Iron Ltd (TSX: CIA) is an iron ore exploration and development company with major projects in the southern Labrador Trough, Canada’s largest iron ore producing region.

Key Highlights

• Rise in iron ore prices: The company has witnessed a rise in iron ore prices in the period with robust demand emerging from china has also helped the group in achieving the higher levels in iron ore production as well as in revenues.

Source: Company

• Record ore recovery: In Q2 2021, the company had a record ore recovery resulted from the stability of concentrator and ore milled during the period. The group managed to cross its recovery target of 83% during the period.

Source: Company

• Positive cash operating margin: This is the fourth consecutive quarter where the company has improved its cash operating margin. In Q2 2021, the group recorded a cash operating margin of 61.9% while the EBITDA margin stood at 63.6%.

Source: Company

Financial Overview of Q2 2021

Source: Company

• The company had a record production of 2,268,800 wmt of high-grade 66.1% Iron ore concentrate in Q2 2021, compared to 2,189,700 wmt of high-grade 66.3% concentrate in Q2 2020.
• Revenues of CAD 311.0 million were posted by the group in Q2 2021, compared to CAD 160.4 million in Q2 2020.
• EBITDA stood at CAD 197.8 million in Q2 2021, represented an EBITDA margin of 64%, compared to an EBITDA of CAD 62.6 million (margin of 39%) in the previous corresponding period.
• The group recorded net income of CAD 112.2 million in Q2 2021 (EPS of CAD 0.24), compared to a net loss of CAD 1.7 million in the previous corresponding period.

Risks associated with investment

The company is exposed to a variety of risks and uncertainties, including the changes in the assumptions used to prepare feasibility studies, project delay, general economic conditions, prices of iron ore, the demand of iron ore, and foreign exchange rate, etc.

Valuation Methodology (Illustrative): Price to Cash Flow

(Note: All forecasted figures and peers have been taken from Thomson Reuters)

Stock recommendation

The company has rapidly improved their balance sheet in Q2 2021, holding around CAD 425.8 million in cash and short term investments as against CAD 298.7 million in Q4 2020, and also brought down Long term debt by 20% to CAD 220 million in Q2 2021 as compared to CAD  276 million in Q4 2020. The improving macro conditions have turned out to be positive as the company witnessed a rise in iron ore prices in the period. Further, robust demand emerging from china has also helped them in achieving the higher levels of iron ore production. The company is in a healthy stage where they decreased their debt by almost 20%, which is going to bring down their interest expense. We expect the demand for iron to increase following the resumption of industrial and economic activities.

Therefore, based on the above rationale and valuation, we have given a ‘Hold’ rating at the closing price of CAD 3.57 on November 3, 2020. We have considered Lundin Mining Corp, Altius Minerals Corp, Ero Copper Corp etc. as the peer group for the comparison.

Source: Refinitiv (Thomson Reuters)

First Quantum Minerals Ltd

First Quantum Minerals Ltd (TSX: FM) is a Canada-based company engaged in the production of copper, nickel, gold, zinc, silver and acid, and other related activities including exploration and development of mining properties. 

Key points

• Record copper production and increased gold output: Cobre Panama and Sentinet recorded the robust operational execution in Q3 2020. Copper production increased ~10% compared to the previous corresponding period, while gold production increased ~4%. This, coupled with increased metal prices and encouraging operating cost supported the company to achieve a significant increase in EBITDA and return to positive net earnings.

Source: Company

• Upgraded Production Guidance: The company made an upward revision to its production for copper and gold. The company expects the copper production for FY2020 to be in a range of 750,000 - 785,000 tonnes, and the gold production would be in between 245,000 -260,000 ounces. The copper production guidance has been increased at Sentinel following a particularly strong six months and at Cobre Panama, following a successful ramp-up during the third quarter.

Source: Company

• Reducing debt burden:The Company managed to reduce its Net debt during Q3 2020, by USD 113 million to USD 7,545 million. The Company expects to have sufficient liquidity through the next 12 months to carry out its operating and capital expenditure plans.
• Ample liquidity:At the end of Q3 2020, the Company had USD 915 million of unrestricted net cash and an undrawn committed senior debt facility of USD 100 million. The current liquidity seems sufficient to meet all current obligations as they become due.

Financial overview of Q3 2020

Source: Company

• The Company posted the revenues of USD 1,402 million for the quarter, up 42% from the comparable period in 2019. Commercial copper and gold sales volumes from Cobre Panama and increased sales volumes at Kansanshi, as well as higher, realized copper and gold prices were the main reason behind this increase in revenue.
• Comparative EBITDA increased significantly to USD 641 million in Q3 2020, compared to USD 354 million in the same period in 2019. Results benefited from higher revenue and lower cash costs.
• Net profit attributable to shareholders by USD 29 million in Q3 2020 compared to a net loss of USD 73 million in the same period in 2019.

Risks associated with investment

The Company is prone to commodity price risk from fluctuations in the market prices of copper, gold, nickel, zinc and other elements such as interest rate risk, and foreign exchange risk along with the demand of the metals. 

Valuation Methodology (Illustrative): Price to Cash Flow

(Note: All forecasted figures and peers have been taken from Thomson Reuters) 

Stock recommendation

The company reported a decent quarterly result and returned to profitability. The company’s Cobre Panama mine and Sentinet mine gave the robust operational execution in Q32020. The company also issued its guidance to increase the production of both commodities. We are bullish on the gold and copper prices. We believe that despite a little pullback, gold, as an asset class would continue to remain in the limelight as uncertainty over the global economic growth is still prevailing. The demand for copper is expected to increase in the near term as industrial activities have started to resume following the easing in lockdown restrictions across the globe. Therefore, based on the above rationale and valuation, we have given a ‘Hold’ rating at the closing price of CAD 15.36 on November 3, 2020. We have considered Teck Resources Ltd, Kinross Gold Corp, Lundin Mining Corp etc. as the peer group for the comparison.

FM daily technical chart. Source: Refinitiv (Thomson Reuters)

Disclaimer

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