Champion Iron Ltd

Champion Iron Ltd (TSX: CIA) operates 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. CIA generates majority of its revenue from the Mine segment.

Key Highlights:

• Growing Demand for Iron-ore: China is the major producer of crude steel; hence it requires an ample supply of iron ore, which is majorly provided by Australia and Brazil (~77%). Usually, extraction of Iron ore requires extensive capital investment while return on investment is quite low. Hence, there is mismatch in the supply-demand resulting surge in the iron-ore prices. However, we are positive that the company is highly poised to cater to the growing demand supply mismatch from the region.

                          Source: Company Presentation

• Decline in Long-term debt: The company maintained an impressive net margin of more than 30% during the last three quarters v/s the industry median of 3.3%. Apart from strong operational efficiency, the company reported a constant decline in interest expense, which has supported growth in net margin. The decline in the interest cost is primarily attributed to the constant reduction of the company’s total debt. The group reported total debt of CAD 248.9 million in Q3FY21, reflecting a slide of 9.2% and 22.75% from Q2FY21 and Q4FY20, respectively.

Q3FY21 Financial Highlights:

• Champion Iron Ltd. declared its quarterly results, wherein the company posted revenue of CAD 329.545 million V/s CAD 171.100 million in the previous corresponding period (pcp). The surge in revenue was aided by the higher gross average realized selling price (CAD 194.8/dmt sold v/s CAD 140.1/dmt sold).
• Gross profit stood significantly higher at CAD 212.435 million, as compared to CAD 62.350 million in Q3FY20, supported by strong revenue growth, while a slightly higher cost of sales (CAD 106.291 million v/s CAD 104.119 million in pcp) remained a drag.
• The operating income increased to CAD 203.300 million, v/s CAD 53.279 million in pcp, partly offset by higher general and administrative expenses (CAD 5.218 million v/s CAD 4.766 million in pcp).
• The group reported a net income of CAD 120.771 million, as compared to CAD 30.184 million in Q3FY19.
• CIA reported Cash and cash equivalents of CAD 489.640 million, while total assets were reported at CAD 1,265.122 million.

Q3FY21 Income Statement Highlights (Source: Company Reports)

Risks: The group performance would be impacted by volatility in the international iron ore prices and change in demand dynamics of iron ore.

Valuation Methodology (Illustrative): Price to CF based

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

Stock Recommendations:

The group acquired Bloom Lake in 2018 and reported a constant increase in production along with declining input costs driven by several structural changes, which has supported the company’s overall performance, which is worth mentioning.

              Source: Company Presentation

Going forward, we expect the demand for irone ore to remain robust, which would drive the iron ore prices. Consequently, the group’s financial performance is expected to improve further. We have valued the stock using the Price to CF based relative valuation method and have arrived at a single-digit upside (in percentage terms). For the said purposes, we have considered peers like Ero Copper Corp, Capstone Mining Corp etc. Considering the aforesaid facts, we recommend a ‘Hold’ rating on the stock at the closing market price of CAD 4.77 on March 24, 2021.

One-Year Price Chart (as on March 24, 2021). Source: Refinitiv (Thomson Reuters)

Copper Mountain Mining Corporation

Copper Mountain Mining Corporation (TSX: CMMC) is a copper producer, developer and explorer. Copper Mountain's flagship asset is the Copper Mountain mine located in southern British Columbia near the town of Princeton.

Key Updates:

• Management Update: Recently, the group informed that it had appointed Ms. Paula Rogers to the Copper Mountain Board, and in additional to this, Ms. Rogers would also serve as a member of the Audit Committee.
• Impressive Guidance: The Company anticipates production to ramp up with in the range of 85 to 95 million pounds of copper in 2021 due to higher grade. Additionally, the company expects all-in cost (AIC) to remain lower in FY21 and is estimating AIC within the range of USD 1.80 to USD 2.00 per pound as a result of higher production and improved grade, which is a key positive for the margin.

Source: Company Presentation

• Commission of New Project: The Company resumed the second and final stage of the Ball Mill 3 Expansion Project during the later half of FY20. This project is planned to improve mill throughput to 45,000 tonnes per day from 40,000 tonnes per day and to upgrade copper recovery by achieving a finer grind of ore. The Ball Mill 3 Expansion Project is on track to complete commissioning by the end of Q3 2021. 

FY20 Financial Highlights:

• CMMC announced its quarterly result, wherein the company posted revenue of CAD 341.748 million, significantly higher than CAD 288.460 million in FY19. During FY20, the group made a sale of 73.3 million pounds of copper, 26,137 ounces of gold and 323,276 ounces of silver, as compared to 9 million pounds of copper, 26,478 ounces of gold and 254,541 ounces of silver sold in FY19. Moreover, elevated gold and silver prices acted as a positive catalyst for the company.
• Gross profit surged to CAD 104.643 million, from CAD 25.098 million in FY19, thanks to the higher revenue coupled with a lower cost of sales (CAD 237.105 million v/s CAD 263.362 million in FY19).
• The company reported an income from operations of CAD 90.599 million, as compared to a loss from operations of CAD 37.308 million in FY19. The period was benefitted from lower general and administration expense (CAD 8.476 million v/s CAD 11.544 million in FY19), while a higher share-based compensation expense (CAD 5.568 million v/s CAD 2.093 million in FY19) remained a drag.
• The group reported a net income of CAD 50.264 million, improved drastically from a net loss of CAD 25.941 million in FY19.

FY20 Income Statement Highlights (Source Company Report)

Valuation Methodology (Illustrative): Price to CF based

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

Risk: The group’s financial performance is dependent on the price of copper and gold. A volatility in metal prices might impact the company’s overall performance.

Stock Recommendation:

The company expect its FY21 production to remain higher, driven by improved demand dynamics of copper, while a constant focus on lower input costs is likely to improve the company’s overall profitability. The company has lowered its long-term debt to CAD 129.153 million in FY20, from CAD 188.123 million in FY19, which would further improve the company’s financial flexibility. We have valued the stock using the Price to CF based relative valuation method and have arrived at a single-digit upside (in percentage terms). For the said purposes, we have considered peers like Capstone Mining Corp, Hudbay Minerals Inc etc. Considering the aforesaid facts, we recommend a ‘Hold’ rating on the stock at the closing market price of CAD 2.97 on March 24, 2021.

One-Year Price Chart (as on March 24, 2021). Source: Refinitiv (Thomson Reuters)

Disclaimer

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