• Kashyap Sriram

Champion Iron Initiation Report

Champion Iron (TSX:CIA, ASX:CIA) is an iron ore producer operating the 7.4 Mtpa Bloom Lake mine in Quebec. Champion purchased Bloom Lake out of bankruptcy at the very trough of the commodity cycle in December 2015, when iron ore was hovering around US$38/t and the mine was placed on care & maintenance. The prior operator, Cliffs Natural Resources, acquired the asset for C$4.9 billion in 2011. Champion paid a grand total of C$10.5 million (plus assumed liabilities totaling C$42.8 million) for a 63.2% stake, the remaining held by Ressources Québec a Quebec government sponsored entity. The company purchased the remaining stake in 2019 for C$211 million and now owns 100% of Bloom Lake.



Following the completion of a Feasibility Study in February 2017, Champion brought the mine back into production in February 2018, and declared commercial production by June. Importantly, the restart was completed ahead of schedule and within budget.


The good timing was not merely luck, but the vision of Executive Chairman Michael O’Keeffe, an Australian with a long track record of creating shareholder value. In his prior stint at Riversdale Mining (ASX:RIV) from 2004 to 2011, the company grew from a $7 million African coal explorer to an eventual buyout offer from Rio Tinto for $4 billion.


You can read Michael’s bio here. No doubt Michael did his due diligence before setting his sights on Bloom Lake.


The Bloom Lake property is located on the south end of the Labrador Trough, approximately 13 km north of Fermont, Quebec, and 10 km north of the Mount-Wright iron ore mining operation of ArcelorMittal Mines Canada. The mine is an open-pit truck and shovel operation with a concentrator. From the site, iron concentrate is transported by rail, initially on the Bloom Lake Railway, to a ship loading port in Sept-Îles, Quebec.


This access to infrastructure is important, as transportation costs take up a big chunk of the freight on board (FOB) realized price.



At a time when capex spending was falling across the sector, Champion moved counter-cyclically. Being contrarian looks impressive in hindsight, but it also meant the financing came with a steep price tag – the company had to pay interest rates as high as 14.75% on its credit facilities to fund mine re-start. As cash flows started coming in, the company retired the more expensive debt and substituted it with less expensive debt. A sharp rebound in global iron ore prices meant the company was gushing cash, with net income margin going from under 12% during its first year of production to an all-time high of 39% for the most recent half-year period.


Investors seem not to have noticed, or perhaps have been spooked by the news on China limiting steel production in order to curb emissions and conserve electricity. Iron ore prices have roughly halved since June mainly due to this fear. If China is indeed focused on curbing emissions, that’s actually a positive for Champion. The company makes iron ore with higher iron content (66.2%). The higher quality of ore cuts emissions by 10% as compared to the benchmark. Also, the company is working on making pellet feed concentrate grading over 67.5% iron, which could be used in electric arc furnaces to potentially lower emissions by as much as 50% compared to traditional blast furnaces.


In other words, if China wants to ‘go green’, Champion’s iron ore will be in high demand. The company already earns a premium for its ore quality. China FUD aside, global steel output is still growing quite strongly.



But let’s just assume iron ore stays at US$100/t for the company’s next 6 month period (Q4 2021-Q1 2022). The company earns a slight premium for quality. This is how the numbers look:

Values in CAD

2019

2020

2021

H1 2022

H2 2022F

2022F

Mining Revenue

655,129,000

785,086,000

1,281,815,000

876,414,000

560,000,000

1,436,414,000

Op. Income

263,621,000

​326,539,000

774,063,000

590,415,000

280,000,000

870,415,000

OI Margin (%)

40.2%

41.6%

60.4%

67.4%

50%

60.6%

Net Income

83,046,000

89,426,000

464,425,000

338,935,000

168,000,000

506,935,000

NI Margin (%)

12.7%

11.4%

36.2%

38.7%

30%

35.3%

EPS

0.19

0.19

0.92

0.67

0.33

1.00

Operating cash flow

176,698,000

309,567,000

623,476,000

361,512,000

160,560,000

522,072,000

OCF/share

0.41

0.66

1.24

0.71

0.32

1.03

Production (dmt)

6,994,500

7,903,700

8,001,200

4,025,100

4,000,000

8,025,100

Realized Price (C$/dmt)

91.90

103.60

166.80

223.10

140.00

181.00

Cash Cost (C$/dmt)

49.40

52.70

54.20

58.20

58.20

58.20

AISC (C$/dmt)

55.80

62.70

62.80

73.10

73.10

73.10

Long-term Debt

209,903,000

282,280,000

220,515,000

242,455,000

242,455,000

242,455,000

*Note: the company’s financial year ends with the March quarter.

**dmt: dry metric tonnes.


At current share price of C$4.01 (as of 12/1/2021), the company is trading at a PE of 4 even assuming the worst case scenario of iron ore prices not recovering. To add more context: if we assume status quo iron ore prices over the 20-year life of mine, 66 cents in earnings per share at a 5% discount implies a share price of $8.23.


The company is working on the Phase II expansion which will double capacity to 15 Mtpa from current nameplate capacity of 7.4 Mtpa (yes, the company is currently producing 8 Mtpa, slightly above nameplate capacity). Phase II will be complete by mid-2022, following which the company will deliver a Feasibility Study on the newly acquired Kami project. Kami is located a few kilometers beside Bloom Lake and has a historical resource estimate of 1275 Mt. This could potentially be the next growth driver. The company also has other prospects nearby, the most advanced being the Consolidated Fire North project hosting a historical resource estimate of 694 Mt and located 60 kms from Bloom Lake.


The availability of rail and port infrastructure in the area is a huge plus since it removes a major barrier to scaling up exports.


This is a company that is cheap by traditional valuation metrics, while simultaneously being 6 months shy of doubling its production and revenue once Phase II kicks in. The combination of growth and value makes it an extremely compelling speculation, even though I expect shares to take a beating during tax-loss season.


End Notes

Key shareholders, as of April 27, 2021:


Bloom Lake Phase II feasibility study: https://newsroom.championiron.com/2019-06-20-Champion-Iron-Announces-an-After-Tax-IRR-of-33-4-in-Feasibility-Study-for-the-Phase-II-Expansion-at-Bloom-Lake

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