Our view: We remain positive on Champion Iron shares following the update with FQ4/22 results. Champion enters the ramp-up phase for its Phase 2 project from a position of strength with a net cash position and a healthy pipeline of growth projects. We forecast growing FCF growing to ~ $412M in F2024 as Bloom Lake reaches commercial production on Phase 2 in 6-8 months. We have revised our model and incorporated the DR feed project into our NAVPS calculation and increase our price target to $8.50 from $7.50. We maintain our Outperform rating.
Key points:
• Phase 2 cash harvest: At spot prices (P65 U$157.50/t) we forecast $549M in FCF in F2023 (15% yield), growing to $914M in F2024 (26% yield) when Phase 2 is operating at full capacity. At our forecast iron ore prices (P65 of U$126.25/t in F2023 and U$98.75/t in F2024) we forecast FCF of $354M and $412M (10% yield and 12% yield, respectively). We expect Champion to continue to return capital to shareholders via its $0.20/ sh annual dividend (~3% yield, aggregate ~$103M) and focus on growth projects that the company is in the process of evaluating.
• DR feed plant: Champion expects to complete the feasibility study this summer and has stated this is the first priority in terms of its pipeline of projects. We don't currently include the DR feed plant in our financial estimates as we await details from the study; however, we have made high level estimates using company disclosures to estimate a NAV of $337M ($0.64/sh) which we now include in our NAVPS valuation. In our NAV calculation we estimate a 2.5 year build following a construction decision in calendar H2/22 at a cost of U$300M for the 8Mtpa flotation plant (see pg 3 for details).
•Pelletizing plant: Champion entered into a definitive purchase agreement for the Pointe Noire pelletizing plant and an MOU with a global steel producer to examine the refurbishment of the facility located at Sept-Iles (see pg 3-4 for details). The facility had capacity for 6Mtpa which could be wholly supplied by Bloom Lake and its DR feed plant and Champion expects to complete a feasibility study in 2023.
• Kami & Bloom Lake Phase 3: Champion expects to deliver an updated feasibility study for Kami in H2/22 with the project providing further growth potential and optionality to leverage the company's existing infrastructure in the Labrador Trough. Bloom Lake Phase 3 is another growth option which could expand production to 25-30Mtpa; however, we view this as a longer dated potential catalyst and the focus over the next few years to be on the DR feed plant and refurbishment of the pelletizing plant.
• Valuation: CIA is currently trading at 0.69x P/NAV at our forecast prices, below the iron ore producers at 1.10x & iron ore producing diversified miners at 1.38x. On calendar 2022E EBITDA, the shares are trading at 4.5x, below the iron ore producers at 5.1x and iron ore producing diversifieds at 4.9x.