Ryan Irvine (Keystone Financial)They don't recommend much so this is a solid endorsement. GLTA
YSOT Champion Iron Ltd. CIA:TSX
1)
Champion Iron symbol CIA on the TSX currently trades at a price of $6.00 and a market cap of $2.95 Billion being down 13% year to date. The company pays a dividend yield of 3.4%.
Champion Iron is an Iron Ore producer which owns and operates the Bloom Lake Mining Complex, located on the south end of the Labrador Trough, approximately 13 km north of Fermont, Qubec. Bloom Lake is an open pit Iron ore operation with a mine life of 20 years and a concentrator that primarily sources energy from renewable hydroelectric power.
2) Q4 Preliminary Release
The company has released preliminary data for its Q4 2023, ending March 31st 2023, the company produced 3.1 wet metric tons off 66.1% iron concentrate for the quarter a 41% year over year increase. This is on the back of Champion ramping up its phase II expansion project , which the infrastructure was also completed during the quarter. Once fully utilized the company expects a capacity of 15 million tons of ore per year.
The company also reported a $79.0 cash cost per dry metric ton compared to $60.0 in the prior year. Cash cost was higher during the quarter due to higher fixed costs from Bloom Lake’s production expansion and inflationary pressures compared to the prior year.
Further, the company is looking to increase the grade of its iron ore concentrate to 69% through its Direct reduction pellet feed or DRPF project. As of right now, the company has budgeted an additional $52 million after positive findings from its feasibility study. The higher grade concentrate allows for the usage in electronic arc furnaces over gas furnaces which have lower carbon output. The increased grade in ore concentrate attracts a premium over the current 66%.
The project is expected to cost $470.7 million and take 30 months for construction.
The company also reported a cash and equivalents position of $327.1 million, which with debt staying at the same level as the prior quarter would result in a net debt & leases position of $192 million, once the full results are released the net debt position will likely be lower as some will have been paid off, but will still be a net debt position.
3) Iron Ore price
The biggest question for Champion, as well as any iron mining operation, is the price of iron. For fiscal Q4 we saw higher index iron prices in the range of 110 to 130 throughout the quarter compared to 90 to 110 in the past quarter. But have since seen a fall off in prices to the low 100s.
4) Valuation
Using the trailing twelve months figures from fiscal Q3, Champion has an EV to EBITDA of 6.7 times. The Ebitda is going to drop year over year once the 4th quarter is released as it laps difficult comparables from high iron prices, but the cash position will improve offsetting, likely resulting in a very similar EV/EBITDA around 7, assuming the stock price stays relatively similar. This valuation is higher than recent as the company is still coming off high comparables, but is not absurd, and is reasonable given the near-term growth.
5) Conclusion
In summary, the company has had its margins contract over the past couple of years as iron ore prices have dropped and costs inflated, but has had tremendous production growth and will see further near-term production growth in the near future, with adding an additional value with the DRPF project by late 2025, and a reasonably strong balance sheet given the significant capex. If one were to want exposure to the iron market Champion could be a reasonable choice.