TD upgrade to $48.00Event LIORC reported its Q1/21 results.
Impact: NEUTRAL
LIF reported Q1 results EPS of $1.35 that fell short of our estimate of $1.56 and consensus of $1.58. The miss was largely driven by lower-than-expected revenues, which we suspect may have been a timing-related issue considering the volatile and rapid escalation in iron ore prices, with high-grade (65%-Fe) iron ore prices up 31% q/q.
Exceptionally strong price momentum continues - Since quarter end, prices have continued to accelerate to the upside setting all-time highs as steel prices in both China and the U.S. continue to set records. In the past two days alone, iron ore prices are up ~US$20/t to US$244/t following a deterioration in relations between Australia and China. On Thursday, China’s National Development and Reform Commission said it had 'indefinitely suspended' its high-level strategic economic dialogue with Australia. The suspended discussions raises concerns over a potential disruption of iron ore exports to China. Considering, however, that Australia represents over 50% of seaborne exports, most of which is imported to China, we do not believe an outright ban is feasible. For now, we have left our recent iron ore price forecasts unchanged, but recent price action suggests our forecasts may be too conservative.
IOC continues to guide for 2021 consolidated production of 17.8-20.3Mt. As previously disclosed, a force majeure remains in effect due to the fire at the Port of Sept-Iles announced on April 3 (see note). We continue to model 2021 production of 18Mt consisting of 7.3Mt of concentrate and 10.6Mt of pellets.
TD Investment Conclusion We are increasing our target price to $48.00 from $44.00 and maintaining our BUY rating. We have increased our P/NAV multiple to 1.00x from 0.95x and our P/2022E CF multiple to 14.0x from 12.0x. While our P/CF multiple is above the 10- year average multiple of 12x, we note our 2022 price forecasts are ~50% below current spot pricing. If we were to increase our 2022E iron ore price forecast to US $135/t from US$125/t, our target price would similarly increase to $48.00 using our previous 12.0x multiple. We plan to review our iron ore price forecasts in the coming weeks