From ScotiaMeaningful Dividend Upside Risk Despite Lower Fe Prices
OUR TAKE: Neutral.
LIF reported slightly better than anticipated Q2/21 results. Looking ahead, we continue to see meaningful upside risk to our dividend expectations despite materially lower Fe spot prices. We note that the current 62% Fe price of US$170/t is down 28% from recent peak levels but remains 36% above our 2022E price expectation of US$125/t and 143% above our long-term price of only US$70/t. Overall, we view the update as largely neutral for LIF shares. We rate LIF Sector Outperform based on relative valuation and our strong dividend outlook. Our 12-month target of C$55.00 per share is based on a 50/50 weighting of 15.0x our average 2022E-23E dividends and 1.4x our updated NAVPS(8%) estimate.
EY POINTS Q2/21 CFPS beats. Q2/21 adjusted EPS of $1.72 was largely in line with our estimate of $1.69 and consensus of $1.75. More important, adjusted cash flow per share of $1.85 was modestly above our estimate of $1.79 and was well above consensus of only $1.40. Although Rio Tinto (RIO:L – not rated) had pre-released production and sales volumes for the Iron Ore Company of Canada (IOC) as per our July note, sales volumes as reported by LIF were 2% above forecast due to minor timing differences. LIF reaffirmed Rio's 2021 IOC Fe production guidance (100% basis) of 17.9-20.4Mt (+8% YoY). We forecast combined 2021-2023 Fe production of 18.1Mt, 19.3Mt, and 20.0Mt, respectively, which is unchanged. We forecast 2021 IOC total Fe sales of 18.2Mt.
Dividend outlook unchanged; meaningful upside risk remains. Our 2021E-2023E CFPS estimates of $5.88, $4.36, and $3.28 (based on 62% Fe prices of US$173/t, US$125/t, and US$100/t) compare to $5.83, $4.36, and $3.28 previously. Similarly, our 2021E-2023E declared dividends per share estimates of $5.60, $4.40, and $3.53, reflecting current yields of 11.4%, 9.0%, and 7.2%, respectively (vs. the shares' 3-year and 5-year historical yields of 10.5% and 9.5%), are unchanged. However, assuming still elevated current spot prices (62%/65% Fe prices of US$170/t and US$200/t; pellet premium of US$78/t; CAD of 0.80), we estimate a markedly higher 2022E CFPS of $7.70 (+77% above our estimate), suggesting a very compelling potential yield of ~16%. Alternatively, based on our 8% NAVPS, we estimate that LIF shares are currently implying a 62% Fe price of only US$71/t (or a 58% discount to spot and in line with our long-term price of US$70/t) given the strong premium for high-grade products.