TD Upgrade from $7.00 to $8.50Event We have updated our estimates for Champion to reflect our increased iron ore price forecasts. In addition, we now incorporate valuation upside to reflect the potential to upgrade Bloom Lake's concentrate to direct-reduction (DR) pellet feed.
Impact: POSITIVE
War in Ukraine having a major impact on the steel supply chain — Russia and Ukraine collectively exported ~65Mt of steel in 2021, most of which were imported by the EU. Additionally, both Russia and Ukraine account for ~4% of global iron-ore exports, or 70Mt, including almost one-quarter of the world's pellet supply, which is largely destined for either China or Europe. Steel prices have risen sharply following the invasion, with several producers in Ukraine declaring force majeure and Russian producers forced to redirect supply due to sanctions.
The immediate impact of the war has been less pronounced on iron ore, with spot high-grade prices (65%-Fe) rising ~4% since the invasion to US$172/t as Chinese demand continues to dominate the market. That said, the crisis in Ukraine has provided pricing support for iron ore by constraining supply against a backdrop of lagging Chinese steel output, which has fallen 10% y/y through February, driven by a weak property sector, along with Olympic-related pollution curbs.
There is room for optimism, after Chinese Vice Premier Liu He announced on March 15 that Beijing is planning to take measures to boost the domestic economy, including pausing plans to expand trials of a property tax to ease pressure on the debt-laden property sector. We are forecasting that Chinese steel production will increase 0.6% this year, after falling 3% in 2021.
We have increased our high-grade iron-ore price forecasts by 15% on average through 2025 to reflect tight supply. We have also raised our long-term iron-ore price assumptions, starting in 2026, to US$95/t from US$90/t in response to the ongoing structural shift in the steel industry towards higher quality steel products and lower carbon emissions, which require high-grade iron ore. TD Investment Conclusion
We are increasing our target price to $8.50 from $7.00 and maintaining our BUY rating. In our view, Champion is very well-positioned to meet the growing demand for high-purity iron-ore products. 8 8