June 1, 2023
Champion Iron Limited Production growth to drive increased FCF
Our view: Champion is on track to deliver the nameplate capacity (15Mt/ year) from the Phase 2 expansion by August as they move past equipment delivery delays. This can drive strong FCF despite headwinds for iron ore and potentially lead to better valuation multiples. We reiterate our Outperform rating as we see strong risk/reward for the shares, and we trim our target to $8 from $9 after updating our model post F2023 results.
Key points:
Expanding production with lower costs: Champion management reiterated that they are on track to reach the expanded capacity of 15Mt/ year by August this year. The additional mining equipment is operating and the facilties have reached nameplate on certain days, while the locomotives required to increase rail capacity should be operational in the coming months. We forecast production growth to 14.2Mt in F2024 from 11.2Mt in F2023 and up to 15.3Mt in F2025. We forecast cash costs falling to C$65/ t in F2024 from C$79/t in F2023.
To drive increased FCF: At our forecast prices ($103/t Fe 62% in 2023 which is close to spot at $104/t) we estimate FCF of C$376M in F2024 for an implied yield of 14%. At $80/t Fe 62%, FCF would fall to C$263M (10% yield) while at $110/t FCF would be C$651M (24% yield). See Exhibit 3 for FCF sensitivity to iron ore prices.
To fund shareholder returns and organic growth: Champion currently pays a $0.10 semi-annual dividend (yielding 4%) and they have committed to spending C$52M for initial work on the DR pellet feed project. The DR pellet feed project would upgrade Bloom Lake's iron to 69% and make it suitable feed for DR pellets and come online in H2/2025 with C$471M of initial capex. Project sanctioning is pending securing adequate power from the province which could happen in the next few months, and debt financing. We ascribe a value of C$559M to the DRPF project representing 12% of our operating NAV estimate. Beyond the DRPF Champion is advancing the Kami iron ore project and the Pointe Noire pelletizing facility with feasibility studies expected for both later this year.
Re-rating opportunity: Champion is currently trading at 0.63x our NAVPS estimate of C$8.12 which compares to industrial metals peers at 1.1x and 3.9x F2024 EBITDA which is below peers at 6.3x. While bulk material stocks typically trade at a discount to base metals stocks we continue to see an opportunity for CIA shares to re-rate as they execute on the production growth and cost reduction in the coming quarters and de-risk projects.
Price target to $8 from $9: We have trimmed our F2024 production estimates and increased costs which took our F2024 EBITDA estimates down by -18% and NAV down -15% which takes our target to $8 from $9, based on 1.0x NAV and 5.0x EBITDA, inline with peers.