Scotiabank: CIA price target raised to C$7 from C$6.50

Champion Iron Ltd. Impressive Cash Generation as Strong Momentum Continues

OUR TAKE: Positive. CIA reported better-than-anticipated Q3/F21 results driven by another solid operating performance at Bloom Lake. The company continues to generate impressive FCF in the current elevated Fe price environment. Overall, we view the update as positive for the shares. We rate CIA SO based on Bloom Lake's high-grade and premium concentrate, strong margins, capital efficient near-term growth, and attractive valuation. Our revised 12- month target of C$7.00 per share (from C$6.50) is based on a 50/50 weighting of 6.0x our avg. F2022E-F2023E EV/EBITDA and 1.5x our 8% NAVPS estimate. We are removing our Speculative risk ranking given CIA's markedly improved balance sheet.

KEY POINTS
Q3/F21 results beat. Adjusted EPS of $0.25 fd was above our estimate of $0.22 and consensus of $0.23 due to higher Fe volumes (+6%) and better price realizations (+4%), as recent discounting has now eased (this is very positive). Similarly, adjusted EBITDA of $212M was 10% above our forecast of $192M and 4% above consensus of $204M. Overall, Bloom Lake realized a very strong cash margin of US$85/t based on AISC of US$50/t. See Exhibit 1 and our First Look note for more details on the quarter.

Phase II expansion progresses. The recently approved Bloom Lake Phase II expansion project designed to double capacity to 15.0 Mtpy remains on schedule for completion in mid-CY2022. To date, $115M of the $634M budget has been spent. Net cash continues to grow. CIA exited Q3/F21 with cash (including ST investments) of $507M and debt of $244M, resulting in a further improved net cash position of $263M (vs. net cash of $164M at Q2/F21).

The company generated an impressive $135M of FCF this quarter. We forecast the company will remain in a net cash position indefinitely despite our markedly lower FY2022-2023 62% Fe price assumptions of US$104/t and US$83/t. At elevated current 62% Fe spot prices (US$156/t), we estimate that CIA could generate ~$750M of OCF and ~$675M of FCF in FY22 before expansion funding. Minor estimate revisions.

Our revised FY2021-2023 EBITDA estimates of $722M, $508M, and $579M increased by an average of 1% pa. Our updated NAVPS of $4.74 declined by 2%. The shares are trading at a P/NAVPS of 1.09x based on our Fe price deck but at a spot P/NAV of only 0.24x and an implied 62% Fe price of only US$61/t