February 1, 2021Champion Iron Limited Phase 2 in Mid-2022Our...

February 1, 2021

Champion Iron Limited Phase 2 in Mid-2022

Our view: We continue to like Champion for its strong leverage to high quality iron ore from its flagship Bloom Lake mine. The company offers strong growth via the Phase 2 expansion, which is expected to be completed by mid-2022 and further upside potential from the recently acquired Kami Project, located just a few kilometers south-east of Bloom Lake. We have updated our model for stronger expected production as Bloom Lake has demonstrated it can operate above current nameplate capacity which resulted in our Price Target increasing to $6.00, up from $5.50. We maintain our Outperform rating.

Key points:

• Phase 2 timeline communicated: CIA expects the Phase 2 expansion to be completed by mid-2022, inline with our model. We forecast production to increase from the current ~8Mtpy to ~16Mtpy. At our LT iron ore price forecast (U$65/t) we estimate CIA can generate an avg. $260M in annual FCF once Phase 2 is ramped up (10% FCF yield) up from an avg. of $104M in FCF (4% FCF yield) at our LT iron ore price with only Phase 1 operating. Once Phase 2 is ramped up, for each +U$10/t change in the iron ore price our FCF estimate increase ~$136M (+5% yield).

• Funding to support further growth or return capital: CIA ended FQ3 with $507M in cash & equivalents ($45M in additional restricted cash). We estimate remaining capex for Phase 2 of $474M (inclusive of $76M in contingencies), which we expect CIA to fund with ~$100M in equipment financing, $70M in financing to fund expansions at the port and the rest ($304M) with cash on hand. CIA also has access to an additional U$200M credit facility that we don't currently forecast the company drawing on. Once Phase 2 is de-risked we could see the company return capital to shareholders via special dividends or a buyback. We expect the company to balance return of capital with advancing the Kami Project which presents optionality in our view (see pg 3).

• Updating our estimates: In the preceding 4 quarters Bloom Lake produced 7.9Mt of iron ore concentrate, above nameplate capacity of 7.4Mt. This includes FQ1/21 production where operations were reduced to essential activities for 3-weeks due to COVID-19. Management attributes the better than nameplate production to investment in equipment and innovations implemented over the past year which have helped increase ore availability and throughput stability. We have updated our forecast production rates, modestly increasing concentrate production by ~0.3Mtpy from an average of 15.8Mt when Phase 2 is ramped up to 16.1Mt. As a result of our increased production rates our NAVPS increased from $4.78 to $5.13 and our Price Target increased to $6.00 from $5.50.

• Attractive valuation: CIA is currently trading at 0.98x PNAV at our forecast prices, below the iron ore producers under coverage & diversified miners at 1.05x. On calendar 2021E EBITDA, the shares are trading at 2.9x, below the other iron ore producers at 3.3x and diversifieds at 4.3x (at our estimate of U$123/t iron ore).

https://thefly.com/landingPageNews.php?id=3239079&headline=CHPRF-Champion-Iron-price-target-raised-to-C-from-C-at-RBC-Capital