Scotia Update Also Positive

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Champion Iron Ltd.CIA-T: C$6.14Target: C$8.50

Rating: Sector Outperform

Acquisition of Pelletizing Plant Provides Upgrading Optionality

OUR TAKE: Positive. CIA announced that it has entered into a definitive purchase agreement to acquire the past producing Pointe Noire Fe pelletizing facility located in Sept-Iles, Quebec, for nominal cash consideration of $2.5M. In conjunction with the purchase, the company has entered into an MOU with a major international steelmaker (identity not disclosed) to complete a feasibility study (FS) to evaluate the potential re-commissioning of the pellet plant to produce Direct Reduction Grade (or DR) pellets. The plant, which is located adjacent to the company’s current concentrate port facilities in Sept-Iles, was commissioned in 1965 with a pelletizing capacity of 6Mtpy, and has been on care and maintenance since 2013.

CIA noted that the plant will require significant re-investment to modernize and restart (we estimate potential capex in the range of ~US$0.7-US$1.0B based on replacement cost). We note that the current DR 67.5% Fe pellet premium (65% Fe basis) is US$67/t, and we would anticipate upgrading costs in the US$20-US$30/t range.

The feasibility study is expected to be completed in 2023.In our view, further upgrading a meaningful portion of the company’s Fe production (6Mtpy would represent ~40% of the company’s installed Fe capacity of ~15Mtpy) to a DR product makes significant strategic sense.

Moreover, bringing in a steel partner to share the potential capex requirements lowers the risk to the company.

However, the magnitude of the required capital investment to modernize and restart the plant will be the key variable in the forthcoming economic analysis.

Overall, given the nominal upfront commitment to evaluate this significant opportunity, we view the update as a positive development for CIA shares.