Company Overview: Champion Iron Limited (ASX: CIA) is involved in the production and selling of iron ore concentrate globally to customers in China, Japan, the Middle East, Europe, South Korea, India, and Canada. Through its subsidiary Quebec Iron Ore Inc., CIA owns and operates the Bloom Lake Mining Complex in Québec. The company also owns a portfolio of exploration and development projects in the Labrador Trough, and the Consolidated Fire Lake North iron ore project. The company was listed on ASX on 8 June 2007.

CIA Details

Key Takeaways from H1FY22 Results: During the six months ended 30 September 2021 (H1FY22), CIA produced 4,025,100 wmt of iron ore concentrate and sold 3,928,600 wmt of iron ore concentrate over the period. Some of the key highlights of H1FY22 are as follows:

• Increase in Realized Selling Price: Gross average realized selling price for H1FY22 stood at CA$156.6/dmt, which is 59% higher than the previous corresponding period (pcp), due to the high demand for high-grade iron ore products.
• Rise in Revenue: For the six months ended 30 September 2021 (H1FY22), CIA reported total revenue from ordinary activities of CA$876.4 million, up 58% on the previous corresponding period (pcp), underpinned by the premium pricing of its high-quality products.
• Increase in Net Income: Net income for H1FY22 stood at CA$338.9 million, up 81% on pcp, mainly due to higher gross profit and improved production resulting in more iron ore concentrate sold during Q1FY22. Notably, during Q2FY22, the net income was impacted by higher sea freight costs and negative provisional adjustments compared to the same period last year.
• Cash Position Update: As at 30 September 2021, the company had cash on hand and restricted cash of CA$567.5 million, up from CA$466.7 million as at 30 June 2021.

Revenue Trend (Source: Analysis by Kalkine Group)

Key Metrics:  Gross margin for Q2FY22 stood at 64%, down from 76.4% in Q1FY22, but up from industry median of 12.9%. Net Margin for Q2FY22 stood at 34.6%, down from 41.1% in Q1FY22, but up from 6.4% of industry median. Current ratio for Q2FY22 stood at 2.2x, down from 3.12x in Q1FY22. Debt to Equity ratio for Q2FY22 stood at 0.26x, down from 0.67x in Q2FY21.

Debt to Equity Ratio (Source: Analysis by Kalkine Group)

Top 10 Shareholders: The top 10 shareholders together form around 41.47% of the total shareholding, while the top four constitute the maximum holding. O'Keeffe (William Michael) and Investissement Québec are holding a maximum stake in the company at 8.89% and 8.59%, respectively, as also highlighted in the chart below:    

(Source: Analysis by Kalkine Group)

Change of Director’s Interest: On 19 November 2021, one of the company’s Directors, Gary Lawler, acquired 19,725 ordinary shares of the company for a total consideration of $80,764 via on-market purchase.

Key Risks:

• Fluctuations in Iron Ore Prices: The company is exposed to the risks related to the fluctuations in the prices of iron ore, as it could impact its financials.
• Foreign Currency Risk: The company’s operating results and cash flows are exposed to the risks related to the fluctuations in the exchange rate for the Canadian dollar against the U.S. dollar.

Outlook:  With its high-grade product, access to renewable hydropower, significant investment made to reduce emissions at mine sites, CIA offers a global solution to reduce emission in the steel making supply chain, demonstrating the company’s focus on sustainability. The recent output increase in major steel producing hubs is supporting the outlook of the global steel industry. Currently, the company is evaluating a potential accelerated completion schedule for its Phase II expansion project, which is currently expected to be completed by mid-2022. Notably, the expansion project is expected to double the company’s nameplate capacity at Bloom Lake to 15 Mtpa of 66.2% Fe iron ore concentrate. The company is also focused on pursuing capital return strategies and other organic growth opportunities.

Valuation Methodology: EV/Sales Multiple Based Relative Valuation (Illustrative)

Analysis by Kalkine Group

*% Premium/(Discount) is based on our assessment of the company’s NTM trading multiple after considering its key growth drivers, economic moat, stock's historical trading multiples versus peer average/median, and investment risks.

Stock Recommendation: Over the last three months, the stock has been corrected by 20.96% and is trading lower than the average 52-week price level band of $4.015 - $7.86. The stock has been valued using EV/Sales multiple-based illustrative relative valuation method and arrived at a target price of low double-digit (in percentage terms). The company might trade at a slight discount to its peers, considering the uncertainty surrounding the impact of COVID-19 pandemic and fluctuations in iron ore prices. For the valuation purpose, peers such as BHP Group Ltd (ASX: BHP), Rio Tinto Ltd (ASX: RIO), South32 Ltd (ASX: S32), etc., have been considered. Considering the company’s improved results in H1FY22, expected increase in the nameplate capacity at Bloom Lake, rising cash balance, modest outlook, current trading level, and key risks associated with the business, we give a ‘Speculative Buy’ rating on the stock at the current market price of $4.575 as on 24 November 2021, 10:30 AM (GMT+10), Sydney, Eastern Australia.

CIA Daily Technical Chart, Data Source: REFINITIV

Note 1: The reference data in this report has been partly sourced from REFINITIV

Note 2: Investment decisions should be made depending on the investors’ appetite on upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the analysis has been achieved and subject to the factors discussed above alongside support levels provided.

Technical Indicators Defined: -

Support: A level where-in the stock prices tend to find support if they are falling, and downtrend may take a pause backed by demand or buying interest.

Resistance: A level where-in the stock prices tend to find resistance when they are rising, and uptrend may take a pause due to profit booking or selling interest.

Stop-loss: It is a level to protect further losses in case of unfavourable movement in the stock prices.

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