Hot Stock: Why We Think Champion Iron Is A Buy
With the global drive to reduce greenhouse gas emissions under the Paris Agreement on climate change, much of the market’s attention is currently focused on electrification and battery metal components. such as lithium and copper.
However, the steel industry currently accounts for 8% of global emissions, up from 5% over the past 20 years.
Improving the quality of raw materials and moving to a greater proportion of electric arc furnace (EAF) production, which can run on energy from renewable energy sources (and away from blast furnaces to more traditional high-emissions), is a valid adaptation route for the hard-to-reduce steel industry.
Champion Iron’s Direct Reduced Iron Ore (DRI) concentrate can be used by EAF steelmakers in conjunction with renewable energy sources to make steelmaking cleaner. Champion’s 67.5% pellet feed concentrate, considered high by global standards, is used by EAFs to produce steel and can reduce emissions by 50% compared to the steelmaking process. steel blast furnace/oxygen blast furnace. DRI can also be used in BF/BOF to reduce emissions compared to traditional lower grade iron ore inputs.
What he does
Champion Iron owns the Bloom Lake Iron Ore mine in Quebec, Canada. It was an opportunistic buy ($10 million for an initial 63% stake) during a crash in iron ore prices in 2016, following which the mine was placed in conservatorship.
Since then, prices have recovered and the company has invested to expand production, taking advantage of the existing mine and port footprint where costs have been swallowed up by previous owners. The mine produces high grade/low impurity iron ore, with further investment planned to pelletize their product to further increase the Fe content.
Management is experienced and has a history of value creation. Founder Michael O’Keefe, who also founded Riversdale Mining which was later sold to Rio Tinto for $3.8 billion, retains a 10% stake in the company.
Since purchasing its Bloom Lake mine, the company has made investments that have reduced GHG emissions by 36% per year per tonne of iron concentrate produced. In total, 65% of its energy consumption comes from renewable hydroelectric production. Energy-intensive expansion into granulation can also be powered from these government-owned renewable sources at favorable prices.
We find that support for steel-intensive economic growth keeps demand steady through 2030 as Chinese government environmental policies give way to the economic growth imperative.
The Russian invasion and delays in expanding/replacing tons in Brazil and Australia supported prices. As additional tonnes hit the market over the medium term, we believe value in use will become a key focus as decarbonization premiums benefit cleaner iron feedstocks such as DRI.
Champion’s quality product position is now supported by a competitive cost base after recent investments. Improvements to the processing plant and optimization of the mine plan reduced stripping ratios, increased recoveries and subsequently increased production above nameplate.
While electricity costs have traditionally been low in Quebec, Bloom Lake’s cost position is now improved thanks to lower labor costs, foreign exchange and a logistics solution reset, which which reduces the cost of bringing products to market.
The Bloom Lake region of Canada is the second largest hub for high-grade iron ore exports. Over US$4 billion has been invested in the Champion mine in the mine and infrastructure, primarily by former owners.
It has over 20 years of mining life with substantial reserves and resources available for future expansion.
Champion is also nearing completion of its study to install a reprocessing circuit to further improve the product to a DRI pellet feed specification.
The project may cost US$300 million in capital expenditure and add US$5/dmt to its cost base, but would add US$15-20/dmt in premiums. Steel mill customers are logistically well located across the border in the United States.
The steel industry will need to switch to low carbon inputs to meet commitments to substantially reduce emissions by 2050. We believe this will drive strong demand for Champion Iron’s product in the medium to long term.
Over the past five years, an investment in Champion would have returned 36% annually, which compares to a 7% annualized return for the S&P/ASX 200 Accumulation Index.
Champion paid an inaugural dividend in February 2022, as the company began to generate strong cash flow, with another dividend in June, both without a franchise.
At the current share price, this represents an annual return of 4.7% and a payout ratio of approximately 32%. We believe the board has the opportunity to increase this payout ratio, paying out significantly higher dividends if current commodity prices are broadly maintained.
We consider Champion a solid buy. The company sits at a significant discount to its peer group, despite significantly superior sustainability attributes and growth profile, in our view.
Although the company is not the only operator in the region, we believe the drive to decarbonize will drive customers to increasingly focus on sourcing in the region, given the sustainability and low-emission attributes. .
We are attracted to Champion’s ability to leverage the shift to higher quality iron ore in the future, including the combination of mine planning and execution, processing and marketing to produce a product that responds to customers’ growing attention to quality.
Champion’s unique asset footprint and low volume carry a risk (which can be mitigated) of being able to extract the full economic rent from its infrastructure and quality advantage. Key additional risks include commodity prices, changes in financial market conditions and possible capital misallocation (we believe unlikely).
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