Quality Ore Elevates A Champion

ESG Focus | Oct 10 2024

This story features CHAMPION IRON LIMITED. For more info SHARE ANALYSIS: CIA

Rising grades at Champion Iron’s operations raise broker expectations for a higher price premium against the iron ore benchmark.

-Rising product grades support earnings for Champion Iron
-New high-grade concentrate project underway, another planned
-Concentrate reduces carbon emissions, as does hydropower supply
-Premium realised prices in prospect

By Mark Woodruff

After Champion Iron ((CIA)) completes plant upgrades in FY26 at its Bloom Lake Mining Complex in Canada, nearly half of iron ore production will contain an iron content essential to producing high-quality steel, paving the way for an even higher realised price premium against the 62% iron (Fe) iron ore index.

While the mine and mill at Bloom Lake (near the border of Quebec and Labrador, Canada) generate around 15mtpa of high grade (66% Fe) iron concentrate, management has taken a final investment decision (FID) on the high-grade direct reduction pellet feed (DRPF) project to upgrade around 8mt of Bloom Lake product to 69% Fe from the second half of FY25.

At the end of September, the DRPF project was 36% complete. Once a 69% direct reduction grade is achieved, the company’s concentrates can supply direct reduction iron to electric arc furnace steel producers.

The electric arc process is estimated to reduce carbon emissions by -2-7x times compared with traditional blast furnace methods.

Promisingly for the new project, on a recent investment tour of Bloom Lake analysts at Goldman Sachs came away impressed by management’s project execution capabilities, along with the operating performance of existing assets.

For Jarden, the prospect of higher-quality ore underpins the broker’s positive stance on Champion Iron, with the low impurity DRPF product a strategic differentiator helping to achieve materially improved prices.

Building on the overall green theme, management has committed to greenhouse gas emission reductions at site of -40% by 2030 and carbon neutrality by 2050, aided by renewable hydropower supplying more than 50% of energy consumed.

Potentially, the next step by management will be to upgrade all production to the upcoming higher grade at the DRPF project, suggests Bell Potter.

And, waiting in the wings, the nearby Kami project could add a further 9mtpa of DR-grade production, according to a prefeasibility study in January this year. Management is currently advancing Kami towards both a feasibility study and a partnering process.

Adding to the investment case for some shareholders, Bell Potter expects earnings will continue to support the payment of dividends.

Overall, this broker predicts a lift in product grade for the company will support average realised prices, earnings and dividends amid a consensus view of iron ore prices trending lower.

The pricing mechanism and potential valuations for Kami

Higher grades translate to higher prices relative to the 62% iron (Fe) iron ore index.

Further, as emission policies such as the EU Carbon Border Adjustment Mechanism become more acute, these premiums will likely expand to capture emission reduction economic benefits, Bell Potter highlights.

Over the last two years, Champion’s gross realised price has averaged around US$15/t above the 62% index, and the analysts estimate DR-grade concentrate could fetch a further premium of around US$25/t.

Reaching even higher, Goldman Sachs assumes a US$75/t premium over the 62% Fe Index for Champion’s 69% Fe product.

The recently released pre-feasibility study (PFS) for Kami assumes a 25-year mine life, capex of circa -US$3bn and a modest valuation (according to Goldman) of US$400m, at a long run price of around US$155/t for the high-grade product.

Goldman’s project valuation increases to US$1.7bn at a long-run price of circa US$185/t, including a US$35/t premium for DR feed.

Management has indicated first production may be possible in 2031.

In the meantime, the broker has excluded the Kami project from its base case scenario as progress is contingent on a joint venture partner, FID, permitting, and financing agreements, as well as power allocation from Newfoundland.

Back in early-August, Macquarie also removed Kami from its forecasts due to iron ore market uncertainty and potential political uncertainty in North America surrounding increases for green project subsidies, both in Canada and the USA.

Returning to the present, Jarden recently downgraded the stock to an Overweight rating from Buy after the analysts forecast a price realisation for 66.2% Bloom Lake concentrate of US$120.8/dmt compared to the US$126.1/dmt average for the June quarter.

All three brokers monitored daily researching Champion Iron in the FNArena database have Buy (or equivalent) ratings.

The average target price is $7.12, which suggests just under 8% upside to the latest share price.

Outside of daily coverage, Goldman Sachs (target $7.60) has a Buy rating, while Jarden recently downgraded to Overweight from Buy and has a target of $6.91.

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