Commodities | 1:14 PM
Rising costs and weak pricing weighed on first quarter earnings for Champion Iron, but development projects remain on course to support growth.
-Champion Iron’s first quarter production and earnings disappoint
-Record sales, but rising costs and lower realised pricing
-Capex projects on track, liquidity expected to improve
-Improving balance sheet, but still sensitive to commodity prices
By Mark Woodruff
Iron ore mining and development company Champion Iron ((CIA)) has navigated a challenging pricing environment and rising costs in the June quarter while ramping up strategic projects. Investors are watching how new partnerships and operational improvements will support long-term growth.
Financial and operating results for the first quarter of FY26 (March year-end) were at the lower end of consensus expectations.
Despite record quarterly sales, earnings fell materially below analysts' forecasts due to the double whammy of higher cash costs and lower realised selling prices.
Macquarie describes the overall result as "weak", with misses on earnings, production, costs, and realised pricing. More positively, the analyst notes shipments were in line and helped generate necessary cash flow.
Management explained first quarter production of 3.5m wmt (which missed the consensus forecast by -3%) was negatively impacted by increased processed ore hardness, lower head grade, reduced plant availability, and scheduled annual power interruption by the service provider.
Scheduled third-party rail infrastructure maintenance also weighed, yet Champion generated record quarterly sales of 3.8m dmt, meeting the consensus estimate.
Champion Iron is focused on high-purity iron ore production, leveraging innovative technology and a skilled workforce to supply premium iron ore concentrate for the global steel industry.
Back in late-2023, management secured a US$230m term loan to fund strategic growth initiatives aimed at decarbonising steelmaking. This increased liquidity was viewed as enabling the Bloom Lake Phase II ramp-up and future projects.
The Bloom Lake mine and mill are in Canada’s largest iron ore producing region, Quebec’s Labrador Trough, producing high-grade 66% iron concentrate which commands a premium to the benchmark 62% iron ore price.
Bloom Lake is an open pit mine with an expanded capacity of 15mt per annum after the Phase II expansion, and it utilises hydroelectric power for its two processing plants.
The company markets its product to China, Japan, the Middle East, Europe, South Korea, India, and domestically in Canada, and is positioning itself as a supplier of direct reduction grade iron ore for green steelmaking.
In addition to Bloom Lake, the company holds interests in development projects nearby, including the Kami Project and Consolidated Fire Lake North, which are being advanced in partnership with strategic investors to support future growth.
Capex projects
In late January 2024, a new Direct Reduction Pellet Feed (DRPF) plant project at Bloom Lake was approved. The company also released a positive feasibility study for the Kami iron ore project around this time.
DR (Direct Reduction) quality pellet feed is a high-grade iron ore pellet specifically manufactured for use in direct reduction furnaces, such as those found in electric arc furnace (EAF) steelmaking.
In January this year, management highlighted ongoing progress for both growth initiatives, notably advancing the DRPF plant construction and announcing details of the Kami Project Study.
The Kami study evaluated the construction of a 9m wmt per year DR-quality iron ore operation, enabling management to consider strategic partnerships or a potential sell-down prior to advancing the project.
When Champion Iron released its full-year FY25 results in late May, the numbers confirmed a downtrend in profitability.
Around the same time, Champion announced plans for a major capital raise to fund its growth projects: in June 2025 it issued US$500m of senior notes maturing 2032. While this bolstered the balance sheet for expansion, it also meant significantly higher debt.
In mid-July, Champion Iron finalised a partnership agreement with Japan’s Nippon Steel Corporation and Sojitz Corporation to jointly develop the Kami high-grade iron ore project, aiming to share development costs and aligning a future customer for the mine’s output.
Late last year, Champion agreed to sell a -49% stake in the Kami project to Nippon Steel and Sojitz for US$245m, forming a joint venture with the Japanese partners for the development and ownership of the mine.
The latest quarterly update by management revealed the DRPF project is on track and set for commissioning in December 2025. In the first quarter capex of -CA$47.5m was incurred on the project for a cumulative -CA$387m out of the total -CA$470.7m budget.
Regarding Kami, the company highlighted the recent framework agreement with Nippon Steel and Sojitz, whereby the sell-down will occur in two steps. An initial receipt of CA$68.6m is due in 2025 with a further CA$176.4m within several months of completion of the definitive feasibility study (DFS), by the end of 2026.
Realised prices lower and costs higher
Management achieved an average net realised price of US$73.4/dmt after taking into account freight (US$26.9/dmt) and negative provisional pricing adjustments (US$5.2/dmt), explains Macquarie.
Cash costs of CA$81.9/dmt were -6% worse than the consensus forecast.
Macquarie attributes year-on-year cost inflation to increased waste stripping, greater plant maintenance driven by harder ore, a higher valuation of stockpile inventory, and reduced production volumes limiting fixed cost absorption.
Cashflow and debt
Net debt reduction was a modest -CA$23m in the first quarter, given DRPF capex.
Quarter-end cash stood at CA$176m, with net debt reduced to CA$567m (in line with the consensus forecast) from CA$590m in the prior quarter.
Operating cash flow totalled CA$42m, supported by a CA$39m release in working capital, offset by the -CA$47.5m in DRPF capex and -CA$63m in other and sustaining capex.
Management expects the liquidity position to gradually benefit from sales of the 2.1m wet metric tonnes (wmt) of iron ore concentrate stockpiled at Bloom Lake.
Certainly, with ongoing restraint on operations by harder ore, Canaccord Genuity expects further destocking and cash flow generation over the coming quarters.
Positively, lower operating cash flow (OCF) was largely offset by lower-than-expected capex. Free cash flow (FCF) of negative -CA$38m (calculated as operating cash flows less investing cash flows) was US$7m better than Macquarie’s forecast.
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