Ground Breakers: Champion Iron’s high grade iron ore strategy is paying off
Champion Iron (ASX:CIA) may hold the prize for the last mining downturn’s best timed deal.
In a classic buy low, Champion paid just C$10.5m for a majority stake in the Bloom Lake operation in Quebec, Canada, off US steelmaker Cleveland Cliffs back in 2015 when iron ore price sunk to cyclical lows of US$38/t.
While it did later spend some C$211m acquiring the 36% stake previously held by Quebec’s state resources agent Resources Quebec in 2019 the payoff has been handsome.
And with iron ore at current prices of ~US$130/t, something analysts broadly expect to be supported through the second half of 2022, it should keep spitting out cash as Champion ramps up an expansion from its historic 7.4Mtpa run rate to 15Mtpa by the end of the year.
Bloom Lake raked in C$926 million of EBITDA in the 2022 financial year, pulling in ‘net income’ of C$522.6m, up 12.5% on its 2021 profit of C$464.4m.
That has backed two 10c a share dividends this financial year, with its inaugural payout on the first half of the year sent to shareholders in March.
Champion benefits from the 66%-plus grade of its iron ore, which makes it highly sought after by steelmakers for its quality and grade.
High grade iron ore is generally viewed as having a better outlook than lower grades due to the premium price it draws from customers and its use in lower emissions steelmaking technologies like direct reduced iron for which lower grades are a no go.
The company sold its product for an average price of US$181.10/dmt across the year up to March 31, well above average prices pulled in by Pilbara miners like Fortescue (ASX:FMG), Rio Tinto (ASX:RIO) and BHP (ASX:BHP).
But the Canadian miner produces at substantially higher costs due to the smaller scale of its operations and the cost of processing its lower grade magnetite feedstock into a high grade concentrate.
Champion reported an all in sustaining cost of C$73.10/dmt for the 12 months to March 31, up from C$62.80/t in 2021, with higher prices driving cash operating margins up from C$104/t to $117.80/t.
Commodity prices continue to look pressured by geopolitical issues and Chinese economic struggles despite plans from the Middle Kingdom to boost its economic growth lifting the materials sector yesterday.
Copper prices were a notable casualty, falling 0.9% overnight after major producer Freeport McMoran’s Indonesian division indicated in a response to a local parliamentary hearing that it would ramp up copper metal output by 20.1% to 1.6Mt this year.
Freeport is the owner of the major Grasberg copper and gold mine in the South East Asian nation.
Gold also struggled, dulling gains made yesterday while iron ore futures dropped swiftly this morning after Chinese Premier Li Keqiang delivered a downbeat message on China’s economy yesterday, sending sentiment in the Pilbara majors down.
The materials sector fell 1.33% with energy stocks 1.23% lower as of 12.40pm AEST.