Champion Iron Ltd
ASX:CIA
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Good morning, ladies and gentlemen, and welcome to the Champion Iron Limited second quarter results of the fiscal year 2021 conference call. [Operator Instructions] This call is being recorded on Wednesday, October 28, 2020.And I would now like to turn the conference over to Michael Marcotte. Please go ahead.
Thank you, operator. Joining me today from Champion management team is David Cataford, our Chief Executive Officer; our executive -- I'm sorry, Michael O’Keeffe, our Executive Chairman; Natacha Garoute, our CFO; Alexandre Belleau, our Chief Operating Officer.I would also like to turn over to our disclaimer part where -- which is also available on our website at championiron.com under the Events and Presentations section. And I also like to remind our listeners that some of the matters to be discussed during this call may contain forward-looking statements. And I would refer you to the disclaimer at the beginning of the presentation, which I'll be referring to during this call, which is also available on our website.For additional information with respect to forward-looking statements, risk and assumptions, please consult our most recent MD&A which is available on our website. I'd also like to remind people on the call that all dollar amounts referred are in Canadian dollars, unless otherwise stated.With that in mind, I'll turn the call over to Michael O’Keeffe, our Executive Chairman.
Thank you, Michael, and good morning or good evening to those who's listening. I'm in Australia. And we're in a fortunate situation here where we had 0 cases of COVID in Queensland, and they're limited in Australia, but it's been a very difficult time for us in North America with the operations and also Québec, who's suffering quite badly at the moment. But we've managed our way through this process, and that's really thanks to David and his team. Not only did he manage through the process of COVID and how to manage our way through that, but he's also been able to perform with his team to deliver these sorts of results. I mean we got an outstanding resource. We've got outstanding assets, and now we have the people to go with it. And thanks to David, he's built that team up.And what you're seeing there as a result of being able to deliver on time. The product quality that we've been able to produce, the demand for that and also, it's becoming quite clear now that this product is so consistent with the 66.2% Fe, and we're now up at 85% recoveries consistently, which is just absolutely amazing that our product is in so much demand. So that all goes well for us. And as we continue to navigate our way through this with the workforce that we have, I'm very confident that we can continue delivering these results.Over the last couple of days, there's been a lot of talk and questions on Phase 2. We are, as you know, the Board has approved more funding for Phase 2, and we're moving along that road. But I don't want to take the focus away from what we're doing currently with our operations. There's no doubt that, that will flow into Phase 2 once we have all our docks lined up. And what we want to do is we don't want to go and announce this is going to be a Phase 2 with a whole lot of conditions, condition on financing, condition on this and that.So over the next couple of months, we're going to be lining all of this -- those loose ends up, port access, expansion report, all of the issues on financing, et cetera, et cetera. And we'll be able to -- when we do push the button, we'll have all of these areas completed. But I think it's really important now to really focus on what the team has achieved. I keep saying that, but I sit back and look, it's quite amazing effort.And I'll let David talk to you about that now, and we'll answer questions after that. So David, over to you.
Thank you very much, Michael, and thanks, everyone, for being on the call. We're very excited to be able to report the second quarter results today. I think when we look at the second quarter highlights, I had to ask Marcotte to remove the word record because it was essentially beside every single metric that you see on this slide.But realistically, the team has been able to achieve over 2.25 million tonnes of concentrate during the quarter. So an absolute fantastic result, especially during the COVID situation. As Michael mentioned as well, an 85.2% recovery, which is another record during the quarter, and doing that also while managing diligently our cash cost. Brought it back down to $48.5 per tonne, which allowed us to generate quite a lot of cash during the quarter and allowed us to sit on just over $425 million of cash on hand now.Turning over to the actual COVID situation. I think it's important to highlight that we have no known cases of COVID-19 confirmed in the company. We put in place a significant amount of measures that our employees and contractors continue to respect and to adhere to, which is very important for us. We also audit these measures on a daily basis to make sure that we're keeping everybody safe at site because Québec is one region that has been hit pretty hard on the second wave, and we want to make sure to keep everyone at Bloom Lake safe.What we've also managed to do in the past quarter and in the past weeks is to have a portable lab delivered at Bloom Lake, which will allow us to systematically test all contractors before they come into site. So this is a great achievement that we've managed to do. We're commissioning it right now, and it should be ramped up in the coming weeks to allow us to prepare for not only our current operations, but also our growth initiatives. We're very happy on the way that the team has been managing the health and safety and the COVID situation.If we turn to environment and sustainability, no occurrence of major environmental issues happened during the quarter. And even if it's a more difficult time, we've managed to continue our revegetation plan. So we revegetated 19 hectares mainly in the tailings area and near our concentrate stockpile at site. That allows us to mitigate dust at site and is continuing to keep our reputation on the environment side as pristine as it has always been since the beginning of the operation.We've also appointed Louise Grondin to our Board of Directors. She comes from Agnico Eagle, heading all of the ESG for Agnico Eagle worldwide. So we're very proud to have Louise join our ranks and be able to help us grow on all of our green solutions that we have for the concentrate that we produced at Bloom Lake.We'll come back to the market also on these elements in the coming quarters, because we really differentiate ourselves using hydroelectric clean power to be able to produce one of the highest grade materials in the world.If we turn to the industry and look at the iron ore price, we saw that in the past quarter, the iron ore price continued to rise. So this has been very positive for our business. And we've also managed to maximize the output and the amount of concentrate produced in a time of very high iron ore prices. We did see the premium for the P65 shrink a little bit. And one of the anomalies also that we saw in Q2 that we had already seen in Q1. Because the pellet premium has been very low recently and the European market and Japanese market, which consumed quite a lot of pellets has seen reduced steel outputs in the first 2 quarters of the fiscal year, we saw a lot of these pellets move their way into China, which created some pressure on the high-grade fines. So for certain vessels, we had to give some slight discount to the P65 to be able to compete with these pellets.We don't see this as a long-term trend. We've now seen Europe and Japan recover. So they're on the right track to being able to consume most of these pellets, which is translating into a higher demand for the high-grade fines that Bloom Lake produces. So we see this situation being able to be resolved in the coming months.The Bloom Lake operational results. Well, again, as we mentioned, we produced over 2.25 million tonnes of concentrate in the quarter. We did that while achieving our record recovery. One important thing to note as well is that in Q1, we had told the market that due to the ramp-down at Bloom Lake, we had to reduce by about 50% our workforce to comply with the government regulations. And this created a little bit of backlog on the waste mined at Bloom Lake. We've started to recover that backlog in Q2 and have a clear plan to be able to completely recover the backlog.The mine was always in a healthy state. So there was no risk in us not being able to produce concentrate or to access the ore. But we like to be ready for our growth initiatives, and that's why we've brought the strip ratio back to 0.7 and ramped up the waste to move at the mine.If we turn to iron recovery, so Q2 has typically always been the quarter where we have the highest recoveries. It's a combination of not having a major shutdown. So if you remember, the major shutdowns are Q1 and Q3. So typically, Q2 and Q4 see the highest recoveries at site. And when the mine is stable, when the plant is stable, it's easier for the team to be able to tweak the recovery circuit and to really maximize the amount of iron ore that's being recovered at the site.So although our overall target remains at 83%, the team is working to be able to increase that target to be able to reflect the kind of results that we saw in the past quarter.On the financial highlights, while producing a lot of tonnes and in an environment where the realized price is very high allows us to also have record EBITDA. So another fantastic achievement in the quarter, just shy of $200 million of EBITDA. And we managed to do that by controlling our cost sub-$50 delivered in the vessel in Sept-Îles, and this is taking into account a lot of inefficiencies that we have at site right now due to the COVID situation. So the team really delivered on what we had told the market the previous quarter. On the previous call, we had mentioned that our focus was going to be on maintaining our cost while keeping everybody safe. And we've managed to achieve this in the current quarter.If we look at our realized selling price, we did have a positive impact with provisional price adjustments, which reflects to about USD 10.6 per tonne on our realized price and combining that with some slight discount that we had to give on certain vessels. And the fact that we had a little bit of a better freight price in the quarter, mainly due to the fact that we've booked 1 vessel per month at $15.46 per tonne. So that allowed us to have a net realized price of just over CAD 150 per tonne. So a great achievement for the realized price at Bloom Lake.We also tried to explain as best as we can, the provisional price adjustments. What we're showing here is really what we had expected at the end of the previous quarter on the price settlements during the quarter. We had initially planned for USD 109 per tonne, but what we realized when the vessels arrived at the clients was a realized price of USD 126. So this is combined with the 1.3 million tonnes that were in transit at Q1. That's what translates into USD 22 million or 20 -- close to CAD 29 million positive impact on provisional price.And to try to plan this a little bit better, for the coming months, what we've shown in this slide as well is that the average expected price at settlement that we have for the tonnes that left this quarter is around $128 per tonne. So far, the P65 average is around $133 for the quarter. So we're well in line to be able to achieve that price.One interesting fact as well is that this is the fourth quarter that our margins have increased. Again, this is a combination of the realized price and also the operating cost that we've managed to manage in a very diligent way.When we look at our balance sheet, our company has always operated in a very conservative way, and we can see this in the current balance sheet now. We can see how well positioned we are also to work on our growth initiatives. So we currently sit on over $425 million of cash with long-term debt in Canadian dollars of $266 million. So the company is in a very positive state on the cash. And in the past quarter, we managed to increase significantly our cash position at Bloom Lake.And we managed to increase that cash position even if we paid $97 million of taxes on September 30, and also declared a preferred shares dividend to the Québec pension fund of $17 million. Combining those 2 elements, we still managed to increase the cash position of the company by $79 million and again, during the whole COVID situation. So to be able to achieve this is a fantastic result that positions us very favorably on the Phase 2 project.Turning to the expansion. So one important fact here, we're declaring that the company is going to come back to the market before the end of calendar year to be able to explain our plans on the Phase 2 project. So the official time line and the complete financing package for Phase 2. Although we are generating quite a significant amount of cash, again, we've always positioned the company in a very conservative way and want to make sure that we can complete the Phase 2 project while still maintaining a healthy cash balance in the bank and being able to deliver these tonnes into the market.On the realized portion for Phase 2 during the past quarter, we increased our cash by 20 -- sorry, we increased the capital spend -- approved capital spend to $120 million from $98 million to allow to continue the work that we're doing on the Phase 2. We currently have between 50 to 70 contractors at site in the past weeks to be able to advance the various projects that we're doing at Bloom Lake. One important element to note is that we completed all the foundation work on our train load-out facilities. So one of the projects associated to Phase 2 is completing the -- or improving the load-out where we load our cars, the ore cars.We've also installed a permanent heating, lighting, the elevator system to make sure that when we start up the official construction project, that it's a much more efficient workplace with the contractors. And since we've started receiving a portion of the recovery circuit from Australia, at Bloom Lake, we've also initiated the installation of this recovery circuit at site now. So if we look at the total Phase 2 envelope, the previous owner invested $1.2 billion. We've deployed to date just over $77 million. The remained approved budget is just over $42 million, and we have an estimated remaining CapEx just shy of CAD 400 million. So they're very well positioned to be able to complete this project in the current environment.Also while we appreciate that it's a little bit more difficult to travel to Bloom Lake in the past months, what we've achieved in this -- in this quarter is to really have a virtual platform that presents a 360-degree view of Bloom Lake. So on our website, you can now visit Bloom Lake as if you were there. The only thing you're missing is the great people that are at Bloom Lake, but you can really see the $4 billion invested in the ground at Bloom Lake by visiting all of our infrastructure.It also allows you to have a little bit of a sneak peek into the Phase 2 to see how advanced it is and to be able to see also the quality of the build on all the various fronts. You can also tour the port operation, which is included into our virtual tool. So a very powerful tool that we put in place into this -- for the market into this quarter and that we'll be happy to update as the Phase 2 project advances.So I'd like to thank all of our staff for the incredible results. I'd like to thank also local communities, the Québec government for allowing us to operate and to allow us to continue delivering into these results. Everything we've put in place is to make sure that we protect the local communities and protect our workers and with the help of everyone, hope to be able to deliver results as positive as this in the future.So at this point, operator, I'd like to open the lines for the Q&A session.
[Operator Instructions] And the first question comes from Orest Wowkodaw at Scotiabank.
I'm just curious, given how much free cash flow you're generating, do you think you actually need to secure external financing? And as part of that question -- this is for the expansion. As part of that, what would be do you consider sort of a comfortable minimum cash balance that you're prepared to run with through that expansion?
Yes. Thanks, Orest, for the question. One important thing to highlight is that we're sitting on $425 million of cash, but we do have a provision for taxes that we'll have to pay come next May. So there is a portion of the cash that is going to be paid in taxes. So this has to be accounted for. And also although we would love the iron ore price to stay where it is today, we don't plan to have the price at that level when we look at the way that we manage our balance sheet.So we don't see necessarily indications that the iron ore price will go down. But for us, we like to manage that in a more conservative way. So typically, we've always operated with a minimum close to about CAD 100 million of cash in the bank, and we want to continue to be able to have a healthy minimum cash balance to be able to weather any variations in the market. And we want to make sure that we can deliver the Phase 2 project in a timely manner, but also to make sure that we don't run out of cash during the actual construction. So again, I think the main focus on the way that we operate this in a conservative way and to make sure that we can deliver the project in a timely manner as well.
Great. And just on a secondary note, you mentioned that there's still been discounting going on to compete with low or depressed pellet pricing. Should we -- should we essentially assume that, that's going to continue through this next sort of calendar fourth quarter here? And can you give us a sense of what percent of your volume is being discounted?
It's really sort of a quarter-to-quarter answer because depending which clients to whom we sell, we have different pricing formulas. So it's very difficult to answer that in a simple way. High level, the discounts have been pretty low. And what we've been seeing now is they're eroding right now. So for the spot cargoes, we don't feel that there will be significant discounts in the coming quarter or in the coming quarters.But again, they're not very big discounts, but we still like to be as transparent as possible to be able to align ourselves with the P65. But I think for the fiscal year, we're still thinking that we can align ourselves to the P65 index.
The next question comes from Hayden Bairstow of Macquarie.
Well done on a good quarter. It's good to see the consistency starting to really flow through as the market is going to be open. Just a couple from me. Just the comments you made at the start, Michael, is on approvals and sort of final sort of box-ticking for this expansion approval. Just kind to understand what's left that's sort of beyond your control in terms of getting approval to kick this off? Or is it literally just the Board being more comfortable on funding?And then also, I guess, in line with the earlier question, I mean, you've got plenty of cash. It's a lazy balance sheet effectively, putting some debt on there, makes a bit of sense. But then I mean, ArcelorMittal selling their steel assets, I've looked at the infrastructure before. I mean is there opportunities to get on the front foot on the acquisition front? Because obviously, operationally, everything is going perfectly. So just keen to understand how you can leverage that with the iron ore price and grow the business.
Yes. Look, I'll let David detail some of the issues, but all the permitting is effectively in place for Phase 2, and I'll go on to that. What we wanted to do is make sure through the winter, we got a lot of the -- all of the groundworks need to be done before the snow sets in. So we're in a good position, the work on the port, et cetera, et cetera. So really, the big thing for us and David can step through again is the financing and the cash is working on all of that. But it'd be fair to say that people are looking at is a lot more favorably now given our balance sheet.There are -- and I'll just finish off on the commentary you talked about [ Arcelor and those ]. What we've noticed around the world is Brazil or even in where we are and IOC, if you look at their production, it's -- they're just not making the tonnes. So we've been able to rise above, especially what's happening -- I mean, we didn't have problems in Brazil that they have. But still in all, we've had our issues and we've been able to manage them. But we've been able to keep that production up where others haven't. Now we believe that Phase 2 is there, but we're looking beyond that how we can grow into the business. We'd like to have more assets around there that operated. But -- and I'm sure we'll keep looking at. But the big focus for us is keeping our production up Phase 2, getting ourselves about 15 million to 16 million tonnes. And if you look at it, I mean, so look at mineral resources today, their market cap is nearly $5 billion, and they're producing, what, 15 million tonnes or something like that. And here we are at $1.4 billion market cap, and we're about to get into that next stage of where we want to be.So there's a lot of upside for us to grow. We don't need a lot of money to finish off what we're doing, focus on that. I'd like -- I'm a 10% shareholder of the company. So I'd like to see dividends coming before to -- much longer. And I think David would still be long enough. And we'll get to a position. The EBITDA that we can generate will be in a very good position for us to pay dividends as well and pay back this debt pretty quickly.So David, do you want to just articulate some of the issues on the expansion?
Yes. On the expansion front, I think the main focus for us, and I think being patient is really what allowed us to be able to deliver great results since the beginning on the way that we acquired Bloom Lake, the way that we financed the first pack is refinanced and now making sure to just complete the financing for the Phase 2 in a very positive way for all of our shareholders. So once this portion is settled, as Michael mentioned, all of the permits are in place. So we already have since 2012. The ability to operate at 16 million tonnes per year at Bloom Lake, this permit has been granted. So we're -- the sort of final elements that we had to be able to deliver was really the COVID-related measures.So we've now demonstrated that we can operate in a safe way and the commissioning of our lab to be able to systematically test everyone before they come to site is really the key to the sort of final step for the COVID mitigation measures. So as Michael mentioned, we're just lining up all the final docks here and to be able to before the end of the calendar year and our plans on Phase 2.
And I look forward to giving a sight to it, David, that we've had a convocation to it since April, but I can't even get out of the state and probably won't be able to for another 4 or 5 months. So it feels like it's some time away before I'm in Canada.
I need to get out of home. So it will be my pleasure to tour that with you.
Your next question comes from Lucas Pipes at B. Riley.
Great job this past quarter yet again. I wanted to touch on the kind of commercial considerations for Phase 2. Have you had discussions with potential customers? And if so, where would those customers be located? Would really appreciate your thoughts on that.
Yes. Thanks for the question, Lucas. So we've been discussing with potential clients for quite a while now for our Phase 2 tonnes. And we've also been positioning the new DR-grade type material that we can produce, that allows us to have a higher premium for our material and also allows us to help in the CO2 reduction strategy of a lot of the steel makers. So the big advantage of the DR-grade type material is that it can reach clients in Europe and in the U.S. and also in the Middle East. So these are closer clients to Sept-Îles, which allow us to benefit from a lower freight rate as well. So the way that we're positioning the marketing for the Phase 2 tonnes is to have a good blend of DR-grade type material.And with our typical product, the typical high-grade, 66% Fe, we've been having quite a lot of demand for next year and the coming years. So we see that the -- this is also a product that's going to be in high demand. And when we look at the events that happened in Brazil, We also see some clients that are trying to align themselves with a little bit more stable production for at least a portion of their tonnes and to be able to have a stable high-grade type material, Canada is a clear fit with the stability in the production that we've seen in the past 50 to 60 years with our neighboring facilities.
That's very helpful. I appreciate that. And just in terms of kind of magnitude on the DR side, would that -- can you give us some indication on what percent of output would be falling into that product category?
If we look at medium term, I think a lot of the tonnes of the Phase 2 will be able to be sold at DR grade quality. We see that there's a clear push, especially post -- or in the second wave of COVID when you look at most of the initiatives from the governments around the world, there's a clear transition to have a greener economy restart, and a lot of the focus is associated to that.One way to get to a greener steel production is really to increase the quantity of DR and then DRI and electric arc furnaces. So medium term, we really see a high demand for this type of material. And the big advantage that Bloom Lake has is that very little ore bodies in the world can actually produce this type of material. So it really positions us well to be able to maximize the amount of DR grade that Bloom Lake is able to make.So it's a little bit tough to give you a clear number now until we have more official contracts with our clients, but we do see a trend to be able to maximize the amount of tonnes at Bloom Lake. And knowing that in our Phase 2 project when we talk about Phase 2, we're also modifying Phase 1 to be able to produce the DR grade as easily in our expansion or also in our current plant. So if there is ever a demand to have a full 15 million tonnes of this kind of material, it's the -- it's something that we could transition to maximize the value at Boom Lake.
The next question comes from Alex Jackson at RBC.
Congrats on a strong quarter. Just curious if you guys give the go ahead at the end of the year for Phase 2, what does that construction time line look like to get to kind of first production?
Yes. Thanks for the question, Alex. So what we've told the market is that post-Board decision, it's roughly about 18 months delivery time to get Phase 2 up and running. Realistically, when we look at the current situation, we've deployed quite a lot of capital up to now, and there's roughly about 50 to 70 contractors currently at site working on the Phase 2. So we'll be able to communicate the official time line when we come back to the market with our Phase 2 update. But realistically, the maximum time line is 18 months post-Board decision.
Got it. And just one follow-up. Just curious on the sort of sustainability of current production levels. Are there some efficiencies that you guys have been able to create that might carry forward sort of in Q3 and Q4 and those quarters where maybe you do have some shutdowns?
Well, if we look at this current quarter, so the Q3 fiscal year quarter, it's a quarter that we have a major shutdown in. So that's a quarter where production is slightly lower. And we also see certain efficient -- inefficiencies when we start up the plant post a major shutdown. So typically, Q1 and Q3 will have a bit of lower throughput.When we look at what we've managed to achieve in this quarter, it's really been a combination of sort of perfect execution from the team at site. So everything went 100% according to plan, and we managed to maximize the amount of tonnes. A lot of the work that we did last year to identify the bottlenecks resulted into some improvements. So you saw some sustaining CapEx being spent to be able to improve certain areas of the plant to be able to improve the throughput.We're not saying that we're going away from our nameplate capacity and talking about a permanent increase. We still have a nameplate capacity of around 7.5 million tonnes per year, but we'll always try to maximize the amount of tonnes that we can deliver, especially in the high iron ore price environments.
[Operator Instructions]
Well, thanks, operator, for this call and thanks, everyone, for tuning in. Looking forward to communicating with you next quarter. And Michael, I don't know if you have any final words.
No, I -- congratulations. It's an amazing achievement. I think when we commissioned this plant not so long ago to be able to get where it is. We've got leading-edge technology. We've got very new operations. I think NV has a lot of people in the product that we're able to produce. We've -- We're putting a lot of effort into letting people understand that we are a very green company, something that we haven't had the time to do. When you reflect on the product that we produce, very clean, high grade and as the environmental problems coming into the world and the pressure on various investment companies put on and funds put on the mining houses, we're going to be positioned very, very well.We have a new director who's focused on that, as David mentioned, and we produce -- our power is all hydro. So there's going to be a lot more focus on that. And if you look at what we've been doing on rehabilitation, we're with a pent-up voice to Québec and Canada and we're used as a standard for other people, and that's the level they have to get to.And also, our work with First Nations is -- it's also been -- we've been proposed to Boards for that, too. So we're going to focus on more of that. You're going to see us producing on time, on budget, very good quality, a variation in product, more tonnes. And we'll be able to get our cost structure further down, which you've seen with these recoveries of 85%. It makes a big difference to us. I don't see shipping rates going through the roof. So we're in a very good position, and oil prices are at the lows now. So that makes us very, very competitive with a very good product and a fantastic team and a huge amount of resources. But watch this space because we continue looking at opportunities, and don't be surprised if you see some other things take on to us because we'll be out there looking for it.So thanks, everyone, and thanks for your support mostly, and we're going to continue to deliver and make your company even greater.
Ladies and gentlemen, this concludes your conference call for today. We thank you for participating, and we ask that you please disconnect your lines. Enjoy the rest of your day. Thank you.