Champion Iron Ltd

ASX:CIA

Earnings Call Transcript 2023-Q3

[Operator]

Good morning, ladies and gentlemen, and welcome to the Champion Iron Limited, third quarter results of the fiscal year 2023 conference call. At this time, all lines are in a listen-only mode. Following the presentation, we will conduct a question-and-answer session. [Operator Instructions]. This call is being recorded on Friday, January 27, 2023.

I would now like to turn the conference over to Mr. Michael Marcotte. Please go ahead, sir.

[Michael Marcotte]

Thank you, operator. And good morning, everyone. Thank you everybody in Australia especially for dialing in a long holiday period in the middle of the night. I'd like to thank everybody for joining us, discuss our third quarter results of our fiscal year 2023.

Also like to direct people on this call to presentation that management will be referring to, which is already posted at championiron.com under the Events & Presentation section.

I'd also like to remind people that some of the matter that will be discussed during the call may contain forward-looking statements, risks and assumptions. So, if you'd like to refer to more regarding those forward-looking statements, please go to our MD&A which is also available on our website.

I'd also like to remind people that every reference to dollar amounts in the presentation are in Canadian dollars unless otherwise stated.

On the call today joining me are David Cataford who is our CEO; Alexandre Belleau, our COO; and Donald Tremblay, our CFO.

I'll turn it over to our CEO now for the formal presentation and then we'll end the presentation with a Q&A session. With that, David?

[David Cataford, Chief Executive Officer]

Thanks, Michael. Thanks, everyone, for joining in. Very happy today to be able to discuss the third quarter highlights and the third quarter results. I think we've got some exciting news that we've delivered and one on the phase two and also on our future growth projects.

If we look at the quarter, we produced roughly about 3 million tonnes and sold about 2.7 million tonnes at a cash cost of $76 per tonne and generated revenues of CAD 350 million.

When we turn towards sustainability, one of the big highlights is the fact that we are hiring quite a lot of people this year. And we want to make sure that we keep everybody safe. So we're putting significant amount of time in training to make sure that all our new employees ramp up quickly to the standards that we have at Champion to make sure that we can keep everybody safe. Also happy to report that there was no occurrence of any major environmental issues. So all the investments that were done in the past allows us to keep the site in pristine condition when we turn to environment.

In terms of the relation with our host communities, so we've done quite a lot of work with our First Nations partners in the past quarter. One that I'm extremely proud of is that all of our employees has participated in a cultural and diversity training session with our First Nations partners of Uashat Mak Mani-Utenam. This is something that we've developed in partnership with our First Nations community, and also allows us to have each one of our employees understand the realities of what's happening in the Uashat community to help work with our partners in the future.

Also, we had the newly elected officials of the Uashat Mak Mani-Utenam Band Council visit Bloom Lake, again, furthering our partnership and collaboration with the First Nations.

If we turn towards the industry and the past quarter, we saw iron ore prices soften slightly. So when you look at the P62 and the P65 index, modest declines of about 4% and 2% in the previous quarter. One of the big highlights during the quarter is also the fact that China has relaxed its COVID-19 measures. So, we have seen some increased demand in China for the iron ore.

If you look at the whole year, two of the highlights in 2022, especially if we turn to China, is that for a portion of the year, the Chinese steel mills were not making any money, there was negative margins. And also, they did not have any environmental restrictions in terms of the steel production. We do expect that to shift this year. And as the Chinese steel mills turn back into profitability and also have restrictions in terms of the environment, we do expect the premium for the high grade material to increase over the course of the year.

One of the final highlights for the quarter is the fact that the C3 index, so the freight index, has declined a further 14% during the quarter. So you've seen in this quarter where we've reduced our cost of shipping, and that should continue in the coming weeks as we benefit from these lower prices for the vessels that are on the water now and that are coming at Bloom Lake – or in Pointe Noire to pick up the Bloom Lake material during the quarter.

If we turn to operations, so very happy to be able to declare that our phase two is not at commercial production. One of the highlights for the quarter, we produced close to 3 million tonnes during the quarter. One of the challenges we did have – well, actually, there was a few during the quarter. One being the fact that it's always very positive when you deliver a plant ahead of schedule, but it makes all the periphery systems very challenged as you ramp up the full operations.

What we saw during the quarter is there was some delays in terms of the delivery of our mining equipment, especially on drills and trucks. Drills is pretty much solved now. We're commissioning our last drill that just came in. And this will allow us to remove slowly the contractors that we have at site that are doing drilling, but you have to appreciate the fact that when you have contractors drilling in a large operation like Bloom Lake, it's suboptimal in terms of performance and it's higher cost per tonne because they don't have the same equipment as what we use to be able to do the drilling. So as we ramp down the contractors and use our own equipment, now that it's been delivered and commissioned, this should normalize our costs in terms of drilling and also improve our productivity at the mine.

Secondly, we did receive now the trucks that were delayed. So they arrived at site recently. They are being assembled as we speak. As they come into production in the coming weeks, that's also going to allow us to ramp up the actual operations at the mine to make sure that we can deliver the full nameplate capacity of Bloom Lake in the near term. The positives from the quarter, as we now know, both plants are able to operate to full nameplate capacity. Now, we just need to get the periphery systems in the mine to be able to supply at those two plants, so we could get to our full nameplate production.

In terms of financial highlights, we had revenues of $350 million for the quarter. We'll be able to run through that, but slight delay in our sales is actually helping us because we will benefit from the higher iron ore prices that we see now for the vessels that are currently on the water.

If we do a breakdown of our cash cost during the quarter, so there's some non-recurring elements that happened during the quarter. We did see the price increase to $76 per tonne during the quarter. Part of that due to what we've mentioned, the higher cost at the mine. So even if we have a lower strip ratio, you'd expect that the mining costs would be lower. But because of the amount of contractors and the inefficiencies that we have at the mine, we actually saw those costs increase. There's still some phase two related inefficiencies that we're working through as well. And as we get to the full nameplate capacity for the site, we'll be able to remove those costs from the system.

We also had some hiring ramp up costs that are associated in the quarter. That's also going to normalize over the next quarters and be able to be removed as we have our full workforce in place.

We did have a larger-than-planned shutdown in Bloom Lake, so that impacted our costs during the quarter. And you've probably seen diesel prices as well ramp up. And to give you an order of magnitude, every $1 per liter increase in fuel costs actually translates into $6 per tonne in our operating costs. So, that's mainly due to the fact that we use diesel, yes, at the mine for our mining trucks, but also in the locomotives to be able to bring the material down to the port. It impacts also our flight costs when you look at the fly in, fly out and even all the way to the food because the food is more expensive to be able to be brought up to the to the site. So, these are costs that will fluctuate depending on the diesel prices, but everything that's in our control. So to ramp up the site to nameplate capacity, manage our shutdowns better and remove the hiring cost, these are all costs that we should be able to remove from the system as we get phase two up and running at the same capacity, that's phase one, and we get the site at nameplate capacity.

If we look at our sales, as we mentioned, there was a small provisional price adjustment in the quarter. So, there was a slight difference between what we expected and what we realized. We expected about $112 and realized $109. So that had a negative impact of about $4 million in the quarter, which translates to about $1.4 US per tonne sold in the third quarter.

What we do see, though, is that we have about 1.7 million tonnes during the quarter that are associated to a price that we booked at $129 per ton. Those tonnes are on the water right now. And depending where they are and oil price comes to, what the Chinese – we get out of the Chinese New Year, if the price remains where it is today, we could expect a positive provisional price in the next quarter. So we'll follow this closely and be able to report that at the next quarter.

If we look at the average realized selling price, so why did we do better than the P65 index during the quarter? It's mainly due to the fact that we did book about – those 1.7 million tonnes at $126 per tonne at the end of the quarter. So that's a big positive compared to the average P65 of the quarter.

So since most of our sales were done at the end of the quarter and shipped at the end of the quarter, this allows us to benefit from higher iron ore prices once those tonnes actually land to our clients' facilities.

One of the negatives during the quarter is the amount of tonnes that were actually sold. So we sold less tonnes than we did produce. This is not due to inefficiencies in the system. It's mainly due to the fact that Quebec suffered from a major power failure during the Christmas period. Most of Quebec lost power. For some, a few hours; some, a few days. We were mostly impacted at the mine and at the port. The port being the area where we were the most impacted. That translates into two vessels that we were not able to ship at the end of the quarter, which have since sailed in the beginning of January. But those two vessels, we could not load them because there was no power at the port.

Same at the mine, that impacted our production as well since this – every time, there's a power failure, well, yes, we lose production during the actual power failure, but it also takes some time to clean up the operations and start it back up following a sudden halt, like a power failure.

We don't expect that to be a recurring issue as Quebec has one of the most robust grids in the world. But these were extreme abnormal weather during the Christmas period that translated to major power failures.

In terms of cash in the quarter, so the main differences is a change in working capital. Portion of that due to the – we did not receive payments for some of the vessels that were left at the end of the quarter, which we've since received. And a second, we did build up some inventory in terms of either concentrate or also some broken material to be able to feed both plants.

We also paid a dividend during the quarter, so CAD 51 million, and also invested in our operations, roughly about CAD 56 million to make sure that we can continue operations and keep the site in the same condition as it was before.

So with that being said, our balance sheet is still in very good position and very well positioned for our growth projects, which we'll get into right now.

The first growth project being the phase two. So again, very excited to announce that we've already reached our commercial production, and we're now ramping up the site to be able to get to our full nameplate capacity. So we don't see any hurdles now to get the plant to be able to run at full nameplate capacity. And the final step is to get our mining operations ramped up to make sure that we can deliver the full 15 million tonnes per year at Bloom Lake.

If we look at the other growth projects that we're working on, one being the feasibility study for the DR pellet feed, which we'll get into in the next slides. Second, we're continuing to advance our Kami feasibility study. So that's ongoing right now. And also, advancing our feasibility study for the pellet plant facility in Pointe Noire. So both of those are advancing, expected to be delivered in the second half of 2023. And we'll dive a little bit deeper into the DR pellet feed.

The DR pellet feed is a project that we've been working on for quite some time right now. Very exciting project for the company and for shareholders. As a project where we expect to produce roughly about 7.5 million tonnes of DR quality materials, some of the highest quality material in the world, with a maximum combined silica and alumina of 1.2%, again, making this one of the best products in the world. And why is this important? This allows us to feed into the electric arc furnaces and benefit from much higher premiums than the current P65.

In terms of benefits, as we just mentioned, well, this allows us to get into the electric arc furnaces, but also it allows us to go down the BOF, so the basic oxygen furnaces, and blast furnaces, for those that want to start using higher grade material to be able to reduce their CO2 emissions. So not every steelmaker is going to transition quickly towards electric arc furnaces, some are still going to keep their blast furnaces and to be able to achieve their CO2 targets, there's companies in Japan and elsewhere in the world that are working to be able to use DRI material directly in their blast furnaces. So this type of material is going to be destined to producers that want to reduce their CO2 emissions, and that want to benefit from one of the highest quality materials in the world.

You can see on this chart here that very few projects can actually deliver this kind of quality, and we will be one of the highest quality materials in the world. So, what we've been seeing even in the DR space is that the quality has gone down in the past year, very difficult for certain ore bodies to maintain the high quality low contaminants to be able to feed the electric arc furnaces, but we really have a pristine material at Bloom Lake once we've passed it through a flotation process. We remove pretty much every single contaminant apart from a little bit of silica. So, it's a very clean material that will be able to help our partners reduce their emissions in their steel making processes.

How do we do this? Well, we'll get into this a little bit later. But I think what's important to note as well is the significant demand increase that is coming in the next few years. So as these electric arc furnaces that are currently being built actually get delivered, well, what we see is that there is no project to scale that have been announced to be able to produce DR material to be able to supplement this.

There's a fixed amount of high quality scrap in the world. So there will be a very big deficit for this type of material. So we do see that translating into very high premiums for this type of material until eventually there's projects that can potentially balance a little bit more the market. But what we've seen now, very few areas around the world can actually produce this type of material. And again, no projects have been sanctioned to be able to deliver more DR pellet feed. So we do see that as two positives for us to deliver our project in about 30 months to be able to supply a market that's in high demand and that will pay a high premium.

In terms of process, it's a fairly simple process, using some milling at the entry of the plant, then going into flotation to be able to remove the – we're actually floating the silica to produce our 69% material at the end. So, again, a very simple process that will be built right next to our phase two plant right now.

In terms of economics, the project as we had disclosed following our pre-feasibility study, we have a project that's order of magnitude about $350 million. The contingencies for this are roughly about $57 million, which are included in the $350 million. So when you look at the operating costs of roughly about $7 per tonne and the potential premiums in the market in the order of magnitudes today of roughly $25 to $30 per tonne, we do see that this project can be massively accretive for our shareholders and allow us to generate significant margins over the life of the mine by increasing the quality of our material.

In terms of positive impacts, if we factor in those premiums, which we do expect could have some significant upsides depending on where the demand is and how much this material is required to be able to supply the electric arc furnaces, but if we use those sort of numbers that we disclosed just a few minutes ago, the after tax IRR is roughly about 24%. So, a very accretive project for all of our shareholders. And it also allows us to potentially benefit from smaller shipping costs, and this has not been factored into this right now. So we do expect to potentially sell this material closer to home, which could also have a positive effect in terms of our shipping costs.

In terms of timeline and funding, so we do expect to potentially generate enough liquidity out of our own operations to be able to fully fund this project. But to be on the conservative side, as we've always been, we want to make sure a little bit like what we did for phase two, to secure all the funding required to be able to do the project, so that way we can go through construction, even if there's some small hiccups in the iron ore price during the construction period.

So the board has approved a preliminary budget of CAD 10 million to allow us to be funded till the end of the summer and to maintain our timeline of 30 months to deliver the project. And during this time, we're going to work to find the right non-dilutive funding source. So potentially a similar structure as what we had during the build of the phase two plant to make sure that we can have all the funds required to deliver this project.

Again, I think the main highlight for the quarter is us reaching our commercial production at the phase two plant, delivering the findings also of our feasibility study for direct pellet feed and material, starting the project and starting the funding as well, and being able to potentially deliver a project in 30 months that will allow us to have half of our material upgraded to 69%. So, very excited about this quarter.

And I'll now turn it over to the questions from the analysts.

[Michael Marcotte]

Operator, you can now open up for Q&A.

[Operator]

[Operator Instructions]. Your first question comes from the line of Orest Wowkodaw from Scotiabank.

[Orest Wowkodaw, ScotiaBank]

Maybe we could start with operational performance in the quarter. And specifically, I was wondering if we could get more color on costs. We saw the costs move up this quarter to $56 a tonne. I realize there's a lot of moving parts there. You're ramping up capacity, yet you've got some inefficiencies and some inflationary pressures. But can you give us sort of some idea on how much of that increase is structural versus just transitory here and where you see perhaps costs settling down to once you reach that full nameplate?

[David Cataford, Chief Executive Officer]

If I look at the this quarter compared to the past quarter, I'd say most of the increased costs is associated to transitionary costs. So, I do feel we'll be able to bring the cost back down to levels in the order of magnitude of CAD 60 to CAD 65, again, depending where fuel prices end. But in these sorts of levels, I think that's an area where we do believe that we can get the operations back. And you have to appreciate that there has been some pretty large inflationary pressures on different parts of the business. But that being said, I do think that there's a lot of room to improve compared to the costs that we had in the previous quarter.

[Orest Wowkodaw, ScotiaBank]

That sort of CAD 60 to CAD 65 target, does that assume current, call it, input costs for diesel and other consumables? Or does that assume some deflation?

[David Cataford, Chief Executive Officer]

Depending if you use the CAD 60 or the CAD 65, that'll change. But realistically, if you look at the last quarter, if you remove the inefficiencies and you keep that diesel price, we should be able to have operations that run at those prices in the current diesel price environment. But if diesel prices do run back down, then I'm sure we'll be able to get our operations back to lower 60s.

[Orest Wowkodaw, ScotiaBank]

Just switching gears in terms of the study that you released for the DRPF. Couple of questions there. First of all, you noted that the project is contingent on securing additional power? How much of an issue is that? Can you give us an idea?

[David Cataford, Chief Executive Officer]

When you look at this project here in – the impact that it has to be able to reduce CO2 emissions is massive. So this will allow our steelmaking clients to be able to reduce CO2 emissions more than the whole of the company of Tesla. So when you look at the impact that this project can have, it's high on the list in terms of priorities in Quebec to be able to help the decarbonization strategy.

We've also heard the prime minister again – two days ago, the prime minister of Quebec say that, in terms of the most important projects in Quebec, well, there's the battery sector, obviously, there's the green aluminum sector and the green steel sector. So that's in the forefront of what the Quebec government has announced and is continuing to announce. So, I think we're very well positioned to be able to secure that power. And in the event that we will not be able to, I think you've seen our management team, we're extremely creative and we should be able to find the path – even if it takes a little bit more time to secure it with Quebec, we should find a path to be able to find a solution with our existing operation.

[Orest Wowkodaw, ScotiaBank]

Is there currently available power in the Quebec grid?

[David Cataford, Chief Executive Officer]

Yeah, there's a whole lot of available power. It's just that there's been a review in Quebec on where they want to allocate this power. So we know the power is available. It's just a question of getting the actual power secured. So there's no investments required from the government to have to create more power to allocate it to this.

[Orest Wowkodaw, ScotiaBank]

Do you expect that allocation to happen this year?

[David Cataford, Chief Executive Officer]

It's not in our hands. So we're going to do everything we can to get the allocation this year. But again, as we mentioned, if ever we don't, we do feel that we'll have the capacity to have a project that makes sense with the existing power that we have right now.

[Operator]

[Operator Instructions]. Your next question comes from the line of Alexander Pearce from BMO Capital Markets.

[Alexander Pearce, BMO Capital Markets]

David, in the feasibility report, can you break down what premiums you're assuming in terms of what you'd get over and above your existing product? And then maybe you touched on a little bit in the presentation about the alternative routes for the feed. Does the feasibility study assume a certain portion goes into the EAF route eventually versus the blast furnace route?

Also, maybe just building on from that, can you just talk about the order of the projects? Before you make an investment decision on this one, do you want to see the results of the study on the pelletizer as well as Kami first and tie it all together?

[David Cataford, Chief Executive Officer]

If I look at the first one, so we've disclosed an IRR, which probably allows you to back calculate the actual pricing that we've used for these numbers. Again, the last thing we want to do is to lock in a ceiling with our customers and be committed to a maximum premium. So that's why we've been a little bit less vocal about potential premiums because this is not an index-based sale. So if we look at our phase two project, when we do the feasibility study, even if you put a certain iron on price, if the index is higher, you'll be able to sell higher, but this is more on a negotiation base. What we've factored in there, if you back calculate, is a premium in the order of magnitude of between CAD 25 to CAD 30 per tonne depending on the years. So this is what we've factored into the study.

But when you look at the potential that we do see, we do see potentials for that to be even higher as the demand increases because we don't necessarily want to commit to either electric arc furnaces or blast furnaces. We will sell to the customers where it makes most sense for us. So if a customer wants to use this in its blast furnace and is willing to pay a significant premium for this material and we can help him decarbonize, for sure, we're going to go down that route for a portion of our tonnes as well. But we don't see any hurdles in being able to sell this material in the future.

Now, if you look at the order of projects, realistically, I think this one is a bit of a no brainer. I think this one allows us to produce one of the purest materials on the world. It brings us right in the transition for the green steel. It puts us in a very good spot to be able to sell tonnes closer to homes or to reduce our freight costs. And the CapEx is something that we do feel is manageable out of our own operating cash flow.

So when you look at the other projects, let's say the actual pelletizer or the Kami project, I'd say that the pelletizer would only happen anyways if we did this project before. So we want to produce DR pellets out of that pelletizer. So we need to do the upgrading facility first. So that one, we don't need to wait for the study. And second, Kami is going to be potentially very accretive for our shareholders, but it's a larger project than this one here. And by the time that we get the results from the study, we would already be about a third of the way in to our DR pellet feed project.

So I don't see Kami or the pelletizing feasibility being required for us to give the final go on the DRPF. I do think that this is where the company wants to go. And this is the most accretive path for our shareholders as well.

[Operator]

Your next question comes from the line of John Tumazos from John Tumazos Very Independent Research.

[John Tumazos, John Tumazos Very Independent Research]

In your marketing, you'd think the highest value added will be to tailor to specific blast furnace customers' specifications and specific blast furnaces that are the minimum transportation distance in your marketing program.

[David Cataford, Chief Executive Officer]

When we look at the way that we've designed our product, I think you're 100% correct. So even when we started Bloom Lake, we tailored the product that we make to make sure that it works with the Japanese market. So they had a maximum 4.5% silica requirement for their blast furnaces and that's how we designed our process.

Now, when we turn towards the new product, the DR pellet feed, well, this one, I think has been tailored for everyone, in the sense that it's going to be the probably the purest material on Earth. So this will be required by either blast furnaces or electric arc furnaces. And the advantage that we have in being an exclusive high grade producer and being, I'd say, a bit smaller is that we are able to work with our clients to be able to deliver specific products.

And I'll just turn to 2020. When we had one of our clients ask, can we make a little bit higher grade material, you probably saw that we delivered three vessels at a specification of about 67.5% iron ore instead of our typical 66% to make sure that this material was the actual material that was required from our client.

So we've got that capacity to tailor a portion of our tonnes to meet our client's specifications and the strategy to sell closer to home is definitely at the top of our list as well.

[John Tumazos, John Tumazos Very Independent Research]

So, we should not jump to an immediate conclusion, for example, that Mittal at – at Dofasco Hamilton or thyssen in Germany is closest, therefore their DR spec in the future would be better than somebody else's because it's closer.

[David Cataford, Chief Executive Officer]

The issue with Hamilton, you probably know that ArcelorMittal has their own mine pretty close to ours. Our properties actually touch. And I do think they'll be self-sufficient to be able to have that material.

Now when you turn to Germany, that's obviously at the top of our list in terms of potential clients because each one of them is going towards a transition to produce greener steel. I think they've got a very good market to be able to get a green steel premium from their clients as well. And I do think that it's a customer base that's going to be very important for us. We already sell into a Germany, but I think we can definitely sell more into the future.

[John Tumazos, John Tumazos Very Independent Research]

You shouldn't have to bear the freight to go all the way to Japan or China or Asia, right?

[David Cataford, Chief Executive Officer]

Correct.

[John Tumazos, John Tumazos Very Independent Research]

If I can ask another question. After Vale's January 2019 catastrophe, the iron ore market appeared to be in deficit and it was sort of like shooting fish in a bucket. In the September quarter and now in the December quarter, five seaborne majors are combined breaking their 2018 quarterly output records. Of course, last year, world steel output fell. So, as the majors have output growth, there needs to be steel output growth, which there wasn't last year. Do you have any hesitations about expansion in a market that appears to be potentially over supplied? Or is your strategy that your costs and quality are so good, you'll produce full out and somebody else has to be the one to shut down?

[David Cataford, Chief Executive Officer]

For sure. We're not going to take an arrogant approach and thinking we can dislodge many tonnes from the majors. I think what we need to focus on is really the quality aspect of it. And when we look at the global output of iron ore, yes, the quantity has been pretty good, but the quality has actually gone down. And what we're seeing is not only in terms of iron ore, but in terms of higher FOS [ph] and the higher alumina. Where we have a different proposition is the fact that we have basically no FOS and almost no alumina as well. So, we really differentiate ourselves in terms of the type of material that we produce.

The other positive that we have is we're an exclusive high grade producer. So we don't have X amount of tonnes of low grade, X amount of or Y amount of tonnes of high grade and then have to push the low grade to allow our clients to have the high grades. So we've got a very good proposition which our clients like because they don't have to buy some lower quality material to have access to the high grade stuff.

So would we push go on further expansions? We're obviously going to look at the market, how it evolves. For us to produce more – or to get into the DR high grade space, I think that makes a whole lot of sense because it's a market that will have a huge deficit. So even if the global iron ore output increases, even much more than what it is today, I don't see the DR quality material increasing significantly. At least I have not seen anything being announced. So that puts us in sort of a niche market, where I do think that we've got room to grow in the future.

For the other potential expansions, we'll follow the market and see where it goes. But if quality continues to decline as what we're seeing now, we do think that there's going to be a good market for material from projects like Kami as well.

[John Tumazos, John Tumazos Very Independent Research]

I could do one more. For sure, Vale, BHP and Rio have a lot of sub 60 stuff and they can't hold their 62 and 65 targets. Last night, Fortescue had their quarterly call. And they produce 189 million, 192 million tonnes of 56% to 59% subgrade. Their 22 million tonnes, 67% magnetite project coming on stream in the next quarter, they say, is a different quality and it's purely incremental. They won't reduce the low grade because they have the high grade. Then they have a project in Gabon, Belinga, that's very high grade hematite, much like Simandou. And that's a third market segment for them. And I don't necessarily agree with their approach. But they're going to produce flat out and they say in all three market segments because they're separate market segments. The reason I'm posing the question to you is because some of the other companies are a little more aggressive, or maybe to use your word arrogant, and trying to go flat out in every quality niche.

[David Cataford, Chief Executive Officer]

I think the only niche that they're not hitting is the DR market. And I think what we'll see in the future is today's high grade is going to be tomorrow's low grade. So when you look at those projects, while they will be required for blast furnaces, but they cannot feed electric arc furnaces.

[John Tumazos, John Tumazos Very Independent Research]

[indiscernible] project, the 67%, they grind to 30 microns.

[David Cataford, Chief Executive Officer]

They could, but they are – what they've announced at least is they will use this material to be able to blend other lower grade materials. So, depending which strategy they take, well, that'll fluctuate. But what they've announced is that this material will be able to blend up some of their lower grade material there.

[Operator]

Your next question comes from the line of Lucas Pipes from B. Riley Securities.

[Lucas Pipes, B. Riley FBR]

Congratulations on reaching commercial production at phase two. On the topic of phase two, could you elaborate on when you would expect to nameplate there? Would it be here in the current quarter, next quarter? Appreciate your perspective on timing.

[David Cataford, Chief Executive Officer]

As we we've announced, we've now got phase two at commercial production. What we need to do now is ramp up the full site to nameplate capacity. So the major constraint there is the mine. We've got most of the equipment delivered at site and will be ramping up in this quarter. So we've announced also that we do expect that, in the near term, we'll be at full nameplate capacity run rate. So I can't really give you more info on this one as we don't give guidance, but fully expect that, in the near term, we'll be able to be running at full nameplate capacity.

[Lucas Pipes, B. Riley FBR]

Do you have a sense of magnitude for how much production would be up quarter-over-quarter. I think that's a similar question to last one, Lucas. No, realistically, we'll be able to ramp up compared to the past – in the past quarter. To what extent, I can't disclose. But I think the teams are doing everything at site to make sure that we can ramp up those mining operations as quickly as possible, so that we can deliver close to our nameplate capacity in the very near future.

[Lucas Pipes, B. Riley FBR]

Second question on the DR grade feed project, would this impact production during construction? I think construction is – might be 30 months. Would this have an impact?

[David Cataford, Chief Executive Officer]

Maybe close to the end of those 30 months in construction, there will be some times between the phase two and this project. But we have designed this to have minimal impact on our operation. So the plan is going to be built beside the phase two project. And apart from those times, we don't expect any reduction in production there.

[Lucas Pipes, B. Riley FBR]

I'll sneak one last one in. The pellet plant project, restarting the facility, I think it's Pointe Noire, would that run on natural gas? And if so, how much? Would appreciate your color on that.

[David Cataford, Chief Executive Officer]

I might have Alex to chime in just for the quantity. But we look at starting with liquefied natural gas. As you know, there's no pipeline of natural gas that comes into the region right now. There seems to be about one project missing for the government to potentially evaluate bringing a pipeline to the North Shore. Because as you know, there's a big aluminum smelter, there's ArcelorMittal's pellet plant, there would be this one. There's a few projects that would require natural gas as well. So the beginning would be LNG and then potentially transitioning into natural gas in the future.

For the quantity, Alex, do you have that at the top of your head there? If not, Lucas, we'll do a quick follow up after.

[Alexandre Belleau, Chief Operating Officer]

No, I think, David, it would be preferable that we do a follow-up, just [indiscernible] number that's off track.

[David Cataford, Chief Executive Officer]

Yeah, we'll get you that, Lucas.

[Operator]

Thank you. There are no further questions in the phone line at this time. Mr. Cataford, please continue for any closing remarks. sir.

[David Cataford, Chief Executive Officer]

Yeah. Thanks for everyone for participating today. I think big highlights, again, is the fact that we've reached our commercial production with the phase two, transitioning to one of the highest grade materials in the world. Very excited about the future that we have at Champion. And we'll continue to work on various projects to make sure that we can generate as much revenue as we can for our shareholders, at the same time as working closely with the various communities, our First Nation partners and all of our employees. So, again, thanks a lot everyone and looking forward to meeting with you in the next quarter.

[Operator]

Thank you, sir. Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines. Have a lovely day.