Mr. David Cataford reports
CHAMPION IRON REPORTS SOLID FY2020 SECOND QUARTER RESULTS
Champion Iron Ltd. has released strong operational and financial results for the second quarter ended Sept. 30, 2019, of the fiscal year ending March 31, 2020.
For complete details of the unaudited condensed consolidated financial statements and associated management's discussion and analysis, please refer to the company's filings on SEDAR or the company's website.
Conference call details
Champion will host a conference call and webcast at 8:30 a.m. EDT (Montreal time) on Oct. 30, 2019, to discuss the second quarter results of the fiscal year ending March 31, 2020. Call details are outlined at the end of this news release.
Record quarterly production of 2,189,700 wet metric tonnes (wmt) of high-grade 66.3-per-cent-iron-ore concentrate or 10.1 per cent higher than previous quarterly record;
Record quarterly recovery rate of 83.9 per cent;
Total cash cost (1) of $48.30 per dry metric tonne (dmt) ($36.60 (U.S.) per dmt), 11 per cent lower than previous quarter results.
Revenues of $160.4-million for the second quarter, net of a provisional sales adjustment of $34.7-million;
Record quarterly cash flow from operations of $104.9-million, representing cash flow per share of 24 cents;
EBITDA (earnings before interest, taxes, depreciation and amortization) (1) totalling $62.6-million or 39 per cent EBITDA (1) margin;
Net loss of $1.7-million for the second quarter and nil earnings per share;
Adjusted net income (1) of $50-million for the second quarter and 11 cents of adjusted earnings per share (1);
Generated $75-million in cash during the quarter, resulting in cash on hand (2) of $211.0-million as at Sept. 30, 2019.
- Completed the previously announced transaction with CDP Investissements Inc., a subsidiary of Caisse de depot et placement du Quebec, for a preferred share offering of $185-million in addition to a $200-million (U.S.) credit facility with Bank of Nova Scotia and Societe Generale as lead arrangers;
Now the 100-per-cent owner of the Bloom Lake mine, further to the completion of the previously announced transaction with the government of Quebec, through its agent Ressources Quebec Inc. (RQ), to acquire RQ's 36.8-per-cent equity interest in Quebec Iron Ore (QIO) for a total cash consideration of $211-million;
Previously approved work program of $68-million on phase 2 to secure the timetable detailed by the feasibility study filed on SEDAR on Aug. 2, 2019, progressing on schedule and on budget;
The company conducted a drilling campaign at its Bloom Lake property to improve ore characterization and a geophysical survey on the Roach Hill property.
"This quarter represents an important milestone for our company. We now have 100-per-cent ownership of our flagship asset and have repositioned our capital structure, which significantly reduces our debt carrying costs," commented David Cataford, Champion's chief executive officer. "While our team continues to demonstrate their operational excellence, our high-quality product remains in strong demand globally. With access to decades of resources, we are well positioned to leverage the support of our financial and regional partners as our company implements its growth initiatives."
2. Bloom Lake mine operating activities (3)
During the three-month period ended Sept. 30, 2019, 9.0 million tonnes of material was mined, representing an increase of 10 per cent compared with the same quarter of the prior year. This increase was enabled by higher mining equipment availability and a higher utilization rate, attributable to the company's progress with its mining equipment rebuilding program. The mining operations' continuous improvement plan reduced the trucking cycle time, which contributed positively to volume mined.
The plant processed 5,450,800 tonnes of ore during the second quarter compared with 4,964,200 tonnes in the comparable prior-year period. The 10-per-cent increase relates to the higher average hourly mill throughput and the higher iron recovery, further to the implementation of operational innovations in the previous quarter, designed to increase plant capacity, reliability and performance.
The company achieved an average recovery rate of 83.9 per cent during the second quarter, compared with 79.5 per cent in the same period of the prior year. The improvement relates to the continuous optimization of the recovery circuit, in addition to preventive works completed earlier this year, which produced a more stable recovery rate, fluctuating from 83.5 per cent to 84.4 per cent during the quarter. The quarterly recovery rate achieved during the period set a new historical record for Bloom Lake, which was first commissioned in 2010.
Based on the foregoing, Bloom Lake produced 2,189,700 wmt of 66.3-per-cent-iron high-grade iron ore concentrate during the three-month period ended Sept. 30, 2019, compared with 1,858,300 wmt in the same period of the prior year, representing an 18-per-cent increase.
In addition to the new hourly mill throughput and recovery rate records achieved during the quarter, the Bloom Lake product quality specifications continue to meet or exceed benchmarks, and significantly, to date, the company has not been assessed any penalties in connection with product quality.
The company mined 17,652,100 tonnes of material during the six months ended Sept. 30, 2019, compared with 16,204,100 tonnes in the same period in the prior year. The increase is attributable to the improvement in mining equipment reliability and increased productivity resulting from the rebuilding program.
The plant processed 10,230,800 tonnes of ore during the six months ended Sept. 30, 2019. During the first half of the current fiscal year, the recovery circuit continues to be optimized, whereby the company achieved a 79.4-per-cent recovery rate at the beginning of the year compared with a recovery rate of 83.9 per cent for the quarter ended Sept. 30, 2019. Over all, year to date, the company has achieved an average recovery rate of 83.1 per cent. The Bloom Lake plant has demonstrated that the current recovery rate is a sustainable rate that can be maintained or possibly increased over the long term.
Based on the foregoing, Bloom Lake produced a total of 4,179,100 wmt of Fe at 66.3 per cent as at Sept. 30, 2019. These results established a new biannual production record for the Bloom Lake mine.
3. Financial performance
The company entered precommercial production in February, 2018, shipped its first vessel of concentrate to China on April 1, 2018, and declared commercial production on June 30, 2018.
During the three-month period ended Sept. 30, 2019, a total of 1,860,400 tonnes of high-grade iron ore concentrate were sold at a CFR China gross realized price of $106.20 (U.S.) per dmt before provisional sales adjustments and shipping costs. The gross sales price of $106.20 (U.S.) per dmt represents a premium of 4 per cent over the benchmark P62 price compared with a premium of 17 per cent in the previous quarter, primarily attributable to pressures on the global steel market. During the quarter, a final price was established for 1.0 million tonnes, which were in transit at the end of first quarter fiscal 2020 and subject to provisional price adjustments. As the iron ore price was under pressure during this quarter and as the premium between the P62 and the P65 decreased by 50 per cent, a price adjustment of $14.30 (U.S.) per dmt was recorded for these shipments. Sales on the spot market were also initiated. Deducting sea freight costs of $26.80 (U.S.) per dmt, together with the provisional sales adjustment of $14.30 (U.S.), the company obtained an average net realized price of $65.10 (U.S.) per tonne ($86.20 (Canadian) per tonne) for its high-grade iron ore delivered to the end customer, benefiting from an average foreign exchange rate of $1.33 (Canadian) to $1 (U.S.). As a result, revenues totalled $160.37-million for the period compared with $174,678,000 in the same prior-year period. The provisional sales adjustments included in sales were recorded at ($34.7-million), compared with $5.5-million in the same prior-year period.
For the six-month period ended Sept. 30, 2019, the company sold over 3,767,100 tonnes of iron ore concentrate shipped to end-user customers, located in China, Europe, Japan and the Middle East, which was shipped in 22 Capesize vessels. While the P65 indicative price of high-grade iron ore fluctuated between $89 (U.S.) per dmt and $135.90 (U.S.) per dmt during the quarter ended Sept. 30, 2019, the company sold its product at an average gross realized price of $112.80 (U.S.) per dmt, before shipping and adjustments related to provisional sales. The gross sales price of $112.80 (U.S.) per dmt represents a premium of 10 per cent over the benchmark P62 price. Deducting sea freight costs of $23.10 (U.S.) per dmt and the negative provisional sales adjustment of $2.10 (U.S.), the company obtained an average realized price of $87.60 (U.S.) per tonne ($116.30 (Canadian) per tonne) for its high-grade iron ore delivered to the end-user customer. As a result, revenues totalled $438,284,000 year to date, compared with $325,419,000 for the same period of the prior year. The sales increase is mainly attributable to the volume and selling price. The provisional sales adjustments included in sales were recorded at ($10.3-million) compared with $5.5-million in the same prior-year period.
B. Cost of sales
Cost of sales represents mining, processing, and mine-site-related general and administrative expenses.
During the three-month period ended Sept. 30, 2019, the total cash cost (1) or C1 cash cost (1) per tonne totalled $48.30 per dmt, compared with $45.20 per dmt in the same period of the previous year. The C1 cash cost (1) of the period reflects the impact of higher costs from port operations, the indexation of the railway transportation contracts and the costs attributable to additional manpower as the company supplemented its work force during the year.
For the six-month period ended Sept. 30, 2019, the company produced high-grade iron ore at a total cash cost (1) of $51.40 per dmt compared with $49.80 per dmt in the previous year. The C1 cash cost (1) reflects, in addition to the factors identified for the quarter, the impacts of the major shutdown performed earlier this year, during which additional works were completed to increase the plant reliability and recovery rate.
C. Gross profit
The gross profit for the three-month period ended Sept. 30, 2019, totalled $65,756,000 compared with $83,329,000 for the same period of the prior year. A higher gross realized price during the period of $12.40 (U.S.) per dmt was offset by an adjustment on provisional sales of $14.30 (U.S.) per dmt, impacting the gross sales by approximately $4-million (U.S.). Higher freight costs and lower volumes contributed to the remaining variation.
The gross profit for the six-month period ended Sept. 30, 2019, totalled $236,449,000, compared with $133,877,000 for the same prior-year period. The increase is largely driven by the 31-per-cent increase in the realized price, together with higher plant reliability and the effectiveness of preventive works completed during the scheduled major shutdowns. Year to date, the company is benefiting from a 45-per-cent cash profit margin per tonne.
D. Other expenses
Other expenses comprise share-based payments and corporate expenses (G&A expenses), as well as sustainability and other community expenses (CSR expenses). CSR expenses are composed mainly of community taxes, such as property and school taxes, and expenditures related to the impact and benefits agreement with the first nations.
The variation of the other expenses and income for the three-month period ended Sept. 30, 2019, compared with the same period the previous year, is essentially due to the completion of the transition from a development cost structure to an operating organization.
The variation of the other expenses and income for the six-month period ended Sept. 30, 2019, compared with the same period the previous year, is essentially due to restart costs incurred in the first quarter of the prior year, as well as Champion's transition from a development-stage company to an iron ore producer. The increase in share-based payments reflects the higher stock price period over period, combined with the issuance of annual equity awards in relation to the performance achieved during the last fiscal year ended March 31, 2019.
E. Net finance costs
Net finance costs totalled $46,433,000 for the three-month period ended Sept. 30, 2019, compared with $7,106,000 for the same period in the prior year. The increase is mainly attributable to the impact of the refinancing closed on Aug. 16, 2019, representing $57.3-million, offset by the revaluation of warrants related to the $19.5-million Glencore debenture. Of the $57.3-million, $53-5 million is related to non-cash items, including the write-off of capitalized past transactions fees, the write-off of derivative financial instruments and the write-off of the unamortized book value of the previous financing facilities. The unamortized book value of the previous debt reflected the deduction of derivative financial instruments that were reclassified in either derivative liability or equity. Therefore, the debt book value was lower than the face value.
The change in the fair value of the derivative liability is associated with the variation of the company's ordinary share price, which decreased by 26.6 per cent during the period and is a non-cash item. This derivative liability is now recorded as an equity item following the refinancing.
The company reports in Canadian dollars and benefits from a natural hedge between its revenues generated in U.S. dollars and its U.S.-denominated term facilities. Consequently, the unrealized foreign exchange loss included in net finance costs represents a non-cash expenditure associated with the conversion of the term facilities in Canadian dollars. The company maintains sufficient U.S. dollars on hand to prevent foreign exchange loss upon interest or capital payments. Unrealized loss on investments and accretion costs are non-cash items.
The increase in net finance costs for the six-month period ended Sept. 30, 2019, when compared with the same period the year prior, is mainly due to the same factors identified in the previous section.
F. Income taxes
The company's subsidiaries are subject to tax in Australia and Canada. As a result of accumulated losses before tax, there are no current or deferred income taxes related to the Australian activities. QIO, Champion's operating subsidiary, is subject to a Quebec mining tax at a progressive rate ranging from 16 per cent to 28 per cent depending on the mining profit margin as defined by tax regulations. The mining profit margin represents the mining profit divided by revenues and is taxable based on three segments as follows:
Mining profit margin range and tax rate
Mining profit between 0 per cent to 35 per cent: 16 per cent
Incremental mining profit over 35 per cent, up to 50 per cent: 22 per cent
Incremental mining profit over 50 per cent: 28 per cent
In addition, QIO is subject to an income tax in Canada, where the statutory rate is 26.68 per cent.
During the three- and six-month periods ended Sept. 30, 2019, current income and mining taxes amounted to $14,624,000 and $67,986,000, respectively, compared with $11,974,000 and $17,504,000, respectively, for the same periods of the prior year. The higher mining and income taxes, period over period, are due to higher taxable profit as the company has no more tax losses available.
During the three- and six-month periods ended Sept. 30, 2019, deferred income and mining taxes amounted to a recovery of $1,449,000 and an expense of $5,218,000, respectively, compared with expenses of $9.34-million and $9.34-million, respectively, for the same periods of the prior year. The recovery during the quarter is associated with the early debt repayment. The deferred expenses for the six-month period is related to the accelerated depreciation permitted under tax rules.
G. Net income (loss) and EBITDA (1)
For the three-month period ended Sept. 30, 2019, the company generated net loss of $1,726,000, with the net income attributable to Champion shareholders for the period totalling $2,139,661, representing earnings per share of nil. The non-controlling interest (NCI) has been calculated until acquisition closing date of Aug. 16, 2019. The variation period over period is mainly due to the non-cash financing costs resulting from the early payments of Sprott Private Resource Lending (Collector) LP and CDP Investissements Inc. (CDPI) credit facilities. In the comparative period of last year, a net income of $67,497,000, representing earnings per share of 10 cents per share, was realized.
As previously mentioned, the refinancing of the Sprott and CDPI credit facilities resulted in non-cash financing costs associated with derivative instruments that were embedded in the original facilities. Excluding the non-recurring non-cash transactions, the company would have generated an adjusted net income (1) of $49,915,000 and an adjusted earnings per share (1) of 11 cents for the second quarter. Similarly, the net income for the six-month period that ended Sept. 30, 2019, that is at $72,515,000 would have been at $124,156,000. Accordingly, the earnings per share would have been adjusted to 20 cents.
During the second quarter ended Sept. 30, 2019, the company generated an EBITDA (1) of $62,575,000 or an EBITDA (1) margin of 39 per cent compared with an EBITDA (1) of $81,321,000 or an EBITDA (1) margin of 47 per cent in the same period of the prior year.
For the six-month period ended Sept. 30, 2019, the company generated a net income of $72,515,000 translating to earnings per share of nine cents. A net income of $88,245,000 or 13 cents per share was realized in the six-month period ended Sept. 30, 2018. By excluding the non-cash impact of the refinancing, the net income for the first six months of the year would have been at $122,255,000 or 19 cents per share.
For the six-month period ended Sept. 30, 2019, the company generated an EBITDA (1) of $229,511,000 or an EBITDA (1) margin of 52 per cent compared with an EBITDA (1) of $126,263,000 or an EBITDA (1) margin of 39 per cent in the same period of the prior year. This increase is mainly attributable to the increase in realized price.
H. All-in sustaining cost (1) and cash operating margin (1)
The company believes that the all-in sustaining cost (AISC) (1) and cash operating margin (1) are measures reflecting the costs associated with producing iron ore and assessing the company's ability to operate without reliance on additional borrowing or usage of existing cash. The company defines AISC (1) as the total costs associated with producing iron ore concentrate. The company's AISC (1) represents the sum of cost of sales, corporate expenditures and sustaining capital expenditures, including stripping activities, all divided by the iron ore concentrate per dmt sold to arrive at a per dmt figure.
During the three-month period ended Sept. 30, 2019, the company realized an AISC (1) of $66.20 per dmt compared with $52.90 per dmt in the same period last year. The variation period over period is due to three main factors. The company made the prudent decision to accelerate tailings containment dam rising construction work to ensure safe tailings deposition. It should be noted that since the works related to the dikes project are mainly of a civil nature, a large part of the program was completed during the summer months, resulting in a higher sustaining capital expense during the current quarter. Additionally, the company made additional investments in the mining equipment rebuilding program, required to increase mining equipment fleet availability. As well, the company finalized its conversion from a development-stage company to an iron ore producer. The conservative decision made by the company to bring forward the tailings investment does not modify the total amount that would have been invested on the tailings facility over the next few years, only the timing of the expenditures.
Deducting the AISC (1) of $66.20 per dmt from the realized average selling price (1) of $86.20 per dmt, the company generated a cash operating margin (1) of $20 for each tonne of high-grade iron ore concentrates sold during the second quarter ended Sept. 30, 2019, compared with $37.50 per dmt in the same period of the last year. In addition to investments being made earlier than planned, the realized selling price decrease of 5 per cent has also contributed to the decrease.
For the six-month period ended Sept. 30, 2019, the company realized an AISC (1) of $64.50 per dmt compared with $56.10 per dmt in the same period of last year. Despite a higher AISC (1), the cash operating margin (1) was at $51.80 per dmt compared with $32.50 per dmt in the same period of the previous year, reflecting the ability to adjust necessary investments to take advantage of the market fluctuations.
I. Non-controlling interest
Following the close of the acquisition of RQ's 36.8-per-cent interest in QIO, Champion's NCI does not exist any more. The net income attributable to the NCI was based on the financial results of QIO. The NCI attributed to the minority interest during the period was calculated up to the closing date of the acquisition on Aug. 16, 2019.
4. Conference call and webcast information
A webcast and conference call to discuss these results will be held on Oct. 30, 2019, at 8:30 a.m. EDT (Montreal time). Listeners may access a live webcast of the conference call from the investors section of the company's website or by dialling toll-free 1-888-390-0546 within North America or 1-888-076-068 from Australia.
An on-line archive of the webcast will be available by accessing the company's website. A telephone replay will be available for one week after the call by dialling 1-888-390-0541 within North America or 1-416-764-8677 overseas, and entering passcode 657982 followed by the number sign.
(1) EBITDA, average realized selling price, total cash cost or CI cash cost, AISC, cash operating margin, adjusted net income, and adjusted earnings per share are non-international financial reporting standard performance measures with no standard definition under IFRS. See the "Non-IFRS Financial Performance Measures" section of Champion Iron's management's discussion and analysis, included in Note 15. Adjusted net income and adjusted earnings per share attributable to shareholders excluding the financial costs related to refinancing closed on Aug. 16, 2019.
(2) Cash on hand includes cash and cash equivalents and short-term investments.
(3) The company considers that precommercial production operations at the Bloom Lake mine commenced on April 1, 2018, with the first shipment of high-grade iron ore concentrate, and that commercial production began on June 30, 2018. Cash on hand includes cash and cash equivalents and short-term investments.
About Champion Iron Ltd.
Champion is a producing iron development and exploration company, focused on developing its significant iron resources in the south end of the Labrador Trough in the province of Quebec. Following the acquisition of its flagship asset, the Bloom Lake iron ore property, the company implemented upgrades to the mine and processing infrastructure, and has partnered in projects associated with improving access to global iron markets, including rail and port infrastructure initiatives with government and other key industry and community stakeholders. Champion's management team includes professionals with mine development and operations expertise, who also have vast experience from geotechnical work to greenfield development and brownfield management, including logistics development and financing of all stages in the mining industry.
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