Mr. Michael Marcotte reports
CHAMPION IRON REPORTS THIRD QUARTER RESULTS
Champion Iron Ltd. has released its strong operational and financial results for the third quarter ended Dec. 31, 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. All amounts are in Canadian dollars unless otherwise indicated.
Conference call details
Champion will host a conference call and webcast at 8:30 a.m. EST on Wednesday, Jan. 29, 2020, to discuss the third quarter results of the fiscal year ending March 31, 2020. Call details are outlined in this news release.
- Quarterly production of 1,832,800 wet metric tonnes (wmt) of high-grade 66.4 per cent iron (Fe) ore concentrate, tracking favourably to the nameplate capacity of the Bloom Lake mine during a planned semi-annual shutdown period, compared with 1,791,300 wmt during the same period of the prior year;
Quarterly recovery rate of 81.7 per cent, including a monthly recovery rate of 84.2 per cent in December, which is close to the company's all-time-high monthly recovery rate of 84.6 per cent, compared with a recovery rate of 80.7 per cent during the same period of the prior year;
- Total cash cost (C1) of $54.2 per dry metric tonne (dmt) ($41.1 (U.S.) per dmt) and an all-in sustaining cost (AISC) of $62.2 per dmt during the third quarter, compared with $49.4 per dmt ($37.4 (U.S.) per dmt) and $55.5 per dmt, respectively, in the same period of the prior year, due to unscheduled downtimes, higher port charges and investments in tailings.
- Revenues of $171.1-million, an increase of 6.7 per cent from the previous quarterly results, compared with $147.5-million in the same period of the prior year;
- EBITDA (earnings before interest, taxes, depreciation and amortization) totalling $57.9-million, representing an EBITDA margin of 34 per cent, compared with $65.4-million, representing an EBITDA margin of 44 per cent, in the same period of the prior year;
- Net income of $30.2-million or earnings of seven cents per share, compared with net income of $31.2-million or earnings of five cents per share in the same period of the prior year;
- Invested $50.9-million at Bloom Lake mainly in connection with the phase II expansion project and prepaid $14.3-million in municipal taxes to the city of Fermont, resulting in cash on hand of $187.6-million as at Dec. 31, 2019, compared with $185.4-million as at Dec. 31, 2018.
- On Jan. 6, 2020, the company announced a proposal to redomicile from Australia to Canada, which is expected to increase the attractiveness of the company to a more diverse financial market, including additional eligibility to indices globally.
Proceeding with the previously approved $68-million work program on the Bloom Lake phase II expansion project as detailed in the phase II feasibility study filed on Aug. 2, 2019.
"With our high-quality product in rising demand, Bloom Lake continues to track its nameplate capacity, delivering strong profitability for our company," commented David Cataford, Champion's chief executive officer. "With this momentum, we continue to upgrade our processes to improve the reliability of our operations and advance critical items for our phase II expansion project. Together with our strong partnerships, we are well positioned to consider the completion of phase II."
BLOOM LAKE MINE OPERATING ACTIVITIES
Three months ended Nine months ended
Dec. 31, Dec. 31, Dec. 31, Dec. 31,
2019 2018 2019 2018
Waste mined (wmt) 3,409,200 3,847,100 10,562,300 10,198,400
Ore mined (wmt) 4,905,300 4,883,400 15,404,300 14,736,200
Strip ratio 0.7 0.8 0.7 0.7
Ore milled (wmt) 4,639,000 4,531,400 14,869,800 13,739,600
Head grade Fe (%) 32.0 32.1 32.3 31.8
Recovery (%) 81.7 80.7 82.7 79.2
Product Fe (%) 66.4 66.4 66.3 66.5
Iron ore concentrate produced (wmt) 1,832,800 1,791,300 6,011,900 5,192,500
Iron ore concentrate sold (dmt) 1,922,100 1,711,500 5,689,200 5,383,600
(in thousands of dollars, except as noted)
Revenues $171,100 $147,546 $609,384 $472,965
Cost of sales 104,119 84,482 297,647 267,515
Other expenses 9,071 (2,345) 24,316 13,778
Net finance cost 4,718 9,279 80,203 30,624
Net income 30,184 31,199 102,699 119,444
EBITDA 57,910 65,409 287,421 191,672
Statistics (in dollars per dmt sold)
Average realized selling price 89.0 86.2 107.1 87.9
Total cash cost (C1 cash cost) 54.2 49.4 52.3 49.7
All-in sustaining cost 62.2 55.5 63.7 56.0
Cash operating margin 26.8 30.7 43.4 31.9
During the three-month period ended Dec. 31, 2019, 8.3 million tonnes of material was mined, a decrease of 5 per cent compared with the same quarter of the prior year. This decrease is mainly due to reduced in-pit crusher availability attributable to unusual wear of a critical component affecting equipment uptime. While the in-pit crusher downtime increased the trucking cycle time, which contributed negatively to the volume mined, the redundancy associated with the second crusher maintained a stable plant feed.
The plant processed 4,639,000 tonnes of ore during the third quarter, compared with 4,531,400 tonnes in the comparable prior-year period. The stable production, despite expected improvements of the operational innovations implemented during the previous two quarters, resulted from unscheduled downtime totalling five production days. The first unscheduled downtime was caused by the premature wear of the discharge grates stemming from the higher throughput achieved in the first six months of the fiscal year ending March 31, 2020. The company is currently improving the design of the discharged grates to prevent this situation from reoccurring. The other unscheduled downtime was attributable to a failure affecting the shaft of the conveyor belt and the unavailability of the required custom spare part. To limit the impact of future unscheduled downtime related to the conveyor belt, a complete review of the criticality of this equipment's required spare parts was conducted. The procurement process associated with the spare parts management has been revamped. Previously implemented action plans, such as the one used last year to prevent chute blockage, have provided positive results and, accordingly, the company is confident that the improvements implemented in this quarter will prevent similar unscheduled downtimes from reoccurring.
The company achieved an average recovery of 81.7 per cent during the third quarter, compared with 80.7 per cent in the same period of the prior year. The reduction in recovery rate compared with the previous quarter average of 83.9 per cent results from reduced throughput stability associated with the concentrator downtimes.
Based on the foregoing, Bloom Lake produced 1,832,800 wmt of 66.4 per cent Fe high-grade iron ore concentrate during the three-month period ended Dec. 31, 2019, compared with 1,791,300 wmt in the same period of the prior year.
The company mined 25,966,600 tonnes of material during the nine-month period ended Dec. 31, 2019, compared with 24,934,600 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.
Despite the unscheduled downtimes affecting the third quarter, the decision to invest in operational improvements yielded positive results. The plant processed 14,869,800 tonnes of ore during the nine-month period ended Dec. 31, 2019, an increase of 8 per cent over the same period of the prior year, while the recovery rate improved from 79.2 per cent to 82.7 per cent, in line with the company's target. Based on the foregoing, Bloom Lake produced a total of 6,011,900 wmt of 66.3 per cent Fe during the nine-month period ended Dec. 31, 2019.
During the three-month period ended Dec. 31, 2019, a total of 1,922,100 tonnes of high-grade iron ore concentrate were sold at a CFR China gross realized price of $106.2 (U.S.) per dmt, before provisional sales adjustments and shipping costs. The gross sales price of $106.2 (U.S.) per dmt represents a premium of 20 per cent over the Platts TSI IODEX 62 per cent Fe CFR China Index (P62) price, compared with a premium of 4 per cent in the previous quarter. The increase is primarily attributable to the rebound of some steel industry economical indicators as well as to the recovery of the historical relationship between the high-grade premium, steel margins and the coke price. The increased sea freight costs during the quarter were affected by two factors: the temporary lower ocean freight vessels inventory associated with the installation of scrubbers in advance of the new IMO rule in effect in 2020 and demurrage costs resulting from unscheduled downtime affecting the Societe Ferroviere du Port de Pointe-Noire (SFPPN), which reduced iron ore concentrate loading efficiency. As a result of SFPPN's inefficient operations, a vessel scheduled to leave before Dec. 31, 2019, was delayed until Jan. 2, 2020, contributing to lower quarterly revenues than anticipated.
During the quarter, a final price was established for 600,000 tonnes that were in transit at the end of the second quarter ended Sept. 30, 2019, and that were subject to provisional price adjustments. Based on the P62 forward selling price, a negative price adjustment of $8.1 (U.S.) per dmt or $15,645,000 (U.S.) was recorded for shipments in transit at the end of the quarter. It should be noted that as the provisional price adjustment reflects the forward curve as of Dec. 31, 2019, which has since improved by approximately $4 (U.S.) per dmt, the adjustment does not reflect a final realized price reduction. Deducting sea freight costs of $30.7 (U.S.) per dmt, together with the negative provisional sales adjustment of $8.1 (U.S.), the company obtained an average net realized price of $67.4 (U.S.) per tonne ($89.0 (Canadian) per tonne) for its high-grade iron ore delivered to the end-user customer, benefiting from an average foreign exchange rate of $1.32 (Canadian) to $1 (U.S.). As a result, revenues totalled $171.1-million for the period compared with $147,546,000 in the same prior-year period.
For the nine-month period ended Dec. 31, 2019, the company sold over 5,689,200 tonnes of iron ore concentrate shipped in 36 vessels to end-user customers located in China, Europe, Japan and the Middle East. While the Platts IO Fines 65 per cent Fe CFR China Index (P65) indicative price of high-grade iron ore fluctuated between $88.4 (U.S.) per dmt to a high of $135.9 (U.S.) dmt during the nine-month period ended Dec. 31, 2019, the company sold its product at an average gross realized price of $110.6 (U.S.) per dmt, before shipping and adjustments related to provisional sales. The gross sales price of $110.6 (U.S.) per dmt represents a premium of 14 per cent over the benchmark P62 price. Deducting sea freight costs of $25.6 (U.S.) Per dmt and the negative provisional sales adjustment of $4.1 (U.S.) per dmt, the company obtained an average realized price of $80.9 (U.S.) per tonne ($107.1 (Canadian) per tonne) for its high-grade iron ore delivered to the end-user customer. As a result, revenues totalled $609,384,000 year to date, compared with $472,965,000 for the same period of the prior year. The sales increase is mainly attributable to the volume and selling price.
Cost of sales
Cost of sales represent mining, processing, and mine site related general and administrative expenses.
During the three-month period ended Dec. 31, 2019, the total cash cost or C1 cash cost per tonne totalled $54.2 per dmt, compared with $49.4 per dmt in the same period of the previous year. The C1 cash cost for the period was impacted by various factors, including unscheduled downtimes, which represent a non-recurring volume impact of approximately $2 per dmt in the quarter, and higher costs from SFPPN port operations. Since the beginning of the restart of the SFPPN's operations in 2018, SFPPN costs have increased beyond the indexation rate and faster than the improvement of the operational efficiency, leading to a negative impact of $2 per dmt for this quarter compared with the same period last year. The board of directors of SFPPN, on which the company's operating subsidiary, Quebec Iron Ore Inc. (QIO), has a representative, elected to strengthen the leadership of SFPPN aiming to revamp operational processes, improve asset maintenance, and overall availability and efficiency, while reducing operational costs. As the newly appointed chief executive officer of SFPPN operations has many years of experience in managing a railroad and port facilities, the company and SFPPN's boards of directors are confident that SFPPN's operational efficiency will improve rapidly. Consequently, the company should benefit from lower port operations costs going forward.
For the nine-month period ended Dec. 31, 2019, the company produced high-grade iron ore at a total cash cost of $52.3 per dmt compared with $49.7 per dmt in the previous year. The C1 cash cost for the period were impacted by the factors identified for the quarter ended Dec. 31, 2019.
The gross profit for the three-month period ended Dec. 31, 2019, totalled $62.35-million compared with $60,471,000 for the same period of the prior year. The variation period over period is attributable to a higher gross realized price during the quarter ended Dec. 31, 2019, combined with higher volumes, offset by a negative adjustment on provisional sales. Higher freight costs and production costs contributed to the remaining variation.
The gross profit for the nine-month period ended Dec. 31, 2019, totalled $298,799,000, compared with $194,348,000 for the same prior-year period. The increase is largely driven by the 30-per-cent increase in the realized price together with the decision made by the company earlier in the year to invest in maintenance and plant reliability to maximize cash flows while the iron ore price is elevated. Accordingly, year to date, the company is benefiting from a 40-per-cent cash profit margin per tonne.
Other expenses comprise share-based payments, corporate expenses (general and administrative (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 (IBA) with the first nations.
The variation of the other expenses and income for the three-month period ended Dec. 31, 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. In addition, expenses were incurred during the period to support the company's redomiciliation process. Higher CSR expenses reflect the company's increased focus on sustainability. This amount also includes the full impact of the agreement with the first nations as these expenses were partially incurred in the prior year.
The variation of the other expenses and income for the nine-month period ended Dec. 31, 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.
Net finance costs
Net finance costs totalled $4,718,000 for the three-month period ended Dec. 31, 2019, compared with $9,279,000 for the same period in the prior year. The decrease is mainly attributable to the positive impact of the refinancing, which closed on Aug. 16, 2019. The new credit facilities bear totalled interests of 4.75 per cent, compared with a rate of 10 per cent for the previous credit facilities. In addition, the previous credit facilities included embedded derivative instruments that needed to be reevaluated on a quarterly basis, which, following the refinancing, were no longer applicable during the quarter.
The company reports in Canadian dollars and benefits from a natural hedge between its revenues generated in U.S. dollars and its U.S.-dollar-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. Unrealized loss on investments and accretion costs are non-cash items.
The increase in net finance costs for the nine-month period ended Dec. 31, 2019, when compared with the same period the year prior, is, in addition to the impact of the refinancing closed on Aug. 16, 2019, mainly due to the factors described above.
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 shown in the attached table.
Mining profit margin range Tax rate
Mining profit between 0% to 35% 16%
Incremental mining profit over 35%, up to 50% 22%
Incremental mining profit over 50% 28%
In addition, QIO is subject to an income tax in Canada where the statutory rate is 26.68 per cent.
During the three- and nine-month periods ended Dec. 31, 2019, current income and mining taxes amounted to $2,644,000 and $70,630,000, respectively, compared with $8,227,000 and $25,731,000, respectively, for the same periods of the prior year. The lower current income taxes figure is due to accelerated tax amortization associated with capital expenditures. The current mining tax is associated with the mining profit.
Accordingly, during the three- and nine-month periods ended Dec. 31, 2019, deferred income and mining taxes amounted to $15,733,000 and $20,951,000, respectively, compared with expenses of $14,111,000 and $4,771,000, respectively, for the same periods of the prior year. The higher deferred income and mining tax expense during both periods is mainly associated with the accelerated tax depreciation, which results in a difference between the net book value and tax value of the company's assets.
Net Income (loss) and EBITDA
For the three-month period ended Dec. 31, 2019, the company generated net income of $30,184,000, entirely attributable to the company's shareholders. The current net income reflects the impact of the negative provisional adjustment combined with higher cash costs and higher deferred income taxes, compared with the same period in the previous fiscal year. In the comparative prior-year period, the company reported net income of $31,199,000, representing earnings per share of five cents.
During the third quarter ended Dec. 31, 2019, the company generated an EBITDA of $57.91-million, representing an EBITDA margin of 34 per cent, compared with an EBITDA of $65,409,000, representing an EBITDA margin of 44 per cent in the same period of the prior year.
For the nine-month period ended Dec. 31, 2019, the company generated net income of $102,699,000, representing earnings per share of 16 cents. Net income of $119,444,000, representing 18 cents per share, was realized in the nine-month period ended Dec. 31, 2018. By excluding the non-cash impact of the refinancing, the net income for the nine-month period ended Dec. 31, 2019, would have been $154.34-million, representing earnings per share of 27 cents.
For the nine-month period ended Dec. 31, 2019, the company generated an EBITDA of $287,421,000, representing an EBITDA margin of 47 per cent, compared with an EBITDA of $191,672,000, representing an EBITDA margin of 41 per cent in the same period of the prior year. This increase is mainly attributable to the increase in the realized price and the number of tonnes sold.
The refinancing of the credit facilities with Sprott Private Resources Lending (Collector) LP and CDP Investissements Inc., a subsidiary of Caisse de depot et placement du Quebec (CDPI), concluded in Q2 of the current fiscal year, resulted in non-cash financing costs associated with the valuation of derivative instruments that were embedded in the previous credit facilities. Excluding the non-recurring non-cash transactions, the company would have generated an adjusted net income of $154.34-million and adjusted earnings per share (EPS) of 27 cents for the nine-month period ended Dec. 31, 2019.
All-in sustaining cost and cash operating margin
The company believes that the AISC and cash operating margin 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 as the total costs associated with producing iron ore concentrate. The company's AISC 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-dry-metric-tonne figure.
During the three-month period ended Dec. 31, 2019, the company realized an AISC of $62.2 per dmt compared with $55.5 per dmt in the same period last year. In addition to the C1 cash costs increase, the company made the decision at the beginning of the fiscal year to accelerate tailings containment dam rising construction work this year, in order to ensure safe tailings deposition. The conservative decision made by the company to bring forward the tailings investment did not modify the total amount that would have been invested on the tailings facility over the next few years; only its timing was modified. Given the magnitude of the project, the construction period was extended until late fall in order to complete the required works. The accelerated tailings investment project is now complete and it is anticipated that this will reduce the sustaining capital dedicated to tailings management over the next few years. Additionally, the company continued investing in its mining equipment rebuilding program, required to increase mining equipment fleet availability and maintain a higher strip ratio, in light of the commencement of the phase II expansion project.
Deducting the AISC of $62.2 per dmt from the realized average selling price of $89.0 per dmt, the company generated a cash operating margin of $26.8 for each tonne of high-grade iron ore concentrates sold during the third quarter ended Dec. 31, 2019, compared with $30.7 per dmt in the same period of the previous year. The variation relates to the acceleration of sustaining investments combined with temporary higher cash cost per tonne sold resulting from unscheduled downtime, which affected operations.
For the nine-month period ended Dec. 31, 2019, the company realized an AISC of $63.7 per dmt compared with $56.0 per dmt in the same period of last year. Despite a higher AISC, the cash operating margin totalled at $43.4 per dmt compared with $31.9 per dmt in the same prior-year period, reflecting the ability of the company's cost structure to take advantage of market fluctuations.
Following Champion's acquisition of Ressources Quebec Inc.'s 36.8-per-cent equity interest in QIO, the company's non-controlling interest (NCI) no longer exists. 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.
Conference call and webcast information
A webcast and conference call to discuss these results will be held on Wednesday, Jan. 29, 2020, at 8:30 a.m. EST. 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 481324 followed by the pound key.
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.
We seek Safe Harbor.
© 2020 Canjex Publishing Ltd. All rights reserved.