Champion Iron positions for organic growth at Bloom Lake

After a milestone-rich year in which Champion Iron (TSX: CIA; ASX: CIA) restarted the Bloom Lake iron ore mine in Quebec’s portion of the Labrador Trough, the company has executed a series of transactions to better position itself for growth amid a global supply shortage in high-grade iron ore.

In May, Champion finalized a preferred share offering for $185 million with Quebec pension fund manager Caisse de dépôt et placement du Québec. The company also secured a fully underwritten, US$200-million credit facility with The Bank of Nova Scotia and Société Générale.

Champion will use $211 million from the new transactions to buy Ressources Québec’s 36.8% equity stake in Bloom Lake.

“Acquiring the full stake in the project is the best use of our capital today,” said Champion CEO David Cataford on a conference call, pointing to the asset’s performance as a cash-flow generator.

“No doubt this transaction is very accretive for Champion shareholders, but we are also extremely proud to generate such a strong rate of return for Ressources Québec,” Cataford says, pointing out the government agency invested in Bloom Lake when funds were scarce in 2017.

Champion’s new debt costs nearly half as much as its old debt (from 6.88% to 7.67%), and comes with less covenants.

In this year’s first quarter, Champion reported production of 1.8 million wet tonnes of 66.2% iron ore concentrate at Bloom Lake, which generated $182.2 million in net revenue. The period also saw the mine achieve a record 81.7% recovery in February from a 31% head grade.

In the same quarter, Bloom Lake produced 66.2% concentrate for $49.74 per dry tonne, which fetched a net realized price of $104.40, representing a 19.4% premium above the benchmark 62% iron ore price, Champion says.

The Bloom Lake mine site. Credit: Champion Iron.

“When you look at current iron ore prices and our operating costs, you can see that we are generating quite significant margins,” Cataford says.

Champion is operating during a supply shortage in high-grade iron ore primarily due to the catastrophic tailings dam failure at Vale’s (NYSE: VALE) Brumadinho iron ore mine in Brazil, which killed hundreds of people earlier this year. Following the disaster, several iron ore mines in Brazil were suspended. In March, Vale reported fallout from the incident could impact up to 93 million tonnes of its iron ore production in 2019.

“We see a good and strong iron price in the coming years, especially for high grade. On the back of the recent events, we believe it will be more and more difficult to bring on new tonnes of high grade to the market — with tough regulations for tailings and difficulties to get approvals for such infrastructure.”

Since Bloom Lake came back online in February 2018, it has produced 7.62 million wet tonnes, which it moves by rail from a loading station on-site to the deepwater Port of Sept-Îles.

“In this short period, we have proven our initial premise that Bloom Lake could favourably compete on the global cost curve by delivering tonnes to port for less than $50 [each],” said Cataford, who took over as CEO in April 2019 from Michael O’Keeffe, who remains Champion’s executive chairman. Cataford joined Champion as vice-president of engineering in 2014, and moved into the chief operating officer role in 2017.

Champion is in the midst of executing a remarkable turnaround at Bloom Lake.

“Iron ore touched the lowest levels since the introduction of the spot price, effectively, the same week that Champion formalized the agreement to purchase the mine from bankruptcy protection,” Cataford says.

Junior developer Consolidated Thompson Iron Mines financed and built Bloom Lake for US$1.2 billion (with the help of 25% partner WISCO), while 62% iron ore concentrate sold for more than US$100 per tonne, achieving initial production in 2010.

In 2011, then-Fortune 500-listed miner Cliffs Natural Resources acquired Consolidated Thompson for US$4.3 billion, and embarked on a US$1.5-billion expansion to increase capacity from 8 million to 14 million tonnes per year.

Champion Iron CEO David Cataford. Credit: Champion Iron.

Over three years, the U.S. miner spent US$1.2 billion to finish 75% of the expansion, which entailed building a second concentrate plant, an in-pit crusher, a 3.5 km conveyor system and upgraded power lines. This coincided with sinking iron ore prices, squeezing Cliffs financially and sending the company into bankruptcy protection in 2015.

In April 2016, Champion closed the Bloom Lake acquisition for $10.5 million.

Bloom Lake can produce 7.4 million tonnes of concentrate per year over a 21-year mine life. The project’s reserves total 411.7 million tonnes grading 30% iron.

Iron formations at Bloom Lake are mostly magnetite-hematite-quartz facies that form mineralization typical of the Lake Superior deposit type.

Cataford said operations continue to improve, as they have worked through any emerging hiccups. “April has been our best month yet — we’ve produced way over budget and under our operating costs.”

In the coming weeks, the company plans to release a feasibility study for expanding Bloom Lake, which would double its nameplate capacity to 15 million tonnes per year, and leverage the infrastructure Cliffs left behind.

On the Toronto Stock Exchange, Champion shares sell for $2.92 apiece in a 52-week range of 89¢ to $3.10. The company has a $1.26-billion market capitalization and $200 million in cash.