Champion Iron Limited

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. If at any time during this call you require immediate assistance, please press star zero for the operator. This call is being recorded on Friday, January 27, 2023. I would now like to turn the conference over to Mr. Michael Mercotte. Please go ahead, sir.

Thank you, operator, and good morning, everyone. Thank you, everybody in Australia, especially for dialing in on a long holiday period in the middle of the night. I'd like to thank everybody for joining us to discuss the third quarter results of our fiscal year 2023. I'd also like to direct people on this call to a presentation that management will be referring to, which is already posted at championiron.com under the events and presentation section. I'd also like to remind people that some of the matter will be discussed during the call. They contain forward-looking statements, risks, and assumptions. Also, 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 Catterford, our CEO, Alexandre Bello, our COO, and Danal Tamblay, 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.

Hi, thanks, Michael. Thanks, everyone, for joining in. I'm 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, one on the Phase 2 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 tons at a cash cost of $76 per ton and generated revenues of $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 and 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 returns 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 a cultural and diversity training session with our First Nations partners of Waxhap-Manitanam. 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 Waxhap community to help work with our partners in the future. Also, we had the newly elected officials of the Washtenaw Band Council visit Root Lake, again furthering our partnership and collaboration with the First Nations. If we turn towards the industry, in 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 Point Noir to pick up the Bloom Lake material during the quarter. We turned to operations, so very happy to be able to declare that our phase two is now at commercial production, one of the highlights for the quarter. We produced close to 3 million tons 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 ton 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 positive from the quarters, we now know both plants are able to operate at the full main plate capacity. Now we just need to get the periphery systems and the mine to be able to supply those two plants so we could get to our full main plate production. In terms of financial highlights, we had revenues of $350 million for the quarter. We'll be able to run through that, but a 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 ton 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 main plate 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-plan shutdown in Abdul 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 ton 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 have brought up 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 costs, 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 as phase one, and we get the site at nameplate capacity. If we look at our sales, as we mentioned, well, 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 U.S. in the quarter, which translates to about $1.4 U.S. per ton sold in the third quarter. What we do see, though, is that we have about 1.7 million tons during the quarter that are associated to a price that we booked at $129 per ton. Those tons are on the water right now. And depending where the iron ore price comes to once we get out of the Chinese New Year, if the price remains where it is today, we could expect a positive original 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 tons at $126 per ton 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 tons actually land to our clients' facilities. One of the negatives during the quarter is the amount of tons that were actually sold. So we sold less tons 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 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 started back up following a sudden halt like a power failure. We don't expect that to be a recurring issue. 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 corridor, so the main differences There's a change in working capital, a portion of that due to we did not receive payments for some of the vessels that left at the end of the quarter, which we've since received. And 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 $51 million. and also invested in our operations roughly about $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 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 tons 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 CAMI feasibility study. So that's ongoing right now. And also advancing our feasibility study for the pellet plant facility in Point Noir. 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. It's a project where we expect to produce roughly about 7.5 million tons 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 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 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 of 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 of 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 US. The contingencies for this are roughly about $56, $57 million, which are included in the $350 million. So when you look at the operating costs of roughly about $7 US per ton and the potential premiums in the market in the order of magnitudes today of roughly $25 to $30 per ton, 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 materials. 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. So 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 $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 gonna 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 2 plant, delivering the findings also of our feasibility study for direct pellet feed 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%. Very excited about this quarter, and I'll now turn it over to the questions from our friend, the analyst.