Champion Iron Limited press release

CHAMPION IRON REPORTS RECORD PRODUCTION FOR ITS FY2023 FIRST QUARTER

2022-07-27

TSX - Toronto Stock Exchange · Iron · Aluminium · Manganese · Copper · Zinc · Australia · Production & Operations

Canada NewsWire

Record quarterly production of 2.3M wmt, Net income of $41.6M , EPS of $0.08 and EBITDA 1 of $94.9M ; Bloom Lake Mine Phase II expansion ramping-up as scheduled

MONTRÉAL , July 27, 2022 /CNW/ - Champion Iron Limited (TSX: CIA) (ASX: CIA) (OTCQX: CIAFF) ("Champion" or the "Company") is pleased to announce the operational and financial results for the first quarter ended June 30, 2022, of the financial year ending March 31, 2023 .

Conference Call Details

Champion will host a conference call and webcast on July 28, 2022 at 8:30 AM (Montréal time) / 10:30 PM ( Sydney time) to discuss the results for the first quarter ended June 30, 2022. Call details are outlined at the end of this press release.

Champion's CEO, Mr. David Cataford , said: "Due to the continuous dedication of our workforce and partners, our Company reached another milestone by completing Bloom Lake's Phase II expansion project and delivering record quarterly production results, even with scheduled semi-annual maintenance. With the progress achieved since commissioning the Phase II expansion, we remain confident in meeting our target to reach commercial production by the end of the calendar year, which should positively impact operational costs per tonne as we ramp up the project. In line with our vision to capitalize on the rising demand for high-purity iron ore products, we continue to evaluate several organic growth projects, which would position our Company as a market leader in the green steel supply chain."

1. Highlights

Health & Safety

No serious injuries or major environmental issues reported during the period; COVID-19 prevention measures reduced in line with the Government of Québec's health directives, including ceasing to operate the COVID-19 testing laboratory at the mine site, which remains on standby should it be required in the future; In collaboration with First Nations communities and in accordance with the framework of Towards Sustainable Mining ("TSM") certification, initiated a conservation and biodiversity management program aimed at preserving the local salmon population; Completed the Company's 2021 Sustainability Report, including the Task Force on Climate-Related Financial Disclosure, available on the Company's website at www.championiron.com ; and Declared that National Indigenous Peoples Day will be treated as an occasion for its employees to recognize and honour the culture of First Nations communities.

Financial

Financial results for the three-month period ended June 30, 2022 were negatively impacted by decreasing iron ore index prices, transitional and expected upfront start-up costs to support the Phase II commercial production, and increased costs caused by global inflationary pressures. The economic benefits of the upfront preparation costs should be progressive as Phase II operations gradually ramp up to reach Bloom Lake's revised nameplate capacity of 15 Mtpa; Revenues of $279.3M for the three-month period ended June 30, 2022 , compared to $545.4M for the same period in 2021, were attributable to significantly lower iron ore index prices; EBITDA 1 of $94.9M for the three-month period ended June 30, 2022 , compared to $405.7M for the same period in 2021; Net income of $41.6M for the three-month period ended June 30, 2022 (EPS of $0.08 ), compared to $224.3M for the same period in 2021 (EPS of $0.44 ); Cash flow from operating activities, before changes in working capital items of $79.1M for the three-month period ended June 30, 2022 , mainly reflected the lower gross average realized selling price, compared to $248.4M for the same period in 2021. Net cash flow used in operating activities totalled $32.2M for the three-month period ended June 30, 2022 , representing an operating cash outflow per share 1 of $0.06 , compared to a net cash flow used in operating activities of $12.6M or $0.02 per share for the same period in 2021; Available liquidity 1 of $571.0M as at June 30, 2022 , including $187.1M of cash and cash equivalents and short-term investments, compared to $746.0M as at March 31, 2022 , attributable to working capital build-up in preparation of Phase II operations, mining and income taxes paid which exceeded the actual expense and the dividend payment on June 28, 2022 ; US$400.0M general purpose revolving facility agreement signed on May 24, 2022 (the "Revolving Facility"), used to refinance the previous Phase II credit facility (the "Credit Facility"), providing increased financial flexibility, enabling the Company to lift the restricted cash covenant of $43.7M as at March 31, 2022 and reducing its cost of capital; and Dividend of $0.10 per ordinary share paid on June 28, 2022 , in connection with the results for the financial year ended March 31, 2022 . Additional details on the dividends and related tax information can be found on the Company's website at www.championiron.com under the section Investors – Dividend Information.

Operations

Record production of 2,282,600 wmt of high-grade 66.1% Fe concentrate for the three-month period ended June 30, 2022 , despite the negative impact of unplanned third-party shutdowns and planned maintenance, positively impacted by Phase II's commissioning, compared to 1,936,000 wmt of high-grade 66.3% Fe concentrate for the same period in 2021; Fe recovery rate of 80.2% for the three-month period ended June 30, 2022 , compared to 82.9% for the same period in 2021, due to the commissioned Phase II concentrator's anticipated lower recovery circuit rate before commercial production; and Free on Board ("FOB") total cash cost 1 of $74.0 /dmt ( US$58.0 2 /dmt) (C1) for the three-month period ended June 30, 2022 , compared to $60.1 /dmt ( US$48.9 2 /dmt) for the same period in 2021. Higher total cash cost 1 was impacted by transitional and expected upfront preparation expenditure in anticipation of the Phase II commercial production; unplanned third-party shutdowns and planned maintenance of additional facilities reported over iron ore sales volumes below nameplate capacity during ramp-up of Phase II; and global inflationary pressures.

Growth and Development

Nearing the completion of the feasibility study evaluating the reprocessing and infrastructure required to commercially produce a 69% Fe Direct Reduction ("DR") pellet feed product, which is scaled to convert approximately half of Bloom Lake's increased nameplate capacity of 15 Mtpa; Advancing the Kamistiatusset iron ore project's (the "Kami Project") feasibility study, expected to be completed in the first half of calendar 2023, whereby the project is being evaluated for its capability to produce DR grade pellet feed product; Entered into an acquisition agreement, upon satisfaction of certain conditions, for the Pointe-Noire Iron Ore Pelletizing Facility located in Sept-Îles, Québec (the "Pellet Plant") on May 17, 2022 , and announced that the Company has entered into a memorandum of understanding with a major international steelmaking partner to evaluate the Pellet Plant's recommissioning and its ability to produce DR grade pellets; and Appointment of Mr. Donald Tremblay as the Company's Chief Financial Officer, effective September 12, 2022 .

Phase II Milestones

The Phase II project's first production line was commissioned ahead of schedule in late April 2022 , despite pandemic-related challenges, with the commissioning of the second production line in June 2022 ; Completed the first rail shipments of iron ore concentrate from Phase II on May 3, 2022 , with cumulative production to date comparing favorably to the scheduled ramp-up of production; and Actively working to remove bottlenecks and optimize systems to achieve commercial production as scheduled by the end of calendar 2022 3 .

2. Bloom Lake Mine Operating Activities

| | | Three Months Ended | | | | | | | June 30, | | | | | | | 2022 | | 2021 | Variance | | | | | | | | | Operating Data | | | | | | | Waste mined and hauled (wmt) | | 5,606,000 | | 4,699,500 | 19 % | | Ore mined and hauled (wmt) | | 6,193,100 | | 5,643,900 | 10 % | | Material mined and hauled (wmt) | | 11,799,100 | | 10,343,400 | 14 % | | | | | | | | | Strip ratio | | 0.91 | | 0.83 | 10 % | | | | | | | | | Ore milled (wmt) | | 6,022,200 | | 5,227,200 | 15 % | | Head grade Fe (%) | | 31.0 | | 29.6 | 5 % | | Fe recovery (%) | | 80.2 | | 82.9 | (3 %) | | Product Fe (%) | | 66.1 | | 66.3 | — % | | Iron ore concentrate produced (wmt) | | 2,282,600 | | 1,936,000 | 18 % | | Iron ore concentrate sold (dmt) | | 2,013,900 | | 1,974,700 | 2 % | | | | | | | | | Financial Data (in thousands of dollars) | | | | | | | Revenues | | 279,321 | | 545,408 | (49 %) | | Cost of sales | | 169,407 | | 120,846 | 40 % | | Other expenses | | 15,605 | | 14,560 | 7 % | | Net finance costs | | 4,190 | | 4,387 | (4 %) | | Net income | | 41,554 | | 224,339 | (81 %) | | EBITDA 1 | | 94,930 | | 405,739 | (77 %) | | | | | | | | | Statistics (in dollars per dmt sold) | | | | | | | Gross average realized selling price 1 | | 190.4 | | 279.7 | (32 %) | | Net average realized selling price 1 | | 138.7 | | 276.2 | (50 %) | | Total cash cost (C1 cash cost) 1 | | 74.0 | | 60.1 | 23 % | | All-in sustaining cost 1 | | 93.5 | | 72.6 | 29 % | | Cash operating margin 1 | | 45.2 | | 203.6 | (78 %) |

Phase II Commissioning

During the three-month period ended June 30, 2022, the Company initiated and advanced the commissioning of Phase II. At the end of April 2022, the Company commissioned the first of two production lines of the Phase II plant and completed its first rail shipments on May 3, 2022. In June 2022 , the Company successfully started the second line, reflecting the normal commissioning curve of a new facility. As at June 30, 2022, both lines were in service, positioning the Company to achieve commercial production as scheduled by the end of calendar 2022 3 .

Operational Performance

In the three-month period ended June 30, 2022, 11,799,100 tonnes of material were mined and hauled, compared to 10,343,400 tonnes during the same period in 2021, an increase of 14%. The increase in material movement was enabled through the utilization of additional equipment compared to the same prior-year period, offset by a longer haul cycle as material sourced from different pits, including those that deepened with mining activities over time, contributed to a longer haul cycle year-over-year. The current strip ratio is in line with the mine plan.

The iron ore head grade for the three-month period ended June 30, 2022, was 31.0%, compared to 29.6% for the same period in 2021. The variation in head grade is attributable to the presence of some higher-grade ore being sourced and blended from different pits, which was anticipated and is in line with the mining plan and the LoM head grade average.

The Company's average Fe recovery rate for the three-month period ended June 30, 2022 was negatively impacted by the anticipated lower recoveries during the commissioning of the Phase II concentrator. The global Fe recovery rate is in line with Management's expectations at this stage of the Phase II commissioning. The Company expects to reach a stable Fe recovery circuit when Phase II achieves commercial production, anticipated to occur by the end of calendar 2022.

During the three-month periods ended June 30, 2022 and 2021, operational activities were impacted by a scheduled semi-annual maintenance program. During the three-month period ended June 30, 2022, Bloom Lake produced 2,282,600 wmt of 66.1% Fe high-grade iron ore concentrate, an increase of 18%, compared to 1,936,000 wmt of 66.3% Fe during the same period in 2021. The Company achieved record production despite semi-annual scheduled maintenance, in connection with the commissioning of the second plant at the mine site. While the newly commissioned Phase II project's production compares favourably to the scheduled production volumes, production in the period was negatively impacted by unplanned third-party shutdowns. Higher throughput and head grade also contributed to higher production volumes, despite a lower global recovery. The plants processed 6,022,200 tonnes of ore during the three-month period ended June 30, 2022, compared to 5,227,200 for the same prior-year period. The throughput for the period was positively affected by the higher mined ore availability and the commissioning of Phase II operations.

3. Financial Performance

A. Revenues

During the three-month period ended June 30, 2022, 2,013,900 tonnes of high-grade iron ore concentrate were sold at the CFR China gross average realized price 1 of US$149.6 /dmt, before freight and other costs and provisional pricing adjustments, compared to US$228.3 /dmt for the same prior-year period. The decrease in gross average realized selling price 1 reflects lower index prices during the three-month period ended June 30, 2022, compared to the same prior-year period. Despite lower index prices, the gross average realized selling price 1 of US$149.6 /dmt represents a premium of 8.5% over the benchmark IODEX 62% Fe CFR China Index ("P62") price for the period, compared to a premium of 14.2% for the same period in 2021.

The gross average realized selling price 1 of US$149.6 /dmt was lower than the IODEX 65% Fe CFR China Index ("P65") average price of US$160.3 /dmt for the period due to the negative impact of sales at a determined price based on the average forward price of US$138.4 at the expected settlement date for 667,600 tonnes which were in transit at the end of the period, and due to the negative impact of sales based on backward-looking iron ore prices, when prices were slightly lower than the P65 index average for the period.

The average C3 Baltic Capesize Index for the three-month period ended June 30, 2022, was US$30.2 /t compared to US$26.2 /t for the same period in 2021, representing an increase of 15%, which contributed to higher freight costs in the three-month period ended June 30, 2022, compared to the same prior-year period. The elevated freight rates for the period can partially be attributed to the rising fuel prices experienced since the beginning of the conflict in Ukraine . Simultaneously, increased iron ore exports from Brazil and port congestions in China caused by COVID-19 lockdowns further influenced rising freight rates.

Provisional pricing adjustments on previous sales, which were directly correlated to the decrease in the P65 index during the quarter contributed to decreasing the net average realized selling price 1 . During the three-month period ended June 30, 2022, the final price was established for the 691,100 tonnes of iron ore that were in transit as at March 31, 2022. Accordingly, during the three-month period ended June 30, 2022, net negative provisional pricing adjustments were recorded as a decrease in revenues for the 691,100 tonnes, representing a negative impact of US$6.4 /dmt for the period, compared to a positive impact of US$25.3 /dmt for the same period in 2021.

After taking into account sea freight and other costs of US$34.4 /dmt and the negative provisional pricing adjustment of US$6.4 /dmt, the Company obtained a net average realized selling price 1 of US$108.8 /dmt (CA$138.7/dmt) for its high-grade iron ore delivered to the end customer. Revenues totalled $279,321,000 for the three-month period ended June 30, 2022, compared to $545,408,000 for the same period in 2021, reflecting the lower net average realized selling price 1 partially offset by the positive impact of foreign exchange rates and slightly higher sales volume.

B. Cost of Sales

Cost of sales represents mining, processing, and mine site-related G&A expenses as well as rail and port operation costs. It also includes specific and incremental costs related to COVID-19 and, starting in April 2022 , it includes Bloom Lake Phase II start-up costs incurred after the commissioning. These start-up costs include mainly abnormal operational costs attributable to the facility not having reached the normalized level of output. For the three-month period ended June 30, 2022, the cost of sales totalled $169,407,000 , compared to $120,846,000 for the same period in 2021.

During the three-month period ended June 30, 2022, the total cash cost 1 or C1 cash cost 1 per tonne, excluding specific and incremental costs related to COVID-19 and Phase II start-up costs, totalled $74.0 /dmt, compared to $60.1 /dmt for the same period in 2021. The total cash cost 1 for the three-month period ended June 30, 2022, was negatively impacted by global market inflation. The higher cash cost 1 for the period was attributable to record prices for fuel and explosives, and cost increases in key supplies and other consumables, air transportation, food, as well as rail and port operations. Higher labour costs and longer haul cycle times associated with the current mine plan also contributed to a higher cash cost 1 during the period. Unplanned third-party shutdowns, planned maintenance of additional facilities and increased headcount and subcontractor usage in relation to the commissioning of the Phase II project also contributed to a higher cost of sales for the period.

C. Net Income & EBITDA 1

For the three-month period ended June 30, 2022, the Company generated net income of $41,554,000 (EPS of $0.08 ), compared to $224,339,000 (EPS of $0.44 ) for the same period in 2021. The net income was mainly affected by lower gross profits associated with a lower P65 index average price, higher sea freight and other costs during the period, as well as higher cash cost 1 , compared to the same prior-year period. The decrease in net income is partially offset by lower current income and mining taxes as a result of lower operating earnings.

For the three-month period ended June 30, 2022, the Company generated EBITDA 1 of $94,930,000 , representing an EBITDA margin 1 of 34%, compared to $405,739,000 , representing an EBITDA margin 1 of 74% for the same period in 2021. The decrease in EBITDA 1 period-over-period is primarily due to lower revenue from lower net average realized selling prices 1 and higher cash cost 1 .

D. AISC 1 and Cash Operating Margin 1

During the three-month period ended June 30, 2022, the Company realized an AISC 1 of $93.5 /dmt, compared to $72.6 /dmt for the same period in 2021. The variation relates to higher total cash costs 1 , sustaining capital expenditures and additional G&A expenses, partially offset by the slightly positive impact of higher volumes of iron ore concentrate sold. The Company is actively working to ensure everything is in place to support Phase II operations, including hiring additional personnel and incurring the necessary sustaining capital expenditures. This negatively impacted costs during the three-month period ended June 30, 2022, as sales related to Phase II operations gradually increased, while upfront preparation-related costs aim to support Bloom Lake's revised nameplate capacity.

Deducting the AISC 1 of $93.5 /dmt from the net average realized selling price 1 of $138.7 /dmt, the Company generated a cash operating margin 1 of $45.2 /dmt for each tonne of high-grade iron ore concentrate sold during the three-month period ended June 30, 2022, compared to $203.6 /dmt for the same prior-year period. The variation is mainly due to a lower net average realized selling price 1 for the period.

4. Exploration Activities

During the three-month period ended June 30, 2022, the Company maintained all of its properties in good standing and did not enter into any farm-in/farm-out arrangements. During the three-month period ended June 30, 2022, $2,132,000 in exploration and evaluation expenditures were incurred, compared to $743,000 for the same period in 2021. During the three-month period ended June 30, 2022, exploration and evaluation expenditures mainly consisted of costs associated with resource development and drilling, work related to updating the Kami Project feasibility study and claim renewal fees. During the three-month period ended June 30, 2022, 3,637 metres of diamond drilling was completed on the Bloom Lake property. Drilling at Bloom Lake was undertaken mainly for the conversion of resources. In the comparative period, exploration and evaluation expenditures mainly consisted of costs associated with minor exploration work and preliminary work related to updating the Kami Project feasibility study.