Champion Iron (ASX:CIA) Q2 2027 Earnings Call

0:00 Good morning, ladies and gentlemen, and welcome to the Champions Q2 results of the financial year 2027 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 Thursday, October 29, 2026. I would now like to turn the conference over to Michael Marcotte, Chief Financial Officer. Please go ahead.

0:40 Thank you, operator, and thank you, everyone, for joining this call. Before I turn it over to our speaker, I'd like to highlight that throughout this call, we'll be making forward-looking statements. If you would like to read about our forward-looking statement of risk and assumptions, please visit our website at championiron.com and our MD&A. We'll also be using a presentation for this webcast, which is available under the Investor tab at the website. Joining me here for this call includes many of our executives. David Catterford, CEO, will do the formal presentation. Our chairman, Michael O'Keefe, will do closing remarks. And I'm also joined by Alexandre Bello, our COO, and other executives. With that, I'll turn it over to David.

1:21 Hi, thanks, Michael. Thanks, everyone, for being on the call. So if we dive into the fiscal year 2027 second quarter highlights, we managed to produce roughly about 3.9 million tons during the quarter, sold just shy of 4.5 million tons during the quarter as well. Cash sat at the end of the quarter at roughly around $267 million. In terms of operational and sales highlights, so if we look at the highlights for this quarter, I mean the increase of 35% quarter over quarter on the sales were driven not only by Bloom Lake but also by Ranner Gruber, so that managed to wind down a portion of the inventory. Also completed the inaugural commercial shipment of our DRPF product during the quarter, so our first vessel that left the port and that has now arrived at our client's facilities.

2:10 for this new, very high-grade product. Turning to community governance and sustainability, so we continue to work closely with our local communities and First Nation partners, so did quite a lot of work during the last quarter to continue to support the various organizations near our operations. If we dive into the actual operations of Bloom Lake and Rana Gruber, starting with Bloom Lake, so in terms of the results of the mine, So we managed to produce roughly about 3.3 million tons in a quarter that had two major shutdowns for plant number one and plant number two, and also a major shutdown in our flotation plant. Also continued commissioning activities at our DRPF project, make sure that we can get the plant as quickly as possible in commercial production.

2:58 Slight decrease on a recovery that is explained mostly due to the fact that we are now commissioning the flotation plant. and when you look at the actual operations in terms of the mine, so the mine is very healthy with a lot of waste material moved, strip ratio of roughly about 1.2, and the head grade at the mine of roughly about 30%. In terms of financial results, so cash cost at the mine, about $60 Canadian per ton, land transport lower, compared to last quarter. Last quarter was roughly about $30 per ton, this quarter about 24, mostly explained by the fact that we've diluted down the fixed cost at the port by a higher amount of tons sold.

3:46 In terms of our all-in sustaining cost, also reduced compared to last quarter as we slowly exit seasonal work, and this will continue in the next quarters, and also the higher tons that were sold. I think the major highlight for us is really the work that's being done on the flotation plant. So the project was completed within the $500 million budget and we're continuing the ramp up, still expect to be able to complete the ramp up to be in full commercial production at the end of the 27 fiscal year. The volumes, if you look quarter over quarter, were fairly flat, but that's due to the fact that we had a major shutdown within our flotation plant. The positive is really the fact that we're hitting the planned quality not only on the iron ore units but also on the contaminant side.

4:39 We secured additional test cargoes during the quarter and also some commercial agreements for this material going into Q3 and going into Q4. So very happy with the progress that's being done on this flotation plant and especially the segment that we're entering which is the DR market. Turning to Randall Gruber, so if you remember last quarter, there was quite a bit of headwind in terms of production and also sales, but that really turned around with an increase of about 40% quarter over quarter in terms of production and about 180% in terms of the actual sales. So that helped reduce the Alden sustaining cost at Randall Gruber to around $97 Canadian dollars per tonne.

5:26 In terms of the consolidated results, a little bit of noise in terms of our gross realized price. This is not due to the fact that we're getting hit with much larger discounts. It's really a timing issue during the quarter. So if you look at the last quarter, we had roughly about 3.4 million tons still on the water as at September 30th. And that really impacted us because if you look at the forward curve in terms of iron ore price, we had to book those tons at $103 per tonne. 103 is significantly lower than the actual average P65 average during the quarter. So that's why you see a big discrepancy between the actual quarter average and the gross realized price. Now, obviously, those tons, we have not settled on the price yet.

6:13 So we will settle the price once the material gets to our clients' facilities. And we'll see how that impacts the provisional pricing for the next quarter. We were also hit by higher freight costs, roughly about $40 per ton during the quarter. We've since seen those prices come down, but during the quarter we did see a larger impact in terms of freight. Again, when you look at those results, I think it really highlights why this flotation plant was important for us, because the last thing we want going forward is to sell all those tons into China and be impacted significantly when there are swings on the C3 index. So by selling closer to home to Europe, North Africa, Middle East, we will be able to be less impacted by those freight swings in the future.

6:59 In terms of consolidated financial highlights, quarterly revenues are about $400 million and adjusted BDA of $23 million for the quarter. In terms of cash, when you look at the company quarter over quarter, roughly one from about $200 million to $214 million during the quarter, so still very well positioned for the next few quarters. In terms of balance sheet and liquidity position, so the company is still in very good condition in terms of liquidity, so we have access to around $800 million of assets cash and undrawn loans. We did go see our financial partners. I mean, when you look at the financial partners that we have that have supported us for the past 10 years, went to see them to amend the financial covenants under the senior secured credit facility just to provide additional flexibility during the current market environment and maintain our access to that liquidity.

8:02 If we turn towards the market, If you look at the last quarter, pretty abnormal when you look at the C3 freight compared to the actual P65 index. Typically what we see is iron ore and freight being very well correlated. When iron ore price goes up, so does shipping and vice versa. What we saw in the last quarter is an abnormal disconnect between the C3 index and the P65 index. So C3 went up, mostly due to elements that... are a little unrelated to the actual iron ore markets. We saw a lot of tons of bauxite leave Guinea to be able to access the Asian market. There was a lot of weather elements in the Pacific that created congestions at various ports in Asia that also reduced the amount of C3 vessels that were available. A little bit more coal as well that was transiting on the seaborne market due to mine closures in China following accidents last year.

9:02 But when you look at a lot of those elements, well, they seem to be changing in the other direction. So the weather has been better now in Asia and more importantly in the Pacific. And we've also seen more mines reopen in China on the coal side, which should relieve some pressure on the actual C3 index. Very easy to see. see the increase on the C3 and just think that it's due to the conflict in the Middle East, but the conflict in the Middle East accounts for a portion of this increase. The other elements account for the rest. When you look at the market in general, if you look at the forward curves on C3 over the next year and the next two years, the market does expect that that will turn, and we've already started to see the C3 index come down from the peaks that we saw in the recent weeks. One interesting element as well when you look at our strategy to be able to make DR material, I think it was definitely the right strategy because when you look in the last year, the DR pellet premium is pretty much one of the only commodities that has risen close to 50% in just 12 months.

10:12 So when you look at the DR pellet premium rose from around $40 US per ton to close to $60 US per ton. in the past year, and that's directly the market that we're targeting. I do think it's the right strategy, a bit of headwind when you look at the pricing environment, the fact that we're finalizing the ramp-up of the flotation plant, but I think we've built the right foundation to be able to be in the right segment of the iron ore space. Just to close on where our company sits today. When you look at our company, we've invested quite significantly in the past years to create the foundation we have today. Over $6.7 billion have been invested at Bloom Lake to be able to create this foundation now that will allow us to enter the DR market and make sure that we benefit from this higher premium segment. But when you look at the sort of multi-year capex cycle, this is now behind us.

11:10 So we've delivered on our plants. We've delivered on our flotation plant. The construction is finalized. we're just finalizing the ramp up but all of this investment is behind us and now we'll be able to start benefiting from these extra premiums in the coming quarters. So with that being said, I'd like to thank all of our staff for all of the work that they've done to allow us to navigate through these more challenging times and I'll turn it over to the Q&A portion of the call. Ladies and gentlemen, we will now begin the question and answer session. If you would like to ask a question, you will need to press star, then the number one on your telephone keypad. And if you would like to withdraw your question, please press star, then the number two. Again, that will be star, then the number one on your telephone keypad to ask questions.

11:59 First question comes from Alexander Pierce from BMO. Please go ahead.

12:05 Hi, David. You mentioned in your remarks that you preemptively obtained some of the waivers on some of the debt facilities. Can you just give us a little bit more detail on some of the key metrics that you have now in place with those?

12:21 Yeah, maybe I can take this one, Alex. This is Michael. And I just want to make sure to reiterate, we sit on very strong financial partners. And I know we've said this many times, but The government of Canada through EDC has been one of our longest backers and they're heavily represented in our financial structure. Investissement Québec, Québec government directly, Caisse des dépôts, FTQ. So what we did here is we did a preventive amendment to our financial structure just to make sure that if the situation continues that we have for some protection. And let me make this clear. We are in compliance for a senior secured facility currently. But what we did is that we secured relief from our financial covenants. So for a period of time up to mid-2027 calendar to make sure that if the ratios don't work, that we can go through the cycle and maintain access to liquidity if we need those. But again, we're sitting on strong cash.

13:19 We're sitting on strong inventories. coming out of a potential relief in mid-27, if we get there, then we would have new financial covenants that are forward-looking and wouldn't look back to the current low cycle, if you want to call it that. So hopefully that provides some color, but we're very happy to lean on our partners to be able to provide these potential relief if we need those.

13:43 Okay, thanks, Michael. Yeah, I mean, it would be good to know what the covenants are. I think there's lots of questions in the market at the minute. Even if you're well within what's required, I think it'd be good to get those. And maybe if I can ask a separate question just around, obviously, cash costs with the DRPS ramp up. I just wondered if you could just comment on how you're seeing costs shaking out with that ramp up and are there any obvious levers that you're seeing at the minute, opportunities to improve things within that part of the processing plant?

14:19 Yeah, thanks for the question. So when you look at the cost structure, so obviously we've always invested everything that was required to be able to not only keep the pit healthy but also all of our infrastructure in extremely healthy condition. That allows us to potentially push out certain investments in this current more challenging time. A lot of these things we started to implement during the summer, but it takes a few months to be able to actually see the results. So we should be able to see in the coming future and in the coming quarters that impact on the reduction of costs that we've started to work on. That's mainly at the mine side, on our sustaining costs as well, that we've now hit more the – the high seasonal portion.

15:05 2.3 and 2.4 are typically quarters that have lower sustaining costs just due to the winter element, but also we've done quite a lot of changes to make sure that we can keep that sustaining lower to make sure that we can navigate through these different times. So a lot of work that's being done at the mine to be able to reduce costs and also on the sustaining part. Okay, thanks. Next question comes from Craig Hutchinson from TD Cohen. Please go ahead.

15:43 Hi, guys. Can you just comment on how the DRPF ramp is going? Like, how kind of close are you guys getting to design? I think you guys are going to allow yourself till early next year, if I recall. But just how's that going? And you kind of talked about the DR premiums you're seeing in the market. Any kind of commentary in terms of what you're seeing for that product?

16:06 Yeah, thanks for the question, Greg. So when I look at the actual ramp up, I think it's going very well. So even if you see flat production quarter over quarter, it's mainly due to the fact that we had a major shutdown in the flotation plant. It was the first one as well. If you go back to when we started phase one and started phase two, the first shutdown always takes a bit more time just because it's the first time that we're actually maintaining all of the equipment. But as you can see in the results now, those shutdowns for plant number one and plant number two are much, much more efficient. So we're going to see the same thing on the flotation plant. So when you look at the actual design, we're hitting the quality that was expected. We're hitting the volume that was expected as well. So all of our major equipment, we've demonstrated that it can operate at or over design. So all of that is going extremely well.

16:54 And you're going to start to see more and more sales in the coming months slash quarters in terms of our results. Even on the test cargoes, we're getting significant premiums over and above our typical 66% material. And when you look at what's happening in the market now, so we can see in Germany they're still moving ahead with DRI facilities. So two facilities are being built right now. One will be delivered next year. The other one in 2028. So obviously that's great potential clients for us. North Africa as well so we're continuing the work and being able to send test cargoes same in the Middle East so even if Bahrain and UAE are currently shut down for us due to the Hormuz Strait we still have access to Oman in terms of potential so there's quite a lot of demand for our type of material and I think the biggest surprise for most of the clients is that we're able to sell full cargoes at the announced quality in terms of contaminants in iron ore units.

17:55 So I think there was a bit of skepticism in the past that we would be able to reach such a high-grade type material. Now that that's going to be behind us, well, we're going to start to see the benefits of that increased quality in terms of the pricing.

18:11 Okay, thank you for that. And then just on a round of Gruber, what do you guys need to seed to make that operation free cash flow positive? I think it's lost money a couple quarters in a row here and is burning cash. What do you need to see from an operational perspective, assuming iron ore prices are flat kind of going forward?

18:27 Yeah, there's three things that impacted Rana Gruber. Obviously, the fuel price, the C3 index. So they're the two major elements that we've seen an impact. Iron ore price, it's a little bit lower as well. But when you look at the C3 and the fuel, they're the two main elements that have been impacting the Rana Gruber site right now.

18:50 Okay, so prices sort of stay the same operationally, like we can kind of assume a kind of similar quarter-over-quarter performance kind of thing.

18:58 Yeah, we still see areas where we can continue reducing costs at Rana Gruber as well. I mean, we're doing the same kind of work over there than we're doing at Bloom Lake. I mean, if you take Rana Gruber as an example, they were able to go through the 2015-2016 cycle and continue to operate during those times. So, I mean, we're When you look at profitability today in the market, if you take the C3 index and adjust it for inflation or an ore price, we're pretty much at levels that are similar to that 2015 and 2016. It was not the easiest time, but they managed to go through it. I would expect that we're going to continue to work on reducing costs at the operations there and be able to navigate through these more challenging times.

19:47 Thanks, guys. Again, if you would like to ask a question, please press star then the number one on your telephone keypad. Your next question comes from Stephen Iannou from ADB Cormorant. Please go ahead.

20:08 Thanks, operator. Thanks, guys. Good to see the inventory come down at the Louvre Lake. Just curious, is it safe to assume now that some of the logistical rail and port logistics are behind us now and things are operating well on that front?

20:23 Yeah, in terms of logistics, things are going much better. So obviously, we're getting some help with the productivity of other operations in the region. So that's relieved pressure also on the rail. But even before that... when the other operations were doing fairly well, we still saw that we were destocking material. So I think those hiccups that when we started phase two, they're behind us, and now the logistics side is doing much better. If you look at September, September was a record month in terms of loading vessels at the port, so everything down at the set-down area and at the actual port operations has been working extremely well. when I look at the logistics side definitely it's something that is in the right trend and what's interesting as well when you look at the actual logistics is if you look at the sentiment of the federal government and certain provincial governments in terms of the high-grade iron ore sector in Canada it's extremely positive so you've seen announcements by the federal government that are supporting initiatives at the port to increase the tonnage in the future So that's definitely going to help not only on potential volume, but it's going to help also on pricing in the actual region. So there's quite a lot of support in the region to be able to improve the overall logistics chain to make sure that this can not only operate in a good way in the future, but can also accommodate more volume in the future.

21:52 Okay, great, great. Thanks very much, guys. There are no further questions at this time. I'll turn the call back over to Michael O'Keefe.

22:08 Thank you very much, and thank you, David and team, for all your work in difficult times. It's stressful for everyone, but thankfully we've got a great team of people to be able to work our way through this process. But I think the best thing is to reflect back, and people have asked me, would you still make the same decision to go to high-grade and spend that capital to get to where we are now? And the answer is most definitely yes. Timing's not always the best. However, if all of the issues in Iran at the moment and the issues with fuel costs have sort of happened earlier, let's say a year ago, I think we'd be, well, I'm sure we'd be in a much more difficult situation than what we are today.

23:02 If I prefer this to happen, you know, I'd say in a year's time because by then, all these test cargos that Dave is talking about would be with the off-takers. They would be testing the material and our contracts would be in place. And, you know, the great bit of this test for us is that if we were to sell this product tomorrow and if we were to fulfill all the obligations that customers have required, we're probably 130% sold. Now, we know that when it comes time to sell, a lot of those people won't be there, but it's a very good indication of the demand for our product and also the potential premiums we'll get. I think David also mentioned, and we were asked earlier today, how do you see that premium coming to us and how do we measure it?

23:53 We're not going to go out and discuss what our contracts are with everyone, but I think you'll see the price we receive for the product It will gradually increase and that's going to be a great benefit for us. So we're separating ourselves from the market. We don't want to be producing a material that's 62% FE going to a cinder plant, going to a blast furnace. We always do that. We always believe that we need to be in a different situation. Also, with the pricing, you would have seen that there was a lot of spot cargoes that we did, which were into China, which is our worst situation. And that was because we didn't want to commit to long-term contracts into China, which is our worst destination. So, obviously, shipping rates being where they are, it was horrible.

24:46 It was horrible two months ago when we were our C3 cost was something like 40 to 50 US dollars a ton it's now in the 30s but if we were to sit down tomorrow and start looking at 2027 once we know where our tons are finally going even to China we can do contracts for C3 in the 20s so that's a huge difference to what we've been paying it's going to be very beneficial for us The fact that we're looking at site to reduce all the costs that we possibly can, it's a bonus for the group because we have to look at the positive side of this.

25:31 Now, obviously, there's also diesel costs, the excise on diesel for rail. All of those things are worse for the situation at the moment. But what we do have is we have, as David discussed, we have good cash available to us at the moment We do have the support of the federal government, which you might have seen recently, that are bouncing in excess of a billion dollars to the steel industry in Canada, should we require that support. And we do have very good investors with us, including the case to pose. So look, we have the right people, we have the right product, and I see a very great future for our material going into the market.

26:16 Gaining a premium And also a lot of these tons Won't be going to China I do see the freight rates coming off And the demand for our product Into the Middle East And to Europe And North Africa Will be of a premium We're seeing some of the big players in the market who actually can't produce the 69 material, wanting to buy out tons. And you'll see some of these contracts come to light that requires material because they understand the importance of it. So, look, tough period of time at the moment. But, you know, we've been through this when we acquired the assets.

27:01 So these issues are not new to us and we've weathered the storm before and we're in a much better position now because of the support we have, the financing we have and the product that we're going to produce. I hope that the market supports us, and I hope that you see that there is a future for the company, a great future, and thank you all very much for your support, and thank you very much to David and your team. On that note, I'll sign off. Thank you very much. Ladies and gentlemen, this concludes today's conference call. Thank you all for participating. You may now disconnect.