This penny stock is counting on the quality of the deposits in one mine which is set to re-open in two months.
In addition to high quality iron ore, the mine has several advantages, including access to major shipping lanes. But the long-range success of the venture will depend on higher prices for iron ore.
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CHAMPION IRON COMPANY (symbol CIA on Toronto; www.championiron.com) is an iron development and exploration firm, focused on developing its iron resources in the province of Quebec.
The company acquired its main asset, the past-producing Bloom Lake iron-ore mine, in April 2016 for $10.5 million. It also assumed $42.8 million in debt.
In 2011, the previous owner, Cliffs Natural Resources (symbol CLF on New York), made a disastrous acquisition in paying $4.9 billion U.S. to buy the mine from Consolidated Thompson Iron Mines. That year, iron ore prices peaked at $190 U.S. per tonne, then gradually sank below $40 per tonne by December 2015. Altogether, past owners invested almost $3.0 billion U.S. on mine development and infrastructure.
Bloom Lake is now owned 63.2% owned by Champion. Government-owned Ressources Quebec holds the remaining 36.8% stake in the site, plus a 10% interest in Champion.
Penny Stocks: Chinese demand is key to the price of iron ore
The partners have raised $350 million in financing to reopen the Bloom Lake mine. That includes about $51 million from the Quebec government and a $100 million loan U.S. from the Caisse de depot Quebec pension fund manager. Sprott Resource Lending has also agreed to provide $80 million U.S. in the form of a five-year loan. The mine is slated to re-open in March 2018.
The mine has access to the port at Sept-Iles, which can handle the large ships needed to ship the ore to customers, as well as a railway to transport the ore to the port.
The key to the success of the mine ultimately rests on the price of iron ore. It is currently about $75 U.S. a ton, and a number of forces at work could keep prices low.
China is actively slowing steel output to cut pollution. That will result in less demand for iron ore. The Asian country consumes more than two-thirds of the iron ore on the market and produces as much steel as the rest of the world combined. At the same time, global supply of iron ore remains high. Australia and Brazil, the world’s two biggest producers and exporters of iron ore, are both expected to raise exports in 2018. This includes a plan by global miner Vale (symbol VALE on New York) to push up production at its giant S11D iron mine in Brazil.
Partly offsetting those negative factors is the high quality of ore from the Bloom Lake deposit. It commands premium prices (in China and elsewhere), because high-quality ore generates less pollution. As well, Champion has strong support from the Quebec government.
TSI Network recommendation: Champion Iron Company is okay to hold, but only for highly aggressive investors.
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