On the Road: Champion Iron

December 2023

 

The Pembroke investment team recently had the opportunity to visit Champion Iron’s Bloom Lake mine, located at the southern end of the Labrador Trough, north of Fermont, Quebec. This world-class district has been a prolific producer of iron ore since 1954. The Bloom Lake deposit is high grade, with low impurity, and has access to hydroelectric power and transportation infrastructure. It sets an industry-leading standard for carbon intensity per tonne produced.

Since our investment in September 2022 at a share price of $4.60, the company has made significant progress on its growth projects. The commissioning of Champion’s Phase II expansion project, which aims to double annual production to 15 million tonnes per year, is almost complete, on time and on budget.

Context

Since 2011, the mine has changed ownership three times in a highly volatile iron price environment. The previous owner, Cleveland Cliffs, faced operational challenges that resulted in the company filing for bankruptcy. Despite significant efforts and capital injections, operations were unable to achieve satisfactory production levels, particularly as iron ore prices fell to almost $70 per tonne.

In 2016, a new experienced management team led by Michael O’Keeffe took control of the mine and leveraged the previous owners’ capital investment, totalling $3.6 billion in sunk costs. Champion committed an additional $325–350 million to recommission the operations in February 2018.

By optimizing the mine plan, improving recovery rates and significantly reducing production costs per tonne, the company has achieved a higher level of commercial production (i.e., 7.4 million tonnes per year), with an improved cost profile. Following the successful restructuring of operations and the beginning of an expansion phase aimed at doubling annual iron ore production, Pembroke initiated its investment in the company.

Critical Minerals Advantage and Sustainable Development

Iron ore is the primary raw material for steel production, which in turn is widely used in transition technologies, such as electric vehicles, solar panels and wind turbines. However, steelmaking is an energy-intensive process that contributes between 8 and 10% of global CO2 emissions. Two approaches are being considered to reduce the carbon footprint of the steel industry.

1. Using high-quality iron ore in blast furnaces, which would reduce emissions by 10%.
2. Switching to electric arc furnaces, which require direct reduced iron, i.e., higher purity iron ore. This process could significantly reduce emissions, producing steel with approximately 50% of the emissions compared to the traditional steel making method.

To meet carbon neutrality targets, several governments are subsidizing steel producers to encourage them to switch from blast furnaces to electric arc furnaces. The market share of electric arc furnaces is expected to increase from 5% to 25% by 2050. However, the availability of high-purity iron ore is constrained and, due to this significant market deficit, high-quality iron ore material is priced at a structural premium. Champion is well positioned to benefit from the secular demand for high-grade iron ore, which only a few global suppliers can produce.

Opportunities

This brings us to the company’s future growth initiatives.

• High-grade ore: planned investments to further improve the quality of the iron ore, increasing the purity from 66.2% to 69%, allowing the company to capture a greater competitive value in the processing chain.
• Kami Project: an iron ore deposit with similar geological characteristics to Bloom Lake, strategically located near accessible rail and port infrastructure, just a few kilometres southeast of Bloom Lake. This project is expected to increase production by 8 million tonnes per year.

The energy transition is a long-term challenge requiring significant investment and we are pleased to support Champion as a key mineral supplier. Our confidence is underpinned by the company’s track record of execution, led by an experienced, focused management team, with a prudent approach to capital management.

Our “boots on the ground” approach has provided valuable insights, allowing us to gain a deeper understanding of the company’s operational progress, expertise and strategic access to infrastructure, and of the family culture that permeates the various levels of the organization. We remain confident in the company’s strategic positioning as a critical supplier in the green transition.

 

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