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Edited Transcript of CIA.AX earnings conference call or presentation 30-Oct-19 12:30pm GMT

Q2 2020 Champion Iron Ltd Earnings Call

Nov 5, 2019 (Thomson StreetEvents) -- Edited Transcript of Champion Iron Ltd earnings conference call or presentation Wednesday, October 30, 2019 at 12:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* David Cataford

Champion Iron Limited - President, CEO & Director

* Michael Marcotte

Champion Iron Limited - VP of IR

* William Michael O’Keeffe

Champion Iron Limited - Executive Chairman

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Conference Call Participants

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* Craig Hutchison

TD Securities Equity Research - Research Analyst

* Dalton Baretto

Canaccord Genuity Corp., Research Division - Analyst

* Gordon Lawson

Paradigm Capital Inc., Research Division - Senior Research Associate

* Jacques P. Wortman

Laurentian Bank Securities, Inc., Research Division - Director of Research & Mining Analyst

* Lucas Nathaniel Pipes

B. Riley FBR, Inc., Research Division - Senior VP & Equity Analyst

* Michael Emery

Euroz Securities Limited, Research Division - Resources Analyst

* Orest Wowkodaw

Scotiabank Global Banking and Markets, Research Division - Senior Equity Research Analyst of Base Metals

* Scott Schier

Clarksons Platou Securities, Inc., Research Division - Analyst

* Stefan Ioannou

Cormark Securities Inc., Research Division - Analyst

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Presentation

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Operator [1]

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Good morning. My name is Joanna, and I will be your conference operator today. At this time, I would like to welcome everyone to the Champion Iron Limited Second Quarter Results Conference Call. (Operator Instructions). Mr. Michael Marcotte, Vice President of Investor Relations, you may begin your conference.

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Michael Marcotte, Champion Iron Limited - VP of IR [2]

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Thank you, operator, and good morning, everyone, or good evening for those dialing in from Australia. I'd like to thank everyone for joining us today to discuss the results of our second quarter of the fiscal year 2020. I would like to direct people on the call to the presentation that management will be referring to, which is posted on our website at www.championiron.com under the Events and Presentations section.

I would also like to remind listeners that some of the matters to be discussed today during this call may also contain forward-looking statements. Forward-looking statements include, but are not limited to, items that size our expectations regarding the market price of iron ore, timetables, mining of operation expenses, capital expenditures, guidance and reserve estimates. Such statements discussed today may involve risk and uncertainties. A number of factors and assumptions were made in preparing the statements. Therefore, actual results could differ materially. Accordingly, you should not place undue reliance on forward-looking statements. For additional information with respect to forward-looking statements, risks and assumptions, please consult our most recent MD&A and other filings made with Canadian securities regulatory authorities. These documents are also available on our website.

Champion disclaims any obligations to update or revise any forward-looking statements, except as required by law. I made this cautionary statement on behalf of all the Champion spokesperson, who maybe may address you during this conference call today. Please note that all dollars are referring to Canadian dollars unless otherwise stated.

Joining me today on this conference call include David Cataford, our Chief Executive Officer; Michael O’Keeffe, our Executive Chairman; and Natacha Garoute, our Chief Financial Officer.

With that said, I will now turn the call over to our Executive Chairman, Michael O’Keeffe, followed by our CEO, David Cataford. We'll also hold the call for a Q&A session at the end. Michael?

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William Michael O’Keeffe, Champion Iron Limited - Executive Chairman [3]

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Thank you, Michael, and welcome, shareholders. Before delving into the details of the results, I'd just like to reflect on the company and where we've come in the last 18 months to 2 years and also make mention of the operating performance of the company. And if you look back at that, it's -- I recruited David Cataford into the company and to work with me right through acquiring this asset through feasibility study, commissioning, and now he's had 2 terms as CEO. And I must say, on behalf of shareholders, myself and the board we couldn't be prouder of the performance that David has done with his team and how he stepped up to the role. We went on a worldwide search for a CEO and we chose David, and our decision has totally been -- is fulfilled in the sense that his performance now.

If you look at -- go back and think about the feasibility study that we did and when we acquired the asset, everyone knows the story, but we were forecasting cost structure of around about USD 35 on boarded vessels FOB. And if you look at today's numbers, we're at $36. I find that outstanding.

What I said to David is that we can't control the prices. We can't control the shipping and foreign exchange, but we can control our prices. So please focus on that. He's done that. Not only did he bring the mine on, on time and under budget, he's been able to deliver consistent results on that.

So thank you, David, and thank you very much to your team, and it's much appreciated. And I'm sure shareholders would agree with me on that basis.

If we look at the concerns about prices these days and the softening of the market, I was told when we acquired this asset on the day of -- in December of 2015, that when the iron ore price is $38, it had a lot more downside on it. So we did our feasibility study, and we are predicting prices that would -- for our equivalent of our material of 66.2% [fee], which we use P65 Platts. We were looking at numbers around about $78 a tonne. And if you project forward to today, we're sitting on $92 a tonne. And even for our feasibility study, we are using in the order of $84 a tonne.

So today, the prices are something we could never believe that, that would be. And what we've always said is that shipping will go up with that. It has done, but we've delivered fantastic EBITDA. You see there of -- in the order of $230 million for the half year we were forecasting in the feasibility study. That's more than double what we were forecasting.

So operationally, we've performed outstanding. You can see the recoveries and the production at the rate of capacity well and truly above the 7.4 million tonnes the rating capacity of the plant, and we're achieving very good margins on the tonnes.

What you will see is going to be variance and David and Natacha can build into that on provisional pricing. Considering we have vessels on the water up to 55 days and our qp -- quotational period could be a month after that. There's quite an extensive period before we receive final payment from provisional. And that's where you see the variances in what we're looking at. Also, the team's done a fantastic job on refinancing the company. As you know, when we started, it was very difficult to find money, both in equity and in debt. So we took numbers that were quite high at the time, but we're not going to renegotiate that, and the team's done a fantastic job there as well in doing that.

And today, for the period, the cost of restructuring, that was around about $78, $79 -- sorry, $78 million on the cost of that, but it's going to be as we go forward, you'll see huge benefits from that structure.

So again, I'll pass over to David and Natacha, but I'd like to thank shareholders, and I'd also like to draw your attention to the -- if you look at the valuation of the company, it's certainly not reflecting in the share price, what we have. And if you look at your earnings per share, we're at about [4, 4.5], that's well and truly in line with the best-performing there is in the iron ore market. And if you look at the enterprise value versus EBITDA, we're half of -- we're [2.8 to 6.3].

So I hope shareholders get behind us and support us a little more in the market. And thank you for those that do. So I'll pass it over to David now and let him delve into the results.

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David Cataford, Champion Iron Limited - President, CEO & Director [4]

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Thank you, Michael, and good day, everyone. Thank you for joining our scheduled call to review the second quarter results of our 2020 fiscal year. The results continue to demonstrate our operational strength as we report another production record at Bloom Lake. The company continues to deliver strong financial metrics, including new record cash flow from operations. These strong results highlight Bloom Lake's ability to navigate volatile iron ore price environment. Our employees are our most valuable asset. This is why health and safety is anchored in our corporate culture. We constantly improve our protocols to provide a safe and healthy work environment. Overall, our company's health and safety statistics continue to track well to industry standards. We will continue our focus on additional training with contractors, arriving at site to ensure that everyone who works at Bloom not only feels safe but is safe. We are glad to report that there were no occurrences of major environmental issues in the period. We continuously invest to reduce the footprint of our activity. Not only have we materially reduced emissions since commissioning in 2018, but we continue to innovate with several programs to improve the sustainability of our operations and its surrounding.

In the summer months, we completed major work to raise our tailings dam. As previously disclosed, accelerated tailings work program improves our already safe standards and is expected to increase our tailings management flexibility. We are also continuously working on the revegetation of the areas surrounding our operations, which now covers over 40 hectares. In addition, we recently initiated work near the town of Fermont to improve in-stream and Fish Habitat to support a sustainable population of fish species in the region. Lastly, we began trials with a new compound, which proves promising in reducing nitrogen oxide gas emissions in our blasting process.

Current prices continue to offer a strong setting for our business. Following a surge in iron ore prices early in the year, prices have recently corrected and have now stabilized near USD 95 per tonne for our product. Despite this recent pullback, the P65 price was 16% higher for the reported period compared to the previous year. We remind everyone that our company remains fully unhedged to capture the benefit from positive iron ore prices momentum shift. Despite some operations in Brazil having resumed production, we understand that nearly half of the affected production remains curtailed. We continue to believe that recent events in Brazil will have a long-term structural impact in the industry, especially in the ability to advance new high-grade projects giving tailings management requirements. This dynamic offers an attractive opportunity for our company as we forecast a growing appetite for high-grade iron ore products by customers.

Looking at freight rates. Our shipping cost tracks the C3 index, which quotes the route from Brazil to China. The C3 index has historically been correlated with iron ore prices at around 20% of the value of the P62 iron ore price. In our fiscal Q1, as supply was disrupted in Brazil, we benefited from abnormally low freight rates. In the current period, the C3 index recovered and was abnormally higher than the historical relationship with iron ore prices. We understand that the freight index was impacted by some operations resuming in Brazil, while several vessels were out of service for maintenance.

Given our team's strong relationships with ship brokers, we have mitigated the short-term spike to reduce the impact on today's results. In recent weeks, the C3 index has corrected to a level closer to their historical relationship with the P62 iron ore price.

As already demonstrated, Bloom Lake produces one of the highest quality iron ore concentrates in the industry. This quality is set by our concentrate grade of 66.2% FE, but also by its low contaminant levels. Our quality product continues to command strong interest from customers globally. The premium for the high-grade P65 benchmark has corrected rapidly in recent weeks.

That said, we continue to engage with several prospective customers seeking supply commitments for our products into the future. The strong demand for our product leads us to believe that the currently depressed premium for high-grade materials, such as ours, is likely to be short-term in nature. We continue to believe in the structural shift occurring in the high-grade market, especially given the increasing importance of emission reductions globally, which is likely to increase pressure on the steel industry.

Turning to operations. Our team continues to exceed expectations. In the reported period, Bloom Lake produced nearly 2.2 million tons of high-grade iron ore concentrate, which is approximately 10% above the previous record. In our last investor call, we had communicated our Blitz work program, which was completed during the first quarter planned shutdown. This program aimed to improve reliability of the mine and plant, which has transpired in the results we are reporting today. Although the impact of this program is not permanent, we have identified several bottlenecks at the plant, which we will aim to rectify in the near future. We have now mobilized the team to identify new work programs that could add capacity to our operations as we address the identified bottlenecks.

It is important to note that this record production has not impacted product quality, where to date, we have never been assessed with any penalties. Since we commissioned Bloom Lake early last year, oil recovery has been the only important operating metric we had yet to meet or beat compared to the expectations initially set by our feasibility study. It is important to note that our team could have attained the target recovery rate earlier, but our focus was set on product quality as we engage new customers.

Today, we are happy to report another record at Bloom Lake with a quarterly recovery rate of 83.9%. Not only does this meet the expectations initially set by our feasibility study, but it also did not impact our product quality. Once again, we are very proud to have such a capable operating team delivering on expectations. Such performance in ore recovery is inspiring, given it already exceeds the levels achieved by other operations in the region. That said, our team will continue to evaluate our flow sheet to further improve the recovery process.

Looking at our operations in more detail, when compared to the previous period, 5.5% more ore was mined, 14% more ore was milled. Also ore grade remained relatively stable at 32.3%, which continues to track with our mine plan forecast. Not only has our production volume reached new records, our operating costs have substantially improved compared to the previous quarter. In fact, our total cash cost stood at $48.3 per tonne, representing an improvement of 11% compared to the last period.

During the period, our company recognized record cash flow from operations of $104.9 million. That said, our operational excellence does not get fully reflected in all of our financial metrics due to several noncash items emerging from the closing of recent transactions. In August, the company closed several transactions, including the purchase of a 36.8% interest in Québec iron ore from Resource Québec, refinancing of our long-term debt and a new preferred equity financing with Caisse de dépôt. Such transactions enabled us to secure full control of our flagship asset and strategically positions our company for the implementation of our growth initiatives. However, in connection with and following the transaction, several write-downs had a noncash impact, which negatively impacted profit by nearly $54 million. These restructuring charges are nonrecurring and are fully accounted for in the Q2 reporting period. Excluding these noncash charges, our company delivered a net profit of $50 million or $0.11 of earnings per share. Additional information on this can be found in our MD&A.

Year-to-date, we generated nearly $230 million in EBITDA, nearly $197 million in cash flow from operations and over $124 million in adjusted net income. Such results translates to $0.19 of adjusted earnings per share. In addition to the noncash items, we would like to explain the impact of provisional pricing in the reported period negatively affecting results due to volatility in iron ore prices. Given that we typically ship 10 to 12 vessels per quarter, we always have material in transit at quarter end. For vessels in transit, we set an expected realized price for the anticipated delivery date, which is a provisional price. Upon delivery, a quotation period with our customers extends the period until we realize our final price, which could be either month of arrival or the month after the month of arrival.

Therefore, although our farthest route takes approximately 55 days, our pricing exposure can extend up to approximately 90 days from the vessel departure date from Sept-Îles. The gap between this provisional price and the final realized price triggers an adjustment for the following reported period. In our fiscal 2020 Q1 quarter, as iron ore prices had increased, we reported an $11.9 per tonne positive price adjustment. Since the end of our fiscal Q1 period, which ended on June 30, 1 million tonnes subject to provisional price adjustments were delivered an established final price. Accordingly, as iron ore prices declined faster than the provisional price assumed in the reported period, we recognized a negative price adjustment of USD 14.3 per tonne. We recognize that such dynamics diminished the positive operational results delivered in the period. Structurally, our product continues to have strong demand, which is reflected in our realized price, receiving over 10% premium to the P62 benchmark year-to-date.

In the period, our gross realized price was USD 106.2 per tonne. The average premium over the P62 benchmark for the period was only 4.1%, but this number was affected by the timing of some sales when the P62 price was substantially lower than the quarter average of $102 per ton. In connection with freight costs as we typically pay approximately a 20% premium to the C3 index, our average freight cost was $26.8 per tonne compares well to the C3 index average of $24.01 per tonne in the period. It is significant to note that we have taken steps to further diversify our customer base and optimize our realized price. Recently, we recommissioned berth 30 at the Port of Sept-Îles to load Panamax and baby cape vessels. This strategy could provide access to customers in markets with shorter delivery routes. As of this date, we have already loaded 2 vessels from this berth. Net of the provisional price adjustments of USD 14.3 per tonne, freight and currency conversion, our net realized price was $86.2 per tonne. When compared to the realized price with our all-in sustaining costs of $66.2 per tonne, we generated a cash operating margin of 23.2% or $20 per tonne.

It is important to note that provisional price directly affects this reported operating margin. Excluding the impact of provisional pricing, our cash operating margin would stand at $38.7 per tonne or nearly 45%. This demonstrates that despite volatile iron ore prices, Bloom Lake is a world-class asset, able to produce robust results and to navigate challenging market conditions. Looking at our cost structure, our sustaining CapEx was higher in the quarter, which is reflected in our all-in sustaining costs of $66.2 per tonne. Such higher costs in the period reflects seasonal work in addition to items expected to improve reliability of operations and growth positioning. As disclosed in the previous quarter, we have accelerated our tailings dam rising work. This additional expenditure incurred in the period is not expected to affect the overall dam-related work budgets, but rather only the timing. Tailings works are more efficient during the summer months, explaining the concentration of expenses in the period. The decision to accelerate this work also positions the company for growth initiatives since it improves tailings management flexibility.

Our mining equipment rebuild program also incurred higher costs in the period. This program aims to improve the reliability of equipment, translating into higher production throughput in today's results. This rebuilding program also positively positions our company for additional work anticipated as part of our growth initiatives. The previously discussed transaction, which closed in August, marked an important milestone for our company. By taking full control of our flagship asset, we are now positioned to fully benefit from both current production and future growth opportunities. The refinancing received strong support from world-class financial institutions, while significantly reducing the carrying costs of our debt. These transactions did reduce cash on hand by $74.7 million as we raised less capital than the funding required to complete the transaction. This capital outflow was offset by the $75 million in cash generated in the period, resulting in cash on hand at the end of the period of $211 million. Essentially, by negotiating and closing the transaction, we now control 100% of our flagship asset, while our cash balance has remained effectively flat compared to the previous period.

In the quarter, we have repaid all debt instruments initially put in place in 2017 to recommission Bloom Lake. We have replaced those instruments with facilities that reflect the mature state of our operations and companies. The new facilities not only offer better terms, but have also created strong partnerships with institutions, which can prove to be both instrumental and beneficial for the company as it implements its growth strategy. At the end of the period, our long-term debt stood at $239.1 million, a reduction of more than $25 million compared to the previous period. We believe our balance sheet is well positioned to face variable market conditions while being able to consider growth opportunities.

Looking at our previously disclosed Phase 2 expansion project, we have now spent nearly $19 million from the $68 million budget approved following the release of the feasibility study in June. Thus far, construction work is progressing on budget and several key milestones have already been completed.

Our team is actively advancing nondilutive financing alternatives as we consider the proposed time line detailed in the feasibility study. As this expansion remains very flexible with the balance of work required, we are carefully assessing strategies to optimize value creation for our company and shareholders. As the bulk of the capital required to complete the expansion project is not scheduled to be deployed until the middle of calendar 2020, we will address the market on further plans regarding Phase 2 prior to next summer.

To date, we have already accumulated over 18,000 work hours on Phase 2. Our current work program have not only maintained the timetable identified by the feasibility study, but are also expected to improve several aspects of our current operations. It is indeed significant to highlight the fact that some of the Phase 2 work which has been completed or is currently underway is expected to positively affect our Phase 1 operations.

In closing, on behalf of our management, I believe it is important to highlight the contributions and continuous efforts from our operating team and partners who have yet again surpassed our expectations. Bloom Lake is a young operation with lots of potential. Our team has proven their ability to unlock opportunities and provide impressive results.

Once again, I would like to thank all our partners who have shared our vision since we acquired Bloom Lake, enabling all of us to make positive impacts on the community. We are truly fortunate to operate in a region with such support and are thankful for the partnerships that have been created as we continue on our journey to build and grow a sustainable mining company.

At this point, operator, I would like to open the lines for the Q&A session.

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Questions and Answers

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Operator [1]

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(Operator Instructions). And your first question is from Orest Wowkodaw from Scotiabank.

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Orest Wowkodaw, Scotiabank Global Banking and Markets, Research Division - Senior Equity Research Analyst of Base Metals [2]

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I'm wondering if you could give us some color on the shipments in the quarter, they seem like they lag production levels by about 12%. Was that just a timing issue? Or were you seeing customers kind of hold back orders, given the falling iron ore price. I'd be curious on any color there?

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David Cataford, Champion Iron Limited - President, CEO & Director [3]

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Thanks for the question, Orest. It's really just a timing element. So there's been no lag in the demand on the high-grade material. We just have a bit of a accumulated tonnes at the Port of Sept-Îles, but to be noted that we can't really play that market in the sense that we have a stockpile that can have about 550,000 tonnes at the port, so it's really just -- you have 1 extra vessel in the quarter, and that would have been much more in line with the current production. So this will be resumed in the following quarter.

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Orest Wowkodaw, Scotiabank Global Banking and Markets, Research Division - Senior Equity Research Analyst of Base Metals [4]

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Okay. So we should expect to catch up then in the current quarter?

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David Cataford, Champion Iron Limited - President, CEO & Director [5]

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Yes. Right.

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Orest Wowkodaw, Scotiabank Global Banking and Markets, Research Division - Senior Equity Research Analyst of Base Metals [6]

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And then in terms of the financing for Phase 2, can you maybe talk about more detail what kind of alternatives you're investigating in terms of whether it's was talking strictly at debt or whether we're also potentially looking at, say, minority interest and things like that?

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David Cataford, Champion Iron Limited - President, CEO & Director [7]

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Yes. Thanks for the follow-up question. So if we look at potential minority interests, they would be only structurally with potential steel mills that would want to partner up the Phase 2 project. But this is not the first alternative that we're currently exploring. We have the capacity to increase our current debt facilities with the strong partners that we have created, and we're evaluating other potential areas in the likes of the high-yield market. But right now, there's been quite a lot of demand from our current lenders and people that missed the opportunity to participate in the previous debt facility. So these are the options we're evaluating right now.

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Orest Wowkodaw, Scotiabank Global Banking and Markets, Research Division - Senior Equity Research Analyst of Base Metals [8]

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Okay. And then just finally, what do you expect the timing to be or your targeted timing to, I guess, announce or close the financing for Phase 2?

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David Cataford, Champion Iron Limited - President, CEO & Director [9]

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So pretty much once we have board approval on the complete Phase 2 project, we're targeting to come back to the market before next summer. So summer of '20 calendar year.

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Operator [10]

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Next question is from Scott Schier from Clarksons

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Scott Schier, Clarksons Platou Securities, Inc., Research Division - Analyst [11]

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Given your extremely strong operating performance year-to-date, should we continue to think of Bloom Lake is about 7.4 million tonne capacity nameplate or there's now more 8 to 8.5 more realistic?

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David Cataford, Champion Iron Limited - President, CEO & Director [12]

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Yes, thanks for the question. So the nameplate capacity is still 7.4 million tonnes. We've spent a little bit more now on CapEx and OpEx to make sure that we can seize the current higher prices. We do see some potential improvements and some bottlenecks that we're working on. But right now, we still see the nameplate capacity at 7.4, but we're obviously going to try to maintain the current run rate at these elevated prices there.

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Scott Schier, Clarksons Platou Securities, Inc., Research Division - Analyst [13]

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Okay, great. And then if I could touch on provisional pricing a little bit as well because obviously, that was a pretty big factor in the quarter. Have there been any thoughts around just trying to rework your sales process a little bit to try to mitigate any potential impacts going forward or lower your exposure period, down from the 90 days where it is today?

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David Cataford, Champion Iron Limited - President, CEO & Director [14]

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Yes. Thanks, Scott. So the recommissioning of the Berth 30 is one of the areas where we can try to focus to reduce that time since with Berth 30, we can now load Panamax vessels and a lot of the European market or the closer markets can only receive these types of vessels. The route is much shorter, and it also allow us to reduce that variability. But realistically, even if we kept the 90 days, our main target is to flatten that number over the whole year. If you look at the previous 6 months, we had sales of about -- revenues of about $440 million, and the impact of the provisional price has been about $10 million. So it flattens out when you look quarter-to-quarter. On 1 specific quarter, you can see a variation, but over the year, you're going to see that flattening out.

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William Michael O’Keeffe, Champion Iron Limited - Executive Chairman [15]

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Yes, David, if I might add to that. I mean one of the things that we are doing, Scott what you always said we would do is we look at strategic stockpiles and what we're currently doing is we set down tonnages in China, and we can draw from that stockpile. Now it takes you a while to build that up, and it takes a while to get the customers taking from it. But what it does is allows us not to rely on a 2,000-tonne shipment to 1 customer. What it allows us to do is to be able to draw from those stockpiles and service some of the smaller mills as well as the big mills. And that will have a smoothing effect too, eventually. And it's the more of these things that we can do to try and mitigate that -- the surges between the different quotation period, the better off we are.

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Operator [16]

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Your next question is from Gordon Lawson from Paradigm Capital.

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Gordon Lawson, Paradigm Capital Inc., Research Division - Senior Research Associate [17]

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Could you please elaborate on the rebuilding program with respect to costs and expected completion, what other bottlenecks you've identified and what throughput and recovery we can expect in the next quarter or 2?

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David Cataford, Champion Iron Limited - President, CEO & Director [18]

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Thanks, Gordon, for your question. So if we look at the rebuild program, well, when we deliver an extra 1 million tonnes of -- or run rate of 1 million tonnes at the plant, that's about an extra 3 million tonnes that come into the plant, so 4.5 million tonnes yearly that are moved at the mine. So we have spent a little bit more on CapEx on equipment instead of purchasing either new equipment. We can do that kind of volume with the current mining fleet, but it requires a little bit more CapEx to get some of the parts installed. So that's basically the main portion of the equipment rebuild. We say rebuild, but it's really the -- all the overhaul that we're doing, the installation of all the parts that last more than a year. It's not an official rebuild in the sense that the equipment coming from the care and maintenance. So on that portion, it's mainly because of the extra tonnes that we are currently doing.

If we look at bottlenecks that we've identified, they're pretty small bottlenecks as some being some conveyors that we would need to either speed up or to increase a little bit of structure so we can pass some more tonnes. That's mainly the areas where we've seen a little bit of bottlenecks. This is not the 3.5-kilometer conveyor, but really the smaller conveyors in the plant and the conveyor that's feeding the silo. It was initially designed for a maximum of 8 million tonnes, and we're doing a run rate of about 8.4 right now. So it's feasible, but there's a little bit of an investment that we're doing here and there on these equipment to bring to be able to operate at these higher numbers. And I think there was a third portion of your question, Gordon, that I might have missed that.

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Gordon Lawson, Paradigm Capital Inc., Research Division - Senior Research Associate [19]

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Yes. Well, your recovery rate was excellent in the quarter and is that something that we can expect to continue in the next quarter or 2?

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David Cataford, Champion Iron Limited - President, CEO & Director [20]

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Yes, we've now hit the recovery rate on 4 months. So from June to today, we don't give guidance as a company, but if you remember our feasibility study, we hit in the lab over 85% recovery with our type of material. So the team is always working to improve the current results. And we now know what kind of blending that we need to send to the plant and how to tweak the recovery circuit to be able to benefit from a higher recovery.

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Operator [21]

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Our next question is from Michael Emery from Euroz.

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Michael Emery, Euroz Securities Limited, Research Division - Resources Analyst [22]

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Look, sensational operational results again, congratulations. Most of my questions have actually been answered, but I just wanted to get some more color, I guess, on the -- your additional sort of sustaining costs that you guys are incurring at the moment. Obviously, you touched on the mining equipment, the tailings dam, which you're sort of doing during the summer. So is it safe to assume that, that's going to reduce somewhat as you head into the winter months? Or are there other opportunities that you've sort of identified where you could, I guess, bring forward some of these expenditures, while the prices are high.

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David Cataford, Champion Iron Limited - President, CEO & Director [23]

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Yes, thanks for your question, Michael. So the tailings work is going to reduce significantly in the winter months. And also, if you remember, our feasibility study, most of the higher CapEx items for the tailings was done in the first 3 years. After that, it was a much lower sustaining costs for the tailings operation. If we do identify some of these smaller bottlenecks, there might be things that we want to complete at these higher iron ore prices, but at the same time, you'll see our sustaining CapEx come lower. This was a higher sort of quarter because of the seasonality, but you will see that number coming down.

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Michael Emery, Euroz Securities Limited, Research Division - Resources Analyst [24]

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And so obviously, just I guess, a follow-on from that. The ultimate cost is out of your control, but do you have internally a sort of margin that you're comfortable with playing with, I guess, does that make sense? So if you're making $40 margins, you can find more bottlenecks and execute those. Is that sort of a $20 margin we then start cutting back on some of those things? Or how does that work?

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David Cataford, Champion Iron Limited - President, CEO & Director [25]

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Yes, the good thing is once we've beefed up a lot of these and understood the elements where we can fix, even though those costs are going to start coming down. So even if you look at our operating costs for the quarter, we managed to produce 2.2 million tonnes at an operating cost of CAD 48 delivered in the vessel. So we reduced by about $6 per tonne, the cost compared to the previous quarter and produced more tonnes. That's mainly due to the shutdown that happened in the quarter, but we also saw some areas now that we can reduce costs even on those shutdowns. So there's a portion of the element where we would -- we're monitoring the price very closely, and we can adjust our operating costs concurrently, but at these kinds of prices, we want to continue the strategy now of getting as many tonnes out in Bloom Lake and finding all those bottlenecks.

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Operator [26]

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The next question is from Lucas Pipes of B. Riley FBR.

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Lucas Nathaniel Pipes, B. Riley FBR, Inc., Research Division - Senior VP & Equity Analyst [27]

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I wanted to ask a market-related question. Obviously, there's been a lot of volatility, not just in the iron ore prices, but in the various grades, quality, specifically. And I wondered how you're thinking about that market going forward? Does that cause you to maybe adjust any production plans or not? And I would appreciate your thoughts on that.

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William Michael O’Keeffe, Champion Iron Limited - Executive Chairman [28]

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Thank you. It's Michael O’Keeffe answering. And look, the thing is we don't have any crystal balls on -- and we produce just 1 product that is the high-grade fine. So -- and the best thing for us in our operating cost is to be able to produce to the tonnes that we're currently doing, which you see reflected in the numbers. But the market going forward, we saw a huge surge. And probably worth going back another step, when we commissioned the plant in February of 2018, and we started our first shipments in April, a couple events occurred at that time. One was that IOC went on strike and thus Rio blew up their production line. They're both high-grade producers. And you saw quite a surge in the iron ore price. And it never retrieved from that even when these mines came back on. Then we had a double whammy with Vale, where it was totally, again, the high-grade market. So if you look at us, even though we produce 1 product, which is high grade, it's very important going forward. And nothing changes with the environmental issues and the value when using a blast furnace. And China is really driving that market. And they want to be competitive with the Japanese.

Now what you'll see with the Vale event is, obviously, for our material, it was up to $130 a tonne, it becomes quite expensive, and the steel mills are not making money at those sorts of numbers when they're already geared with their customers at certain pricing systems. So what you then see is the use of lower-grade material. So you see the Fortescue type material coming up to huge numbers because, effectively, the high-grade being replaced with lower grade material. Now when we're at [$130], our sales are more difficult to conclude because of the cost there's only certain people that are going to take them. However, we still fulfill their position, but it was much harder to do it. So what you've seen in the margin between the low-grade and the high-grade narrow significantly. I think when we start, that was -- the margin was something like $30. We got down to about $3 or $4 at this high grade. So that -- it's a very good litmus test on where you see the steel mills activity when you're talking about the high-grade materials. So as we've now drawn back the margin between the lower grade and the higher grade it's starting to increase again and we'll forecast that to go higher as rates get lower -- sorry, as the prices get lower.

Now what we feel is that, that supply-demand is pretty much in balance. And it doesn't take much to tip it over one way or the other. And I think the forecast that we've put in are quite robust. And we keep talking to customers about that market, and they agree with us around the pricing that we're forecasting for Phase 2. Now we'll continue on with Phase 2 and should there be a massive change in the market. Obviously, that will be stored, but I can't see it happening. What's happening in Europe is also that the steel mills are you see struggling and they're cutting back production. A lot of that high-grade pellet material is finding its way into China. And that's causing the discounts you're seeing on pellets at the moment.

But look, we're very comfortable with our product. One thing that David's maintained and always has since we started was consistent quality, high-grade material of 66.2, silica around about the 4.5 mark, not going above that and also low alumina and Fort. Now that gives us an advantage into the market, and that's what we're seeing, especially with Japan who relies on the quality. If we continue doing that, and we continue with our cost structure the way it is, we can take advantage of the high market, we can also manage our way through the low market, we also have the flexibility of deciding whether we bring on Phase 2 or we don't. At this stage, it's full ahead. And if you go to site today, you'll see all the work that's going on up there at the moment to accommodate a time for Phase 2, which will be probably in the order of 2021, midyear, something like that, all going well.

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Lucas Nathaniel Pipes, B. Riley FBR, Inc., Research Division - Senior VP & Equity Analyst [29]

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Very helpful. I appreciate that, Michael. I wanted to follow-up on the environment in Eastern Canada, more broadly. We saw one of your peers in the region kind of pull back from a sales process and integrated steel mill announcing that they would go ahead with a divestiture or at least planning on one. Could that have any implications for Champion? What's your view of what's going on strategically in the region?

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David Cataford, Champion Iron Limited - President, CEO & Director [30]

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We can't really speak for the other companies. I think when we look at high level, all of the Canadian producers, whether it be us or our 2 neighbors produce the very high-grade material, so I guess the sales process might have been taken off because of this high-grade market and the long-term demand for this kind of material. So we see, whether it be in Japan, in India and Korea, even in China, the high-grade material is really what most of the steel mills are struggling to understand how they're going to get their hands on in the coming years. So there might be a bit of a blip right now. But as projects like [Jandi] come off and the steel mills looking for the low-cost, low-aluminum material while this is a structural -- structural change that these steel mills are going to need to secure supply. We haven't seen anything about our -- the other event that you've mentioned about Arcelor, the only thing that we read in their financials is that they wanted to deleverage a certain amount of their debt. But we haven't seen or heard anything where they want to divest completely out of the Canadian operations. So that they are very robust operations that allowed to produce a consistent high-grade material, and we see that as a long-term play for all of these groups.

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Operator [31]

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Your next question is from Stefan Ioannou from Cormark.

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Stefan Ioannou, Cormark Securities Inc., Research Division - Analyst [32]

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Just you mentioned sort of refurbishment of Berth 30 to sort of expand your customer base. Just wondering, going forward, has there been any more sort of detailed thought put into expanding just your product offering as well beyond just the fines? Or is that something that we can anticipate along with full steam on Phase 2 or something that would come after Phase 2? If at all?

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David Cataford, Champion Iron Limited - President, CEO & Director [33]

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Yes, thanks for your question, Stefan. We've just spent quite a lot of time in Asia, and we see China building a whole lot of pellet plants. And we don't see that much pellet feed coming on into the next year. So there is possibility for us to think of diversifying our product base into fines plus pellet feed. To go into pellets is something we're always evaluating. But right now, it seems like a tough call when you consider all of the added capacity that is coming on and a lot of idled capacity that was there as well. You take even an example of recut coming back on, and they're not producing full hedged pellets right now because of the sort of depressed premium. But we see pellet feed as something very key in the future. So there is a potential going there, and we're always doing tests also because there's -- the Bloom Lake material essentially only has iron and silica, if you look at the mine. So there are potentials to increase the quality of our current material right now, if the timing is right and the premium is right. So we have that flexibility at Bloom where we can potentially produce pellet feed, but we'll always produce the center fines, the high-grade center fines, but we can produce some ultra-high grade center fines as well. So that's probably the way we can diversify our product base.

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Operator [34]

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Our next question is from Craig Hutchison from TD Securities.

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Craig Hutchison, TD Securities Equity Research - Research Analyst [35]

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In terms of the approved budget for Phase 2, now the $68 million, there's about, I think, $50-odd million that's remaining on that. Do you anticipate spending that all for the balance of calendar 2019? Or should some of that creep into 2020?

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David Cataford, Champion Iron Limited - President, CEO & Director [36]

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Some of that's going to creep into 2020, mainly for timing sort of reasons. That budget brings us until about end of March 2020 calendar year. So a lot of the, let's say, the ordering of the recovery circuit, while the payments don't necessarily come right now. So we've incurred a little bit more than what you see now as a dispersed amount. But yes, that brings us about until March of 2020.

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Craig Hutchison, TD Securities Equity Research - Research Analyst [37]

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And in terms of the board's decision for the full Phase 2, what are the sort of specifics or details that they're looking for to make that decision. Is it price related? Is it engineering? Just maybe some or color on that. I appreciate it.

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David Cataford, Champion Iron Limited - President, CEO & Director [38]

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Yes, we're on top of engineering. We're on top of everything that needs to be done for Phase 2. The main elements are to find the right clients for the material. So we want to be a little bit more advanced in securing the longer-term contracts with our material. If you remember, we do have offtake sort of agreements with Glencore and Sojitz, but they're more agency-based contracts. So we really want to find the right steel mills to be able to require this material and stabilize our long-term premium. So we're actively working on this right now and evaluating sort of 3 different nondilutive options of debt for our total financing. So the big advantage that we have is we do have that flexibility to wait until sort of march of next year, before going to the board and asking a full go ahead without impacting our time line. So those are the 2 elements that we, as management, want to sort of fully understand before we go to the Board and ask for the official approval.

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Craig Hutchison, TD Securities Equity Research - Research Analyst [39]

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That makes sense. Just maybe lastly, if prices were to soften more than expected from current levels, is there an option for sort of a hybrid Phase 2 expansion possibly go to something between the 8 and -- or the 7.5 million and 15 million tonnes?

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David Cataford, Champion Iron Limited - President, CEO & Director [40]

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Unfortunately, that doesn't really make sense because you can't really spend less CapEx to get half production. You could maybe save a little bit on the mining side, but the plant, the berth, all those CapEx items still have to be spent. If the price did soften, we'd always have the opportunity to increase the tonnage into Phase 1. So this higher run rate that we're seeing now, we have seen some bottlenecks that we can improve. Currently, our best bang for our buck is really to hit the Phase 2 project. But should prices soften, we can -- we have certain CapEx projects that we could do to increase volume at Phase 1. It wouldn't bring us to the in between of Phase 1 and 2, but for us, every extra million tonnes really makes a big difference on our revenues.

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Operator [41]

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Your next question is from Dalton Baretto from Canaccord.

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Dalton Baretto, Canaccord Genuity Corp., Research Division - Analyst [42]

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Congrats on the great quarter. I'd like to ask a bigger-picture question, if I may. Like I understand David and his team are focused on delivering Phase 2, but from the Board's perspective, how is the board thinking about kind of broader strategy and longer-term growth and kind of where Champion is going to be post Phase 2?

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David Cataford, Champion Iron Limited - President, CEO & Director [43]

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Yes, thanks for your question. So I mean, when you look at what's available in our portfolio, we have over 5 billion tonnes of high-grade resources. Today, there's not that much value associated to those tonnes. But in the midterm, when we see clients requiring more and more high-grade material, we see potential opportunities to maximize value out of those tonnes right now. The main strategy, there's a lot of opportunities in the region right now. So this is something that we're actively pursuing. But realistically, we see potential organic growth or growth through the region here in Québec and Canada and delivering this high-grade material into our clients. We and the Board strongly feels that this shift has been maybe under viewed in the past few weeks that there's a short term blip on the sort of supply of the high grade. But the facts remain that you want to bring on a new high-grade mine you need tailings, and it's going to be very difficult going forward to have a new project coming on with the intense CapEx required to meet the new standards for tailings. We have the advantage here at Bloom to have an operation that can either expand its tailings and that's invested significant amounts to be able to have one of the best operations in Canada on tailings, so we can leverage off of that into the future to supply the world with this high-grade material.

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Operator [44]

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And your next question is from Jacques Wortman from Laurentian Bank.

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Jacques P. Wortman, Laurentian Bank Securities, Inc., Research Division - Director of Research & Mining Analyst [45]

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Just wanted to get just maybe a bit more granular on the balance of fiscal '20. Could you just, if possible, could you provide just a bit of guidance on OpEx and CapEx in fiscal Q3 and fiscal Q4? I guess the nature of the question is, I think your C1 or your cash operating costs were about $54 a tonne in fiscal Q1 and $48 in fiscal Q2. I just want to know if you can kind of maintain that $48 level? Or should we be looking for something in between for the balance of the fiscal year? And then what CapEx sort of looks like over the next 2 quarters? And last question is, could you give us a sense of the current premium P65 to P62?

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David Cataford, Champion Iron Limited - President, CEO & Director [46]

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Yes. Thanks, Jacques. So as a company, we don't give guidance. But if you want to look at the sort of structure of the company we have 2 quarters per year that we have shutdowns, 2 quarters per year that we don't. So the quarters that have the shutdowns will typically have a slightly higher operating costs, not to the level that you saw in the previous quarter because a whole lot of work was done to be able to maximize the tonnage. But realistically, every 6 months, we have 1 major shutdown. And then following that, we have a quarter that has just very small touch-ups in the plant. So that you can build your sort of our own numbers on that, but there's no -- there's nothing sort of a typical in the current quarter. If you look at our strip ratio, we're not under stripping to minimize cost. Our strip ratio was at 0.7 in the previous quarter, and that's similar to where our mine plan is transitioning into this Phase 2 so that there's no sort of special elements coming ahead, if that can be helpful. Premiums. Yes, go ahead.

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Jacques P. Wortman, Laurentian Bank Securities, Inc., Research Division - Director of Research & Mining Analyst [47]

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Sorry, your shutdown quarters are typically fiscal Q1 and fiscal Q3 then?

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David Cataford, Champion Iron Limited - President, CEO & Director [48]

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Correct.

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Jacques P. Wortman, Laurentian Bank Securities, Inc., Research Division - Director of Research & Mining Analyst [49]

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Okay, got it. Right.

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David Cataford, Champion Iron Limited - President, CEO & Director [50]

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For the premium of the P65 or the P62, today, we're sitting close to about 8.5% premium, which is lower than the expected longer-term 20% premium, but we see that right now slowly creeping up. As steel margins increase, we'll see -- we've already seen now steel mills wanting to buy more and more of this high-grade material and now have the capability to pay more to be able to secure it. So we see this premium slowly going back up to the close to 20% mark.

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Operator [51]

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There are no further questions. You may proceed.

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David Cataford, Champion Iron Limited - President, CEO & Director [52]

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Thank you very much, everyone, for assisting this call. Again, we're very proud of this quarter, 2 major records and the closing of most of our cleaning of our balance sheet, the better debt, the preferred shares of the case and the buyback of the government, making us 100% owners.

So thank you very much for assisting this call and speak next quarter.

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Operator [53]

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Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines.