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Edited Transcript of CIA.AX earnings conference call or presentation 31-Jul-19 11:30am GMT

Q1 2020 Champion Iron Ltd Earnings Call

Aug 8, 2019 (Thomson StreetEvents) -- Edited Transcript of Champion Iron Ltd earnings conference call or presentation Wednesday, July 31, 2019 at 11:30:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Michael Marcotte

Champion Iron Ltd. - VP of IR

* David Cataford

Champion Iron Ltd. - CEO

* Natacha Garoute

Champion Iron Ltd. - CFO

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Conference Call Participants

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* Orest Wowkodaw

Scotiabank - Analyst

* Craig Hutchison

TD Securities - Analyst

* Hayden Bairstow

Macquarie - Analyst

* Stefan Ioannou

Cormark Securities - Analyst

* Michael Emery

Euroz Securities - Analyst

* Gordon Lawson

Paradigm Capital - Analyst

* Lucas Pipes

B. Riley - Analyst

* Scott Schier

Clarksons Platou - Analyst

* Jacques Wortman

Laurentian Bank - Analyst

* Brian MacArthur

Raymond James - Analyst

* Brock Salier

Sprott Asset Management - Analyst

* John Schultz

Macquarie - 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 Ltd. first-quarter fiscal year-end 2020 conference call. (Operator Instructions). Thank you. Mr. Michael Marcotte, you may begin your conference.

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Michael Marcotte, Champion Iron Ltd. - 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 would like to thank everyone joining us today to discuss the results of our first-quarter for the fiscal year 2020. I would like to redirect people on the call to a presentation that management will be referring to which is posted on our website at www.championiron.com under the Investors section.

I would also like to remind listeners that some of the matters to be discussed during this call may contain forward-looking statements. Forward-looking statements include, but are not limited to, items such as expectations regarding the market price of iron ore, timetables, mining operating expenses, capital expenditure, guidance and reserve estimates. Such statements discussed today may involve risks and uncertainties.

A number of factors and assumptions were made in preparing such 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 the 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 make this cautionary statement on behalf of all Champion spokespersons who may address you during this call today. Please note that all of the dollar amounts refer to Canadian dollars unless otherwise stated.

Joining me today from the Champion management team include David Cataford, Chief Executive Officer, and Natacha Garoute, Chief Financial Officer. With that said, I will now turn the call over to our CEO, David Cataford, for the presentation portion of the call followed by a Q&A session. David?

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David Cataford, Champion Iron Ltd. - CEO [3]

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Thank you, Michael, and good day, everyone. Thank you for joining our scheduled quarterly investors call. We are pleased to discuss Champion's operating and financial results for the first quarter of our 2020 fiscal year. Once again today's results confirm the operational strength of our main asset, Bloom Lake.

As you may already know, Bloom Lake was recommissioned in February 2018 and we declared commercial production in June 2018. This quarter marks our fourth full commercial period of operation.

Work safety is a priority for us. Safety isn't expensive; it's priceless. Our Company has and continues to focus on safety protocols and we strive to implement new measures on an ongoing basis. We want everyone working at Bloom to take ownership of their work environment. With this in mind, during the quarter no severe lost time injury was reported. Our health and safety statistics continue to track near the benchmark for open pit mining operations.

We continuously look to maximize the safety for everyone working at Bloom and, considering the large influx of new personnel arriving at site, we look to implement further measures to improve safety statistics and adopt standards set by our team. We will focus this year on further training contractors arriving at site as everyone that works at Bloom must feel safe.

We are proud to note that we place a high priority on the environment impact of our business. We are going to report that there were no occurrences of major environmental issues reported in the period. Additionally, our team has elected to accelerate the coarse tailing dam rising construction project in the recently completed period.

In line with our culture to invest in the future of our business, we decided to do this for two main reasons. First, this will maintain a safe freeboard for a broader variety of situations and further reduce the risk of overtopping. Second, this will increase the flexibility of tailings management ahead of our Company's organic growth plans.

It is worth highlighting that this accelerated work program is not expected to increase the overall tailings-related costs, but instead it will only modify the timing of such expenses. In addition, our team continues to work on the many previously announced initiatives. These include the reduction of greenhouse gas emissions and our major plan for revegetation on-site.

Looking at industry dynamics, the environment remains very favorable for our Company. Recent tragic events in Brazil coupled with resilient global iron ore demand continue to push iron ore prices higher. In fact, Chinese steel production is setting new historical highs in recent weeks. These factors have helped push the iron ore price beyond a five-year high in the last quarter.

Champion remains well positioned to benefit from this as we capture the momentum of higher prices since we remain fully unhedged. That said, freight rates are typically correlated with iron ore price. Despite the recent higher iron ore prices, freight rates have remained suppressed during the period as the interruption of Vale's operation has impacted the global demand for vessels.

Although Vale reopened the Brucutu mine and Vargem Grande complex in recent weeks, many of their operations remain curtailed. We believe recent events will continue to have a structural impact on the industry for years to come. We welcome you to read more about our market views in our recurring newsletter posted on our website.

Turning to operations, we are glad to report that we started the year by setting a new historical record at Bloom despite an impact to production from our planned major shutdown. In fact, Bloom Lake produced nearly 2 million tonnes of high grade iron ore concentrate, which is nearly 8% above the previous quarterly record.

This production represents an annual run rate of nearly 8 million tonnes per annum compared to our nameplate capacity of 7.4 million tonnes per annum. We are proud to note that our operational team set several historical records at Bloom Lake, and this is in our first 18 months of production.

Today we are happy to share the positive results of a blitz work program initiated last quarter aimed at improving short-term mine and plant reliability. This work program was implemented to maximize the cash flow potential of our business given the attractive pricing environment of our product.

These initiatives resulted in record hourly mill throughput production and recovery rates despite the previously mentioned planned shutdown. Overall 8% more material was mined at Bloom and 13% more tonnes were processed when compared to the last quarter.

Our team did not sacrifice quality for quantity. Not only did we deliver more tonnes, but our product quality remained 100% compliant and continues to beat most standards regarding contaminants, which is of increasing importance in the iron ore industry.

This work [list] program also allowed our team to push the current operational limits at Bloom Lake. This in turn allowed us to further identify some bottleneck at the plant which could eventually be considered for future organic growth programs.

Our recovery circuit continues to be optimized and, demonstrating this, we are happy to report that we set yet again another historical record at Bloom Lake. In fact, we set a new quarterly recovery rate record of 82.1% including also a monthly recovery rate of 84.6% in June 2019.

Our team remains confident that Bloom Lake will achieve the target annual recovery rate of 82.9% as per our initial expectations. It is significant to note that this improvement in the recovery rate has not jeopardized the quality of the concentrate we produce.

Given such strong operational results and the healthy iron ore pricing environment, we are happy to report robust financial results. Our Company recognized revenues of CAD277.9 million, EBITDA of CAD166.9 million, and net income of CAD74.2 million. This translates into CAD0.09 of earnings per share for Champion shareholders.

Given the strong performance of our share price during the quarter, our EPS was negatively impacted by a non-cash CAD0.05 per share in relation to derivative instruments in connection with the Glencore debenture. These results underpin the benefits our aggressive work program has accomplished in connection with our goal to improve the short-term reliability at the mine and plant.

This work program impacted the Company's total cash costs which amounted to CAD54.3 per tonne. The higher costs compared to prior periods were more than offset by the additional tonnes produced and this is reflected in the substantial improvement of our financial results. In addition, the cash costs for the period reflect the impact of the major planned shutdown which included specific maintenance work required after 12 months of operations.

The all-in sustaining cost of CAD62.8 per tonne was also affected by irregular items. This includes the decision to bring forward the previously mentioned tailings investment which will not change the total amount that would've been invested over the next few years, and also the mining equipment rebuild program which effectively will increase mining equipment availability.

During this completed quarter current income and mining taxes amounted to CAD53.4 million. Our Company has now become nearly fully taxable and is also subject to a higher mining tax rate given our higher mining profit rate. In addition to the $53.4 million, we completed a one-time CAD34.1 million mining duties payment in connection with the full fiscal year 2019. Going forward we expect to make monthly installment payments for our mining duties.

It is also worth noting that our net finance costs total CAD29 million during the period, which is nearly double the prior year's finance costs. This is mainly attributable to a change in the fair market value of a derivative instrument connected with the Glencore debenture since Champion stock appreciated by more than 43% during the quarter.

It is significant to highlight the fact that such variations in the derivative liability will cease as we are about to repay this facility with the recently announced refinancing instruments.

Due to the high quality nature of our iron ore concentrate, our product attracts a premium over the P62 Iron Ore Index. The Company's realized price before shipping was USD117.1 per tonne or USD129 per tonne including the realized price adjustments in the period. [Growth] of such realized price adjustments, are realized price in the period represents a 17% premium over the P62 reference price often quoted in the market.

During the quarter we faced an average freight rate of USD19.4 per tonne which translates into an average realized price before price adjustments of USD97.7 per tonne or CAD130.1. Comparing this to the previous quarter, and excluding price adjustments, our average realized price increased by over 31%.

As many of you know, the premium captured by our product is mainly attributable to a desire from our customers to increase their productivity. Steel mills now recognize that higher iron ore grades optimize their output while significantly decreasing their emissions in the steelmaking process.

Although we benefit from rising prices, the premium for our product has diminished somewhat during the period. The premium for high-grade material tends to be lower in times of rapidly rising prices, while the premium tends to expand when prices stabilize. We believe the dynamic acts as a natural hedge for our underlying commodity as the market fluctuates.

We remain confident in the structural trend occurring in the high-grade iron ore market and believe our product will continue to capture a substantial premium to the base P62 iron ore benchmark in the future.

When comparing the realized price with our all-in sustaining cost of CAD62.8 per tonne, we generated a cash operating margin of 57% or CAD82.9 per tonne. This represents an increase in the cash operating margin of nearly 70% quarter-on-quarter. These results confirm that Bloom Lake is a world-class asset with the ability to deliver industry-leading margins. As discussed earlier, these strong margins justify our focus on increasing operation reliability during the period.

Given these results, our Company's balance sheet continues to strengthen. Our cash on hand at June 30 stood at CAD210.7 million, an increase of more than CAD57 million compared to the previous quarter. Looking at our debt level, our Company's long-term debt stands at CAD264.5 million or a decrease of nearly CAD17 million compared to the last quarter. Overall our balance sheet improved by CAD74.1 million in the quarter.

Our Company's cash balance in the period was negatively impacted by a CAD34.1 million payment for the full fiscal year 2019 mining duties. We will make mining duties monthly installments going forward. As well, our trade receivables increased by CAD56 million in the quarter. But it is worth highlighting that subsequent to the end of the quarter we received CAD84 million in payments.

In addition, CAD26.5 million in investments impacted the cash balance associated with the accelerated tailings work, a major equipment rebuild program and Phase 2 expansion-related expenditures.

On May 29, we announced three transactions that will materially improve our corporate structure and balance sheet. As discussed in our recent public updates, these transactions are expected to simplify our corporate structure by making Champion the sole owner of Québec Iron Ore, and will significantly reduce the carrying cost of our debt.

All these transactions are advancing as projected and we expect to finalize them in the current quarter. It is worth highlighting that Québec Iron Ore is accruing all operating cash flow since March 31 of this year and will remain with the Company upon closing.

Our Company is on a growth trajectory. On June 20, we announced the results of the feasibility study on the proposed Phase 2 expansion at Bloom Lake. This study envisions to double the capacity from 7.4 million to 15 million tonnes per year.

As many of you know, this expansion was nearly 75% complete when it was interrupted by the previous owner of Bloom Lake. Due to this fact, Champion stands to benefit from approximately USD1.2 billion already invested in this expansion. We are very excited about the projected economic impact on the region as it would create over 500 jobs during construction, as well as 375 permanent operational jobs.

We are in the final stages of completing the NI 43-101 technical report for the feasibility study which should be available on SEDAR in the coming days. This report is being prepared diligently by credible firms in the industry using conservative assumptions and it will highlight the details of our expansion, which we believe to be both robust and realistic.

As previously announced, the strong economics of the feasibility study resulted in the approval and funding of an initial budget of $68 million that will secure the timetable detailed in the study.

During the first quarter we ordered long lead items, launched detail engineering, hired key construction personnel and engaged BBA as the EPCM contractor. We would like to highlight that the bulk of the capital required for the Phase 2 expansion will start to be deployed in the middle of 2020.

The recent strength of iron ore prices should continue to provide strong cash flow generation for the next year and reduce the external capital requirements to complete the project. Champion continues to adhere to its strategy of creating shareholder value and believes that this expansion, together with strong capital management, will demonstrate our commitment to accretive growth for our shareholders.

In closing, on behalf of our management team, I would like to thank the hard work of our entire staff who made such outstanding results possible. Our Company has come a long way in a very short period as we recommissioned Bloom Lake a little over a year ago and has since made significant strides towards improving our business model.

I would personally like to thank everyone who has shared our vision to create a long-term sustainable mining company that can continue to make positive impact on the community. We are excited about the future of our Company and thank everyone that has supported our efforts to this date. At this point, operator, I would like to open the lines for Q&A session.

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Questions and Answers

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Operator [1]

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Orest Wowkodaw, Scotiabank.

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Orest Wowkodaw, Scotiabank - Analyst [2]

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Two questions. The first one on your price realization. Can you maybe give us some color on how you were able to get such a premium over the 65% benchmark in the quarter? I think we calculated around CAD14 a tonne above the 65. And I am just wondering if that is a timing issue of maybe where your sales were in the quarter.

And then secondly, just on the recoveries, the uptick there and the very strong recoveries in June, is that -- was there something specific in June that pushed them that high? And do you think something close to that is sustainable as we move forward here? Thank you.

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David Cataford, Champion Iron Ltd. - CEO [3]

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Thanks for your questions. First, on the realized price, there's an CAD11.9 per tonne that is attributable -- I don't know why I still use that word -- attributable to timing issues with the realized price from the previous quarter. So, the real impact that you see towards the -- in that CAD14 that you mentioned is about CAD2 per tonne. And this is basically timing-related throughout the quarter.

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Orest Wowkodaw, Scotiabank - Analyst [4]

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Okay.

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David Cataford, Champion Iron Ltd. - CEO [5]

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For the second question, so we always mentioned that we were realistic about our 82.9% recovery. What we did during the first year was really to focus on quality and to make sure to never have one single cargo that's off spec. Once we managed to achieve that we started working even more on improving the recovery, there was no capital investment required. It was mostly understanding how the recovery circuit works, how to use it with the operators, how to clean it properly.

And when we initiated our work blitz program we had three challenges at Bloom. The first one being making sure we get the tonnes through, especially in this pricing environment. So, we worked on the reliability of the plant, we worked on the throughput of the mill. And once those two were achieved, which shows in our quarter why we achieved over 200,000 tonnes over our initial nameplate capacity, well then we started focusing on the recovery portion in June.

Is it sustainable at those levels? Right now we're still in the view that 82.9% is achievable. But as you've seen, we've demonstrated that we can achieve higher than that. So, we are going to continue to work to improve that recovery to try to beat those June results.

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Orest Wowkodaw, Scotiabank - Analyst [6]

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Okay, great. Thanks for the color.

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Operator [7]

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Craig Hutchison, TD Securities.

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Craig Hutchison, TD Securities - Analyst [8]

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I just had a question on the CapEx. Obviously you had a bit of an acceleration of CapEx in the quarter. What can we expect for the back half of this year in terms of just the Phase 1 at Bloom Lake?

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David Cataford, Champion Iron Ltd. - CEO [9]

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On only the Phase 1 -- on the tailings portion we're almost in line with our feasibility study. So, feasibility study results for year two was about CAD28 million on the tailings portion. We are going to be slightly over that because we accelerated a portion of the tailings work from the subsequent years.

And apart from that, for the mining equipment and the plant we are going to continue in this price environment to have a reliability focused CapEx spend to make sure that we can get as many tonnes out in the current price environment. But we don't expect any surprises or any new elements to come out on the CapEx side.

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Craig Hutchison, TD Securities - Analyst [10]

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And maybe in terms of the production, you mentioned -- obviously you're very close to 2 million tonnes a quarter here. Do you think you can kind of carry that into the second quarter -- fiscal quarter, those type of production rates?

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David Cataford, Champion Iron Ltd. - CEO [11]

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Well, the second quarter where -- we are working on the same initiatives as we did in the first. But as you know, we don't give guidance. The team is trying to maximize the tonnes that are going through the mill at this moment.

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Craig Hutchison, TD Securities - Analyst [12]

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But there will be no shutdowns -- scheduled shutdowns in the next quarter? Is that correct?

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David Cataford, Champion Iron Ltd. - CEO [13]

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No -- there are some minor shutdowns that are scheduled, but our two major shutdowns, one of them was in May and the next one is going to be either November or early December.

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Craig Hutchison, TD Securities - Analyst [14]

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Great. Thanks, guys.

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Operator [15]

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Hayden Bairstow, Macquarie.

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Hayden Bairstow, Macquarie - Analyst [16]

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Just a couple from me. Just back on that provisional pricing question. Just on the 2 million tonnes that you are shipping every quarter, how much should we think about that gets post-quarter adjustments on provisional pricing? Is it around 20% of the quarter volumes or is there a different number to that?

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David Cataford, Champion Iron Ltd. - CEO [17]

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It's around four vessels that we have an adjustment from quarter to quarter.

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Hayden Bairstow, Macquarie - Analyst [18]

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Okay. And just on the mining duties, you're paying installments now. If the (inaudible) price stays where it is I guess profitability keeps going up. What quarter or [bump] do you have to top that up, or is there a reset of the duties you have to pay every month?

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David Cataford, Champion Iron Ltd. - CEO [19]

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There won't be a reset on the monthly payments of duties. So, what will happen is at the end of the year, depending of the margin that was achieved, we might have to top up a little amount on the mining duties. But during this year there won't be -- we are paying based on the CAD34.1 million divided by the monthly installments.

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Hayden Bairstow, Macquarie - Analyst [20]

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Okay, great. And just one last one on the Phase 2. I mean, sitting in Perth as we do, there's plenty of iron ore projects being kicked off at the moment. Is there any fixed gear that you have to buy for Phase 2 that might come under some cost pressures just given that every major mining company, particularly in Australia, seems to be building something at the moment?

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David Cataford, Champion Iron Ltd. - CEO [21]

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The big advantage for our Phase 2 is that pretty much all the equipment has been already bought. So, the mill's installed, the pumps are installed. We've already ordered the recovery circuit. What is going to be left is some mining equipment and some railcars. We've secured already the slot for the railcars and they are being made quite far away from Perth, so we don't see a big impact.

And in Canada there hasn't been that much new projects coming on, so we don't see any risk there. And the way that we are phasing the mining plan with our Phase 2 is that we don't require many new mining equipment year one and two of the Phase 2. So the bulk of the mining equipment comes in about 2023 as per our timeline in the feasibility. So, we don't see any of these projects ramping up being a negative impact on our equipment.

And just maybe to further that even on the construction personnel available, there was two mining projects available in Québec that were going full speed ahead that were actually halted, one in lithium and one in another commodity. So, that has liberated a whole lot of construction workers. So, we should be able to pick from the best for the construction project at Bloom Lake.

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Hayden Bairstow, Macquarie - Analyst [22]

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Okay, terrific. And just one final one, I guess. As you said, the cost pressures aren't really there. Is there much going on given the iron ore price where it is? Are you seeing interest in additional development through the Labrador Trough and some of these old mothballed projects or is it nothing really happening?

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David Cataford, Champion Iron Ltd. - CEO [23]

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No, in the Labrador Trough, if you remember all of those projects in 2010-2011 that were trying to get up and running, there were CAD8 billion, CAD9 billion, CAD10 billion projects of hard magnetite/taconite in the north, north of Québec.

So, we haven't seen any of those come back on. The only project that has started is the Scully mine, the old Wabush mine by a company called Tacora. And apart from that we haven't seen any activity.

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Hayden Bairstow, Macquarie - Analyst [24]

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Okay, terrific. Thanks, David.

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Operator [25]

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Stefan Ioannou, Cormark Securities.

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Stefan Ioannou, Cormark Securities - Analyst [26]

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Obviously appreciate that you're 100% unhedged and everything. But just with iron ore pricing where it is today, and obviously there's a little bit of concern out there in the media just that iron ore pricing may start to come down at least a little bit, and your Phase 2 CapEx requirements going forward. Is there any thoughts at all to even just hedging a small portion of the production profile?

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David Cataford, Champion Iron Ltd. - CEO [27]

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Again, it's very difficult to hedge only the iron ore. You have to have a view on hedging iron ore and shipping in tandem. If you look at the shipping portion, it's very difficult to hedge it in a diligent way because the futures are very expensive. And the way that we view the high-grade material, the premium has come down to almost about $9 per tonne.

So, the way -- we believe the hedging is much more on continuing to hit quality to make sure that we benefit from that premium as potential iron ore prices can go down. While the P65 should remain at a higher level compared to the P62. So, right now to hedge would be pretty difficult for us.

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Stefan Ioannou, Cormark Securities - Analyst [28]

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Okay, okay, that makes perfect sense. And then just maybe a housekeeping item, just on the formal closure of acquiring 100% of the project. You mentioned sometime this quarter. Are you thinking maybe late this quarter? I guess it's somewhat of a moot point just given, like you said, that everything is being accrued within QIO up until -- from March 31 onwards, but just wondering on the timing of that.

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David Cataford, Champion Iron Ltd. - CEO [29]

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Yes, we are working to close that as soon as possible. But again, because there is no impact on the actual cash portion related to QIO, we will make sure to do it this quarter. But there's no pressure to within the coming days, but that's something that we are going to work to close in this quarter.

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Operator [30]

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Michael Emery, Euroz Securities.

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Michael Emery, Euroz Securities - Analyst [31]

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Terrific results as usual. Just quickly, a couple of things. So, you sort of touched on the recoveries. Just wanted to know, are you guys still mining through the limonite patches that you encountered early on? And if so, when do you expect to get through that -- those patches?

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David Cataford, Champion Iron Ltd. - CEO [32]

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Thanks for the question, Michael, and for staying up this late. The limonite patches should be pretty much finished in 2020 and we are mining in them right now. So, we've really managed to understand our flow sheet better.

The main impact on recovery with limonite was a bit less the actual recovery circuit, but more the fact that it created a whole lot of variability in the plant, especially because we had to cut production with the tailings, especially the fine tailings in our thickener.

So, we've managed to really solve that portion, which allowed us to pass more material. But we don't see an as big risk on limonite as we did last year as the team has worked through that issue.

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Michael Emery, Euroz Securities - Analyst [33]

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Okay, perfect, thank you. And on your -- just really on your Phase 2, your (inaudible) coming in mid-2020. Is that -- that's calendar year I assume, or you're talking fiscal year?

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David Cataford, Champion Iron Ltd. - CEO [34]

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Oh, sorry. Yes, it's calendar year.

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Michael Emery, Euroz Securities - Analyst [35]

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Calendar 2020, okay, cool. And then one last one from me, just on the shipping rates. Obviously it hasn't gone up in tandem with the iron ore price because of the Vale shut down. But now with Brucutu turning back on, do you expect or are you seeing that shipping rates are likely to creep back up back into the long-term historical average correlation?

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David Cataford, Champion Iron Ltd. - CEO [36]

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Well, we saw them go up slightly when they restarted, but they've come back down now. So, we always forecast about an average of 20% of the iron ore price. And if we look at mid-three months, six months and one year averages, we are still in that range. So, we feel comfortable it is going to stay in that sort of range.

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Michael Emery, Euroz Securities - Analyst [37]

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Excellent. Great, thanks a lot for that, guys. Much appreciated.

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Operator [38]

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Gordon Lawson, Paradigm Capital.

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Gordon Lawson, Paradigm Capital - Analyst [39]

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I just have two quick questions for you here. How much of the cash cost bump would you attribute to the shut down and production push versus any residual issues? And can you talk about the volume of your sales into Japan and any premium or discount expectations with respect to realized pricing?

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David Cataford, Champion Iron Ltd. - CEO [40]

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Thanks, Gordon. So, if we look at the May shut down, it probably overshot by about CAD6 million if you compare the initial budget with all the initiatives that were done. We changed some pumps that we didn't have to, we increased liner changes, did the same on the crushers to make sure that we can pump as many tonnes as we can in this. So, that was a bulk of the spend.

And the rest would be associated to the work blitz that we did, so the external contractor we hired to help us in the initiatives in the mine as well. Because when you improve the reliability of the plant you also need to make sure you can pump those tonnes from the mine. So, we spent a little bit more on the mining equipment to make sure that we get that availability. So, in total it was probably about CAD 10 million of those costs that were associated to that increased tonnage and reliability.

For the tonnes into Japan, we have up to 3 million tonnes per year to Japan, but we are selling more realistically about 2.5 million tonnes in Japan. And we don't expect any discounts to move those tonnes in the Japanese market or anywhere else in the market, especially if you look at the CAD8 to CAD9 premium right now for our material. It's pretty cheap compared to the $30 premium we saw last year. So, we don't see the need to give a discount to sell those tonnes. Did I touch all your questions, Gordon?

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Gordon Lawson, Paradigm Capital - Analyst [41]

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Yes, that's excellent. Thank you very much.

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Operator [42]

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Lucas Pipes, B. Riley.

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Lucas Pipes, B. Riley - Analyst [43]

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Most of them have been asked. I wanted to ask a quick one on the iron ore market obviously. There's a lot of concern in the market that current prices are not sustainable with weaker steel margins in China and elsewhere. I wondered if you can share your perspective as you look out onto the global supply/demand picture and your outlook for the next six months or so. I would appreciate your thoughts. Thank you.

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David Cataford, Champion Iron Ltd. - CEO [44]

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Yes, thanks for your question, Lucas. We just came back from Japan. We did about a 10-day trip there and met with all the steel mills over there. And again, the main concern for everyone is quality. People often talk about that 66%, but people are worried about the phosphorus, the aluminum. They want to make sure to secure those tonnes and they're willing to pay premiums for that material.

So yes, there's current talk about iron ore price, but as we see the market we believe even when iron ore price is soft, well then we expect the margin for our type of material to be able to climb back up once those steel margins get back into higher levels. So, that's pretty much our view on the -- we still believe that the market will require the Bloom Lake type material and that it will attract a premium.

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Lucas Pipes, B. Riley - Analyst [45]

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Very helpful, thank you. Then maybe a quick follow-up. Just broadly speaking, what's your sense in terms of the supply response globally to these higher iron ore prices? Are we seeing smaller scale projects come online or being in the works? Is there talk of maybe some larger additions? What are you seeing out there in terms of supply coming to the market? Thank you.

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David Cataford, Champion Iron Ltd. - CEO [46]

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We try to focus most of our research on the higher grade market and what kind of supply could come back on or could come on. And the big advantage that we have is that anybody that wants to bring on a high grade project will have to get quite a large amount of CapEx.

The only project we saw sanctioned recently was Fortescue with their higher grade magnetite project which was roughly about USD2.8 billion or a 20 million tonnes per year brownfield expansion of which already [USD]700 million has been spent.

So, anybody wanting to bring on high grade, especially post-Vale incident, well, it's going to cost a whole lot into tailings management. So, most of these feasibilities that you saw in the past years will have to be revised and updated to make sure the tailings portion is correct.

So, that's the big advantage that we have at Bloom Lake. The previous owner already spent over 700 million. We spent another close to about 100 million since the project and the sustaining CapEx, and that was for a 7.5 million going to 15 million tonnes per year operation.

So, if you look at those numbers, we still don't see much supply coming on on the high grade. And the final point on that is not only do you need to spend the CapEx, but you need to also have the resources.

So, Bloom Lake has about a 20-year mine life, but Champion has a 5 billion tonne resource in the ground and the rest of the Labrador Trough is pretty much controlled by Arcelor and an IOC. And elsewhere in the world there's not too many areas where they can produce high grade. So, when we put all those together we still believe that it's going to be difficult to bring on new supply on the high grade market and to be able to dislodge some tonnes in the future.

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Lucas Pipes, B. Riley - Analyst [47]

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Always great to hear that. I appreciate your perspective very much.

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David Cataford, Champion Iron Ltd. - CEO [48]

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Thank you, sir.

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Operator [49]

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Scott Schier, Clarksons.

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Scott Schier, Clarksons Platou - Analyst [50]

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Good morning, everyone. Just one question left for me this morning. I was hoping you'd talk a little bit about your capital allocation priorities. We estimate that Champion will be generating a pretty substantial amount of cash at today's iron ore prices. Do you expect most of it will just go towards funding the Bloom Lake expansion or are there any thoughts about starting a shareholder return program?

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David Cataford, Champion Iron Ltd. - CEO [51]

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That's a good question. For sure we want to focus on doing the expansion. That is our main focus right now, especially in the current prices and future look of the prices. That's the most accretive project for our shareholders. But at the same time, we are reviewing different dividend strategies throughout the Company and we will get back to the market once we've taken a decision on that.

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Scott Schier, Clarksons Platou - Analyst [52]

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Great, thank you very much. I'm looking forward to more color on that. Thanks for taking my question.

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Operator [53]

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Jacques Wortman, Laurentian Bank.

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Jacques Wortman, Laurentian Bank - Analyst [54]

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Excellent quarter. Just a couple questions from me. First of all, how sustainable -- you talked about the recovery rate. How sustainable is the higher iron ore head grade that you've been getting?

Secondly, can you just give us a bit more color on that CAD11.90 per tonne price adjustment in slide 13? I just want to make sure that I understand what the nature of that is and how to use it going forward.

Third, apologies if you've addressed this already. What's roughly the current premium Bloom Lake [con] is getting to P62? And I guess the last thing is do you expect the Phase 2 feasibility study to hit SEDAR this week or next week? Can you just be a bit more granular on when you think that might be fully completed? Thanks.

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David Cataford, Champion Iron Ltd. - CEO [55]

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Thanks for your questions. Can you just repeat the actual first one? The one that I -- on the tonnes.

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Jacques Wortman, Laurentian Bank - Analyst [56]

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Yes, regarding the sustainability of the higher iron head grade that you (multiple speakers).

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David Cataford, Champion Iron Ltd. - CEO [57]

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Yes, sorry about that, yes. So, what's happened with the Bloom Lake ore body is that, especially in all of these limonite patches, we've underestimated the head grade of a lot of our limonite resources. So, when we see higher head grades right now we're actually not mining higher grade material; we're just seeing higher grade than what the block model had predicted.

When you look at the average life of mine head grade, that's still our view for the long-term head grade at Bloom Lake. But we are not high grading right now. It's really only a matter of adjusting the actual head grade versus what we had planned. I'll just pass it over to Natacha for the CAD11.9 adjustment.

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Natacha Garoute, Champion Iron Ltd. - CFO [58]

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Thank you, David. Thanks for your question. So, as you know, our sales are actually realized as soon as the vessel leaves Pointe-Noire in Sept-Îles. And then we get a final price adjustment once the tonnes are landed at their destination.

So, what happens in the environment right now is that some of the sales that were shipped back in the last quarter, when they landed in either China, the Middle East or Japan, the price was much higher given the recent trends and that's what caused the price adjustment between the time it was shipped from Sept-Îles to the time it arrived at destination. I hope that answers your question.

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Jacques Wortman, Laurentian Bank - Analyst [59]

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Yes, that's perfect. Thank you very much. Okay, I understand now. And then with respect to the premium I guess to P62 currently for your Bloom Lake con.

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David Cataford, Champion Iron Ltd. - CEO [60]

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Yes, currently were getting about 7% premium. The P65 is about 7% premium. We get a little bit more than that because we have a 66.2. But as we mentioned, that premium has come down as these iron ore prices are very volatile. But we believe that this will get back to more normal levels as soon as the P62 starts slowing a little bit.

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Jacques Wortman, Laurentian Bank - Analyst [61]

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Okay. And then the last question -- sorry, I had a wash list I guess. Last question was about when you expect the feasibility study to hit SEDAR.

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David Cataford, Champion Iron Ltd. - CEO [62]

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Yes, August 4 is the deadline, so it will be before that.

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Jacques Wortman, Laurentian Bank - Analyst [63]

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Perfect. Okay, thanks very much. I appreciate your time.

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Operator [64]

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Brian MacArthur, Raymond James.

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Brian MacArthur, Raymond James - Analyst [65]

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Just following up on that provisional pricing question so I understand it. And I get it, like there's a delay when you first price it and then there's a realize price. Is that based on the P62 price that changes in those -- in that 30-day period, or is it based on the change in the P65? So, if we get a spread change there, we're going to have even -- like which one is causing the volatility? The 62 reference price as you do it or the 65?

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David Cataford, Champion Iron Ltd. - CEO [66]

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We've managed to sell all of our tonnes based on the P65 index. So, that way we are only impacted on our sales by the P65 index and not by the P62.

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Brian MacArthur, Raymond James - Analyst [67]

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Right, so theoretically going forward the volatility shouldn't be necessarily as high, assuming we believe premium stuff is going to trade at a higher price. Is that a fair statement?

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David Cataford, Champion Iron Ltd. - CEO [68]

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That's what we view as well, yes.

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Brian MacArthur, Raymond James - Analyst [69]

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Perfect, thank you. And just one other question, most of my others were answered. But just so I'm clear on the CAD34 million cash payment. This is more just a cash question. You also say it is offset by current payables. So, actually your payables have gone up this quarter.

Is there then like just the way the timing lag worked out a fairly big tax payment over the next two quarters or something? Because it looks like it's gone up CAD19 million and buried in that was CAD34 million you said you paid out. Or am I reading that wrong?

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David Cataford, Champion Iron Ltd. - CEO [70]

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No, the way the taxes work is after you've done your first year, well then this sets the amount you have to pay. So that's why we paid CAD34 million for the 2019 fiscal year. But now going forward we're making monthly installments to not have that bullet at the end.

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Brian MacArthur, Raymond James - Analyst [71]

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Okay, great. Thank you very much.

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Operator [72]

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Orest Wowkodaw, Scotia Bank.

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Orest Wowkodaw, Scotiabank - Analyst [73]

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Thanks for taking the follow-up. I'm just curious if you could give us an update on your plans for financing with respect to Phase 2. And does the current iron ore market in terms of high pricing change any of that? Thank you.

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David Cataford, Champion Iron Ltd. - CEO [74]

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As you can see from the results that we have now, we are generating quite a lot of cash. And because the bulk of our spend is going to be in about 12 to 13 months, if we look at current prices and current margins, we expect that we'll be able to finance quite a bit of that from our own cash flow. And we are looking with different non-dilutive solutions to be able to bridge the gap if there is a gap on the capital required for Phase 2.

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Orest Wowkodaw, Scotiabank - Analyst [75]

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Okay, interesting. Okay, so you might actually then wait as much -- would you wait as long as a year then to actually secure third-party financing whether that's additional debt or whatever? Or would you like to secure that ahead of time?

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David Cataford, Champion Iron Ltd. - CEO [76]

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That's why we approved the first 68. That brings us into about midyear of 2020 to not miss that timeline. And we are going to evaluate the price going in the current quarter and the next one. And we are still working in solutions in parallel, but it might shift our decision depending -- if the iron ore price stays where it is for the next six months, well it's going to -- we're going to generate quite a lot of cash and won't require much for the capital part of Phase 2.

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Orest Wowkodaw, Scotiabank - Analyst [77]

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Okay. Is the most likely financing solutions debt?

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David Cataford, Champion Iron Ltd. - CEO [78]

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Well, we're going to find the best financing solution. And as we mentioned, we are working on non-dilutive instruments right now.

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Orest Wowkodaw, Scotiabank - Analyst [79]

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Okay, thanks so much.

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Operator [80]

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Brock Salier, Sprott.

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Brock Salier, Sprott Asset Management - Analyst [81]

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I was just wondering if you could talk a bit about the underlying unit cost. It looks like you had on a tonne of rock your mining costs and processing costs have crept up over the quarter. Is that a seasonal thing? Is there any transition that you expect or should we expect the dollar per tonne of rock cost to flatten from here?

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David Cataford, Champion Iron Ltd. - CEO [82]

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Thanks for your question, Brock. It's not a seasonal effect; it's really associated to the fact we want to push more tonnes out. So, we do some -- some of the maintenance was capitalized, some of it was on OpEx, and we've invested quite a lot on either mining equipment and plant equipment to make sure it doesn't stop.

That's why we've hit record availabilities in the plant and at the mining equipment, to make sure that with the current margins now it's better to have a slightly higher operating cost and be able to get the tonnes out. Obviously if the iron ore price would go down we would switch strategies into cutting costs. But right now we're not overspending but we're really investing to make sure that we get as many tonnes out in the current market.

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Brock Salier, Sprott Asset Management - Analyst [83]

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So, should we expect going forward that 10% or 15% drop back to the March quarter unit cost rates going in the second half of the year? Or should we expect these costs to stay where they are as long as your iron ore price does?

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David Cataford, Champion Iron Ltd. - CEO [84]

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Yes, again, we view this on a month-to-month basis and discuss with the operating team at Bloom. And we make sure in current prices we will want to continue to invest to make sure that we hit the amount of tonnes. But the big advantage is we can -- because it's not an overhang on us it's something that if the market would shift we can also shift quite quickly to get back to the level that you saw last year.

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Brock Salier, Sprott Asset Management - Analyst [85]

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Understood. And just following up on that shipping cost question. We've seen the Brazil rate spike up in July. Obviously you have various backhaul synergies and you drop off very specifically. Are you seeing your July shipping prices hit mid-20s or low 20s or still down in the teens?

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David Cataford, Champion Iron Ltd. - CEO [86]

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You can really follow our shipping price. If you look at the C3 benchmark and then, depending of timing, you just add a small premium for the Sept-Îles. And we obviously try not to book the vessels on the days where it spikes and make sure to have a more --.

We only have about three vessels per month, three to four vessels per month, so we can play a little bit on timing for that. But we monitor it quite closely because, when Vale did come back up, a lot of vessels left at the same time. But you saw the price go back down fairly quickly as well.

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Brock Salier, Sprott Asset Management - Analyst [87]

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So, we should expect low 20s rather than high 20s would you expect in the second -- or in this current quarter? Or are you still seeing teens in July?

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David Cataford, Champion Iron Ltd. - CEO [88]

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If you look at the C3, the C3 was in the 20s, so you would have to expect in the 20s for the shipping price.

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Brock Salier, Sprott Asset Management - Analyst [89]

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Understood. That's all from me. Thank you.

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Operator [90]

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[John Schultz], Macquarie.

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John Schultz, Macquarie - Analyst [91]

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Just a few ones. Just getting around to that planned shutdown, is this a normal thing on the schedule? Are we going to see something about every 12 months on that?

And the next one, just looking at the Phase 2 and the rail port infrastructure. What's the [vessel you guys] are currently running on at the moment and what do you need to do to be able to get infrastructure up to handle the 15 million tonnes?

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David Cataford, Champion Iron Ltd. - CEO [92]

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So, if we go to the shutdown, we have basically about a five- to six-day shutdown scheduled every six months at Bloom Lake. So, you can expect that going on for the life of mine. The extra investment that was done this year or at this shutdown was mainly attributable to the fact that the iron ore price is fairly high and that we've made sure to focus on reliability.

And again, as I mentioned, we switched some parts that could've potentially lasted. But we wanted to make sure to focus on reliability to really get those tonnes out. So you can expect a major shutdown every six months but not the cost overrun associated to this one in the future.

As for Phase 2 and the port infrastructure, the current birth has a capacity of 50 million tonnes per year and we are currently the only users. So, there's no investment required on the actual birth. The real investment is more around the set down area and what we need -- our car dumper is sufficient but we need to invest a little bit in sidings on the rail, we need a new stacker reclaimer and some civil work to develop a new stockpile area. All in all it's about CAD70 million for the investment at the port.

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John Schultz, Macquarie - Analyst [93]

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Okay, and approvals for the use of rail in port as well -- I mean, you can scale that up to 15 with no issues?

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David Cataford, Champion Iron Ltd. - CEO [94]

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Correct.

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John Schultz, Macquarie - Analyst [95]

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Okay, perfect. And then one more. So, on your 43-101, that work being done, would the update just be based on production trends or would there be any new drilling data to incorporate in that one?

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David Cataford, Champion Iron Ltd. - CEO [96]

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There's not any additional drilling data because what we basically did -- when we did our first feasibility we used a CAD60 per tonne iron ore price for our resources and that gave us just over 900 million tonnes of resources for Bloom Lake. And what we did for our Phase 2 feasibility is basically converted those resources into reserves.

The drilling that was done was sufficient and all we had to do was to operationalize the resources. And that has given us a 20-year mine life with Phase 1 and Phase 2. And we are going to continue drilling in the future to better define our resources in the South because we do have about 5 billion tonnes of resources around 60 kilometers south of Bloom Lake. So, we'll start focusing on those in the coming year to be able to make sure Bloom Lake can operate for the next 80 to 100 years.

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Operator [97]

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There are no further questions. You may proceed.

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David Cataford, Champion Iron Ltd. - CEO [98]

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Thank you very much, everyone, for joining the call and to participate into another set of historical records here at Bloom Lake. And looking forward to chatting at the next investor call in three months. Thanks, everyone.

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Operator [99]

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