U.S. markets closed
  • S&P 500

    3,298.46
    +51.87 (+1.60%)
     
  • Dow 30

    27,173.96
    +358.56 (+1.34%)
     
  • Nasdaq

    10,913.56
    +241.26 (+2.26%)
     
  • Russell 2000

    1,474.91
    +23.09 (+1.59%)
     
  • Crude Oil

    40.04
    -0.27 (-0.67%)
     
  • Gold

    1,864.30
    -12.60 (-0.67%)
     
  • Silver

    22.99
    -0.21 (-0.91%)
     
  • EUR/USD

    1.1637
    -0.0038 (-0.33%)
     
  • 10-Yr Bond

    0.6590
    -0.0070 (-1.05%)
     
  • GBP/USD

    1.2744
    -0.0007 (-0.06%)
     
  • USD/JPY

    105.5000
    +0.0980 (+0.09%)
     
  • BTC-USD

    10,670.63
    -64.73 (-0.60%)
     
  • CMC Crypto 200

    230.19
    +12.36 (+5.67%)
     
  • FTSE 100

    5,842.67
    +19.89 (+0.34%)
     
  • Nikkei 225

    23,204.62
    +116.82 (+0.51%)
     

Edited Transcript of CIA.AX earnings conference call or presentation 20-May-20 12:30pm GMT

Q4 2020 Champion Iron Ltd Earnings Call

Jul 9, 2020 (Thomson StreetEvents) -- Edited Transcript of Champion Iron Ltd earnings conference call or presentation Wednesday, May 20, 2020 at 12:30:00pm GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* David Cataford

Champion Iron Limited - CEO & Director

* Michael Marcotte

Champion Iron Limited - VP of IR

* Natacha Garoute

Champion Iron Limited - CFO

* William Michael O’Keeffe

Champion Iron Limited - Executive Chairman

================================================================================

Conference Call Participants

================================================================================

* Craig Hutchison

TD Securities Equity Research - Research Analyst

* Gordon Lawson

Paradigm Capital Inc., Research Division - Senior Research Associate

* Hayden Bairstow

Macquarie Research - Analyst

* Jon Scholtz

Macquarie Research - Analyst

* Lucas Nathaniel Pipes

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

* Orest Wowkodaw

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

* Stefan Ioannou

Cormark Securities Inc., Research Division - Analyst of Institutional Equity Research

================================================================================

Presentation

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

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 Fourth Quarter and Full Year 2019 Conference Call. (Operator Instructions)

Mr. Michael Marcotte, you may begin your conference.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Thank you, operator. And good morning, everyone. Good evening for those dialing in from Australia. I'd like to thank everyone for joining us today to discuss the fourth quarter and full year results of the fiscal year ending March 31, 2020. I'd like to direct 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 Events and Presentations section.

I'd also like to remind listeners that some of the matters to be discussed during this call may contain forward-looking statements, and I would refer you to the disclaimer at the beginning of the presentation, which will be used during the call today. For additional information with respect to forward-looking statements, risks and assumptions, please consult our most recent MD&A, which is available on our website.

Please note that all dollar amounts referred to during this presentation are in Canadian dollars, unless otherwise stated.

Joining me today from the Champion management team are David Cataford, our Chief Executive Officer; Michael O’Keeffe, our Executive Chairman; and Natacha Garoute, our Chief Financial Officer.

With that said, I'll turn the call over to our Executive Chairman, Michael O’Keeffe, who will then be followed by our CEO, David Cataford. And after management's comments, we will hold for a Q&A session at the end. Michael?

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Thank you, Michael, and welcome -- hello, everyone, and welcome to the call. I'm currently calling from Australia, which is a lot different to all of my colleagues in North America and also specific in Québec with the pandemic that's raged the world. I mean it's just quite amazing to see how our management team have been able to operate and curb through this. Just to give you an example where I am, I think we haven't had a case in the last 2 weeks, and we had a total sum in the area where I am is about at 10. So it's quite a different situation. And I've been locked out of getting back to Québec, but in daily contact with David and his team. But look, I just -- when you think about how young our company is and how young the management is, and David only took over as CEO 12 months ago, it's been quite an amazing achievement. And I'm so proud of him and the team, that we stand here today, still operating. We've been able to manage a process of isolating people in an area where it's been ranging. And we set standards that are now being followed by rest of the mining community, the government is using. I mean that says a lot for a team that can operate not only in operation but a stressful situation or a social issue like this is nothing short of outstanding. So I'd like to publicly go on record of saying that.

But if you look at where we've come from and where we are today. The first year, we thought it was very good operating second year, our full year of operation as -- I'll let David run through all the numbers for you. But here we are sitting with $300 million of cash through a period of time where we've been able to -- where we started out owning a percentage of this asset. We now own 100% by paying back the government. We paid back our debt to Glencore. We paid back the convertible notes. We own the railcars. We can go on and on and on. Still we have $300 million of cash.

So look, it's been a combination of taking a gamble when none believed in iron ore. And to look at it today, with our iron ore price for the 65 material, north of $110 a tonne. You don't need dream or something like that. And we don't want to make sunshine out of other people's misfortune, but Brazil is struggling. They were struggling before they went to this with not only the social issues, but all of their physical issues with operations. And that's driven the price. And I'd say if the pandemic hadn't have arrived and Europe and Japan were operating as per normal, you'd see a huge, huge shortage in supply for high-grade material. And it's something we're always forecasting. So that's helped us a lot, obviously, the market. But to be able to operate and produce like we have, and David can run through those numbers with you, is phenomenal for a young team. And even an experienced team that have operated the bigger companies, it's a huge tick of approval.

So I won't go on too much. But if you look at the market today, the price is -- what's happened on shipping, what's happened on exchange rate, it gives us a great opportunity to continue generating cash. And I must admit we're not sitting down thinking the other week about where we were sitting. I thought this doesn't hurt us at all, not having to make a decision to go and borrow money for Phase 2 because we're accruing cash so fast. And at the rate that we are with the market terms, it just puts us in a strong and strong position as we go forward. So everything is looking well for us. I don't get too carried away, something could happen tomorrow that everyone knows mining, everyone knows where on quite a knife edge of social situation. So we thank our lucky stars and bless God that we are in a fortunate position that we're healthy and we are operating.

So with that note, I'll pass over to David, and I'm happy to answer any questions in the Q&A session that follows.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Thanks, Michael, for the introduction. So today, we report our fourth quarter results from the 2020 fiscal year, which also includes the completion of our first full year of commercial production. I'm proud to report the company's accomplishments as we delivered an all-time annual production record at Bloom Lake. Ever since we decided to recommission Bloom Lake, our employees have repeatedly demonstrated their ability to improve operations, enabling us to deliver such robust results. Our operational capabilities and strong balance sheet positions the company for growth and enhances our ability to navigate current economic uncertainties. The considerable challenges posed by the recent COVID-19 pandemic has dramatically changed the dynamic for many industries, including mining. We are thankful of our workers, partners and communities who rapidly adapted to new measures aimed to mitigate the risks related to COVID-19. Since the beginning of the pandemic, we have established measures and protocols, which meet or exceed government issued guidelines for the mining industry, which is currently recognized as a priority service in the province of Québec.

Although the Québec government stated that the mining industry could resume normal operations as of April 15, our focus remains on the health and safety of all of our stakeholders. As announced on April 23, we have deployed a plan to gradually ramp up operations in order to reduce the risks for our workers and communities. As of today, we have no known cases of COVID-19 within our workforce, and we remain committed to adapt our measures and operations as the situation evolves.

Despite an increased focus on addressing the COVID-19 pandemic, this has not diminished our commitment to maintain a high standard for our worksite safety measures. In the first -- fourth quarter, no serious injuries were reported. While Québec Iron Ore's overall statistics for the year approaches the Canadian open pit mining benchmarks, we remain conscious of the work required to improve our workplace safety. We look to our people to leverage our strong health and safety culture, well anchored in our company to further improve our work environment and its safety statistics. With the reduction in activities due to the COVID-19 pandemic, we took the opportunity to introduce new virtual training programs for many of our workers. We look to further engage our workers on continuous training for them to adapt to their changing work environment in response to the pandemic.

Turning to the environment. No major environmental issues occurred during the period. We continue to believe that our company needs to participate in the transition towards a green economy and the fight against climate change. As such, we recently completed a detailed analysis of our energy consumption, which clearly demonstrates the benefits of the several structural changes implemented by our company since we recommissioned Bloom Lake in 2018.

In addition to a saving of 40% in greenhouse gas emissions from the significant investments completed to date, approximately 65% of our energy consumption now originates from renewable energy. With these impressive emission reductions as of 2019, our operations are no longer considered a significant imager as per Québec's regulations for the cap-and-trade systems. As such, our company has received carbon credits for over 19,000 tonnes of greenhouse gases, which can be sold at auction with the Western Climate Initiatives. These accomplishments also position our company favorably with customers looking to reduce their emissions across their own supply chain.

In the period, we also improved our already strict waste management process, which has resulted in a significant reduction in residual waste year-over-year. Our team also participated in a new initiative with nearby communities to recover and distribute wood harvested by our operations. As discussed by Michael, despite challenging global economic conditions, iron ore prices remain resilient. Robust iron ore prices, along with declining freight costs and a depreciating Canadian dollar, offer our company an attractive operating environment. Like several industries, steel demand is likely to be affected by the COVID-19 pandemic. However, iron ore prices remain stable, as several mining operations globally were also affected by the pandemic, which balanced the supply demand dynamic. Brazil, which is the world's largest producer of high-grade iron ore, experienced a significant production impact from an abnormal rain season in the quarter. This rain season, in addition to ongoing permitting issues in the country, has limited their ability to supply high-grade iron. Accordingly, the premium for the high-grade P65 iron ore index over the traditional P62 iron ore index has considerably widened as of late. When compared to the previous quarter, the average premium for the P65 index over the P62 index expanded from 10.8% to 16.3%. Today, the P65 index premium sits at 17.4%.

China consumes approximately 70% of the world's seaborne iron ore supply. In response to economic stimulus, the Chinese economy appears to be on rapid path to recovery. As such, our product continues to be in strong demand with our volumes committed for the foreseeable future. Our company also benefits from reduced global economic activity, which has materially affected fuel prices and freight costs. The C3 index, which is used as a benchmark to price our freight, has corrected by over 30% when compared to the previous period, and now it appears disconnected from its historical average with iron ore prices. As we typically book freight rates a few weeks prior to a vessel arriving at our port in Pointe-Noire, we should benefit from the current depressed freight rates for this quarter. Worth noting that the Canadian currency is also depreciating rapidly which is acting as another tailwind for our product pricing.

As we continue to work on several innovations to improve operational reliability and test a new product offering, Blue Lake continued to track favorably to its nameplate capacity in the period. The ore mined in the period increased by over 10% compared to the previous quarter. This improvement is mainly due to higher equipment availability following investments made in the mining equipment rebuild program over the last few quarters. During the quarter, we performed a 3-day planned shutdown to install new inner discharge grates, which appear to be able to sustain a higher throughput. These changes led to a strong plant performance with ore milled up by more than 5% sequentially.

Ore recovery averaged 82.3% in the period and benefited from the operational innovations implemented during the first half of the fiscal year. Considering the recovery was negatively impacted by a low silica commercial production test during the quarter, all recoveries are running in line with expectations and are already surpassing several peers in our industry. Although we are always striving to improve on our results, our operations demonstrated strong overall stability which attests to the billions of dollars invested at Bloom Lake over the years.

I'm also very proud to report the results of a commercial production test completed in the past quarter. At the request of an important customer, our team produced a cargo of 68% iron ore with combined silica and alumina below 2.6%. This product is believed to qualify for DR pellet feed material, which can ultimately be utilized by steelmakers using electric arc furnaces.

Our current product specification remains in high demand and already contributes to emission reductions in the steel industry from the sintering process to blast furnaces and basic oxygen furnaces. However, the steel industry is believed to be at a turning point where electric arc furnaces, which primarily consume scrap material, are believed to be gaining market share over the coming years within emerging markets, such as China. In addition to scrap, electric arcs also rely on DRI pellets to dilute contaminants embedded in the scrap material. Not only is DR quality concentrate expected to increase in demand, it is also in limited supply globally. While many pellet producers are vertically integrated, several steelmakers rely on the global seaborne market to source supply, which is concentrated in few areas, namely Brazil, Peru and Russia. We now know that Bloom Lake is one of the very few producers globally that can adapt with a likely transition to increased electric arc furnace usage in the steelmaking industry in the coming years.

As we look to partner with industry players with long-term vision, this high-quality product, combined with our stable operating jurisdiction, could attract a new subset of customers for our company. With our operational momentum and favorable commodity prices, our company continues to deliver strong financial results.

In the quarter, our company generated sales of $175.7 million, EBITDA of $61.1 million and net income of $18.4 million. Even more impressive are the results we set for the recently completed fiscal year, where we delivered historical annual records for sales and EBITDA. In the period, the total free on board cash cost was $53.9 per tonne with an all-in free on board sustaining cost of $59.8 per tonne, both showing an improvement from the prior quarter. This improvement was realized despite the impact of the commercial production test discussed earlier and the 3 days of scheduled downtime where we replaced inner discharge grates. As well, despite higher costs when compared to the previous year, the recently announced changes at the SFPPN port operations have started to show improvements.

While our sales and EBITDA were higher than the previous quarter, our net income was slightly lower, resulting in an earnings per share of $0.04. Several items influenced our net income, including an unrealized foreign exchange loss on long-term debt, given the significant depreciation of the Canadian dollar. Higher depreciation related to the mining equipment rebuild program and the higher effective tax rate related to a nondeductible foreign exchange loss on the long-term debt. When focusing on our fiscal 2020 costs, our operations demonstrated great flexibility to improve cash flow from operations. Our operating costs were higher than the previous year as we deployed an initiative aimed at improving mine and plant reliability as we sought the benefit from the strong iron ore prices. As such, Blue Lake produced above nameplate capacity and delivered a record production year. The additional volume resulting from our initiatives increased sales by $41 million in the fiscal year.

Our operating costs in the fiscal year were also impacted by some unscheduled downtimes, a $30 million program to accelerate tailings-related work and a higher strip ratio in preparation of the company's Phase 2 expansion project. In the quarter, the high-grade P65 index saw an average premium of 16% over the traditional P62 iron ore benchmark.

Looking at our sales, our gross realized price was USD 96.9, which represents a premium of 9% above the P62 index. Our lower premium over the P62 index reflects the timing of our sales in a somewhat volatile pricing environment as well as the mark-to-market adjustment for 654,000 tonnes that remained in transit at the end of the period. Removing the single-period impact of such adjustments, our gross realized price for the fiscal year, including mark-to-market adjustments, average USD 107.2 which is in line with the P65 high-grade index average of USD 106.4. As discussed earlier, the freight index from which we base our freight cost, saw a significant correction in the period. Our freight costs for the quarter averaged USD 25.8, which is elevated compared to the freight index in the same period. This is explained by the premium we typically pay in the winter months and the fact that we normally lock our freight rates weeks prior to the vessels arriving at Pointe-Noire.

Assuming freight rates remain low, we expect to benefit from the depressed market in the current quarter. Our efforts to manage cost and the premium attracted for a high-quality product translates into strong margins for our business. During the quarter, our cash operating margin was $33.3 per tonne, which is a sequential improvement and converts to an EBITDA margin of 35%.

Looking at our fiscal 2020 results, the company delivered an EBITDA margin of 44% compared to 42% in the prior year and confirms the ability of our company to generate healthy operating margins over time. With these robust results, our balance sheet is strengthening. At the end of the period, our cash on hand and long-term debt face value stood at $298.7 million and $283.7 million, respectively. When including our working capital, our balance sheet has improved by $26.3 million in the period.

While we are well positioned to continue and accumulate cash from operations, we believe that our strong balance sheet will position the company for growth and enable us to participate in an economic recovery following the impact of COVID-19. In the meantime, our product remains in high demand, and the strength of our balance sheet puts our company in a powerful position.

In the period, we added over $111 million to our cash position. This increase in cash stems from the $42.2 million generating from operating cash flows and the positive efforts from the accelerated collection of receivables. In the period, we also drew USD 20 million from our revolving line of credit. To further improve our liquidity, we received over $15 million from the exercise of options and warrants and benefited from a gain on foreign exchange impact.

As our company's financial strength improves, we continue to diligently consider our organic growth plans. Our Phase 2 expansion project continues to advance with $58 million deployed to date from the initial $68 million budget. The work to date has significantly derisked the construction time line, initially estimated at 21 months, and the project remains very flexible regarding the ability to change its completion schedule.

I would like to take this opportunity to remind everyone of the economic findings of the feasibility study, which we released last June. The feasibility study examined the proposed Phase 2 expansion project, and it demonstrated an IRR of 33% and an NPV of nearly $2.4 billion. As of the end of the fourth quarter, we have now deployed approximately 10% of the capital required to complete the Phase 2 expansion project, estimated by the feasibility study.

Current iron ore prices also remain robust compared to our initial assumptions now approximately 36% higher than the price assumed in the feasibility study. As such, we continue to believe that the expansion project likely offers our shareholders the best return on investment for our cash on hand over time. With a priority to reduce the risk related to COVID-19 for our workers, discretionary capital expenditures have been suspended as announced on March 24. As such, we continue to work closely with our partners and advance detailed engineering to position the project for rapid completion, pending a final investment decision. Our commitment and priority is to safeguard the health and safety of our people.

In closing, I would like to express my gratitude to our workers, union and communities who are all aligned to mitigate the risks related to COVID-19. While many companies and industries are either closing or announcing mass layoffs, we continue to benefit from everyone's collaboration as we move forward and build on the positive impact we are making in the region. Since our first day when we decided to recommission Bloom Lake, we knew that with the right team, we could significantly reduce operating costs and compete globally. The implementation of structural changes and the management of our costs required a dedicated and aligned workforce, which has been the cornerstone of our success. The same dedication and alignment will also enable us to navigate the current challenges we all face, and we believe that this foundation and partnership will allow our company to flourish for years to come.

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

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

(Operator Instructions) Your first question comes from Hayden Bairstow from Macquarie.

--------------------------------------------------------------------------------

Hayden Bairstow, Macquarie Research - Analyst [2]

--------------------------------------------------------------------------------

Just a couple for me. Just on the expansion. At what level would you need to feel comfortable at in terms of -- is it about, as you say, David, restricting the amount of people on site as opposed to kicking it back off is clearly the iron ore price where the other amount of money you're making -- funding, it's not going to be that much of an issue. I just want to get your thoughts around that. And then just back on the delisting in Aussie into Canada? Is that going to be back on the table at some point? I mean where is your head at with that?

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Yes. Thanks for the question, Hayden. So if we look at the redomiciliation, we paused it due to the economic uncertainties that we were facing, but it's something that's not been completely put to rest. So it's something that we shelved now, and we will revisit in the future. So some of the economic benefits of the redomiciliation are still there. So it's something that we will revisit in the future.

When we look at the Phase 2, you're correct on the portion for the workers, but we also want to have a clearer view on how Europe recovers and how Japan recovers in the steel process. Right now, iron ore prices are supported by the supply issues in the world. We have not seen any sanctioned projects come to light in this current market. But -- so we still see Phase 2 as a very accretive project for us, but we still want to have a bit more certainty on the steel production in Europe and Japan. What we are doing is still advancing all the work that we can and structuring the Phase 2 to be able to phase it a little bit more. But we'll come back to the market a little bit later this year to be able to explain where our heads at on the Phase 2 expansion.

--------------------------------------------------------------------------------

Hayden Bairstow, Macquarie Research - Analyst [4]

--------------------------------------------------------------------------------

And once you decided to go back to, what will be the time frame to finish it?

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

So right now, when we look at the work that we completed last summer, so we finished all of the concrete, civil work, steel work, everything that typically causes cost delays and time delays, or cost overruns and time delays. So we initially had about a 21-month delivery time. Now we're down to about 18 months. But again, we're revisiting this right now because the industry has changed slightly. So the bottlenecks of the delivery of the mining equipment, where we see that these time lines have now reduced in the current situation. So we're reevaluating the time line. But right now, we sit at about 18 months.

--------------------------------------------------------------------------------

Operator [6]

--------------------------------------------------------------------------------

The next question comes from Gordon Lawson from Paradigm Capital.

--------------------------------------------------------------------------------

Gordon Lawson, Paradigm Capital Inc., Research Division - Senior Research Associate [7]

--------------------------------------------------------------------------------

Congratulations on the record year. Can you summarize the total expected impact of COVID-19 and any maintenance work on Q1 production levels?

--------------------------------------------------------------------------------

David Cataford, Champion Iron Limited - CEO & Director [8]

--------------------------------------------------------------------------------

Yes. Thanks for the question, Gordon. So if we look at the production levels for the current quarter, well, we were given the authorization sort of mid-April to be able to resume towards normal operations. But there still are some bottlenecks for us to completely ramp up. We are ramping up, but the actual logistics of the trains on the QNS&L line or the Rio Tinto line has been limited due to the COVID-19 situation. And the amount of workers that we were able to get on site in the first weeks also limited the production, but we're working towards a plan to be able to ramp up to full production in the coming weeks. If we -- so the first question was the production. The second one was?

--------------------------------------------------------------------------------

Gordon Lawson, Paradigm Capital Inc., Research Division - Senior Research Associate [9]

--------------------------------------------------------------------------------

Well during the slow --

--------------------------------------------------------------------------------

David Cataford, Champion Iron Limited - CEO & Director [10]

--------------------------------------------------------------------------------

The cost, sorry, yes.

--------------------------------------------------------------------------------

Gordon Lawson, Paradigm Capital Inc., Research Division - Senior Research Associate [11]

--------------------------------------------------------------------------------

I know you probably moved some maintenance into the reduced production period. Is that correct?

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Yes, correct. We're currently doing our shutdown now. So we do 2 shutdowns per year, and we're currently doing 1 right now. It is a bigger challenge with all the social distancing measures and the fact that we had to fly in about 250 contractors in the region. The fantastic thing is that all of the communities, whether it be Wabush, Labrador, Newfoundland or Fermont, they've all supported us in everything we've put in place, and we've actually strengthened our relationship with the communities to be able to accept these contractors to come in during this time. So the shutdown is tracking pretty well. And once it's completed, we should be able to resume close to nameplate capacity.

--------------------------------------------------------------------------------

Operator [13]

--------------------------------------------------------------------------------

The next question comes from Stefan Ioannou from Cormark Securities.

--------------------------------------------------------------------------------

Stefan Ioannou, Cormark Securities Inc., Research Division - Analyst of Institutional Equity Research [14]

--------------------------------------------------------------------------------

Just over the last few quarters, there's been a little bit of mentioned just on the port side, that there's been some efficiency issues and logistical issues that have led to some modestly higher costs. Can you just maybe give us a little bit more color on exactly sort of what's been going on there to sort of maybe hopefully rectify the situation sooner than later? Or what the time line might be to get to sort of where you want to be on the port side of things?

--------------------------------------------------------------------------------

David Cataford, Champion Iron Limited - CEO & Director [15]

--------------------------------------------------------------------------------

Yes. Thanks for your question, Stefan. So one of the main issues that we were having at the port was the fact that they had they had broken down a portion of the stacker reclaimer, which was limiting the amount of tonnes per hour that we could transit through it. And this was causing congestions also with the fact that there's a new player that's delivering from the port. What they are doing right now, they're -- during our planned shutdown at the mine, they're also in the shutdown of the port, and they're repairing the stacker reclaimer, where we should be in a position to get back to circa about 40 hours to be able to load a capesize vessel. So this will reduce our cost. And also the better management at this site now has really improved the processes, and we're already seeing the (inaudible) at the port. So we feel pretty comfortable that most of the issues that we had are a thing of the past.

--------------------------------------------------------------------------------

Stefan Ioannou, Cormark Securities Inc., Research Division - Analyst of Institutional Equity Research [16]

--------------------------------------------------------------------------------

Okay. Okay. Great. And maybe just on the last question, just sort of, I guess, maybe trying to somewhat quantify just for -- in terms of the current quarter, the impact of COVID and everything on your production profile. Like obviously, things are still ramping up. They were shut down or effectively significantly reduced for a number of weeks early in the quarter. The current run rate is 1.8 million, 1.9 million tonnes a quarter. Can you quantify sort of what this quarter might look like from a production point of view? Or is it something you're not comfortable saying or not ready to talk about yet?

--------------------------------------------------------------------------------

David Cataford, Champion Iron Limited - CEO & Director [17]

--------------------------------------------------------------------------------

Well, we typically don't give guidance. So what we're working now is really to ramp back up towards our nameplate capacity. We were running in numbers that are close to about 90% of a nameplate before we shut down. So we're hoping we can resume to those sort of levels as this gets back up. But there's still a lot of uncertainty in the air. So we just want to make sure to be prudent in the numbers that we announced. And -- but the one thing you can rest assured is the whole team, the union, the communities, everybody is aligned to be able to allow us to operate as quickly as possible towards a full production.

--------------------------------------------------------------------------------

Stefan Ioannou, Cormark Securities Inc., Research Division - Analyst of Institutional Equity Research [18]

--------------------------------------------------------------------------------

Okay. I appreciate that. Maybe just one, sorry, just one last question, just on the Phase 2. Obviously, the discretionary spending is on hold. Just in terms of your options to finance Phase 2, are those discussions still ongoing? Or are they on hold as well right now until you have a sort of sight line to better timing?

--------------------------------------------------------------------------------

David Cataford, Champion Iron Limited - CEO & Director [19]

--------------------------------------------------------------------------------

Yes. Nothing is on hold right now. So we've continued those discussions. The -- what's fantastic is that iron ore, if you combine it with shipping today, is actually performing better than gold. So there are some partners out there that are still pretty comfortable with the iron ore prices and the iron ore outlook. So there is -- we haven't halted those discussions.

--------------------------------------------------------------------------------

Operator [20]

--------------------------------------------------------------------------------

The next question comes from Orest Wowkodaw from Scotiabank.

--------------------------------------------------------------------------------

Orest Wowkodaw, Scotiabank Global Banking and Markets, Research Division - Senior Equity Research Analyst of Base Metals [21]

--------------------------------------------------------------------------------

I was wondering if you could give us a bit more color on the iron ore price that you realized in the last quarter here. Specifically, the gross realized price of USD 97 a tonne, I mean that was a 6% discount to the actual benchmark 65% Fe price. Can you give us some additional color in terms of what drove that?

--------------------------------------------------------------------------------

David Cataford, Champion Iron Limited - CEO & Director [22]

--------------------------------------------------------------------------------

Yes. Thanks for the question, Orest. So basically, the real difference has been an issue in timing of the realized sales during this quarter. So some of our clients, we work with a sort of pricing that is for the previous quarter and some of the declines we work with is for the future. So when we look at the actual future that we saw, some of those vessels were booked at a bit of a lower price. But now that we've seen prices recover, that should be corrected.

--------------------------------------------------------------------------------

Orest Wowkodaw, Scotiabank Global Banking and Markets, Research Division - Senior Equity Research Analyst of Base Metals [23]

--------------------------------------------------------------------------------

I see. Okay. So does -- but does that USD 97 a tonne, does that include effectively unrealized provisional pricing on some -- on this 650,000 tonnes?

--------------------------------------------------------------------------------

Natacha Garoute, Champion Iron Limited - CFO [24]

--------------------------------------------------------------------------------

Yes, it does. So Orest, you're exactly right. As David mentioned, for the tonnes that are shipped, when the pricing formula for this customer as for the next quarter, according to the IFRS, we need to already, like, capture our most accurate estimates. So that's why the 600,000 tonnes are -- were based on the forward pricing of Q2 calendar 2020, and that's why we had this almost USD 10 difference. And as David mentioned, now that the iron ore price is higher, this provisional price adjustment should be reflected in our Q1 financials.

--------------------------------------------------------------------------------

Orest Wowkodaw, Scotiabank Global Banking and Markets, Research Division - Senior Equity Research Analyst of Base Metals [25]

--------------------------------------------------------------------------------

Okay. Perfect. And then just in terms of CapEx spending. Obviously, the Phase 2 is currently on hold. But can you give us a sense of how much you're planning to spend on just sustaining capital for the next fiscal year? Is it similar to what we just saw around $50 million?

--------------------------------------------------------------------------------

David Cataford, Champion Iron Limited - CEO & Director [26]

--------------------------------------------------------------------------------

Yes. So the -- that's the ballpark that we're targeting to spend for the year. Obviously, depending on the price of iron ore, that's something that could potentially shift. But that's in the ballpark number, correct.

--------------------------------------------------------------------------------

Orest Wowkodaw, Scotiabank Global Banking and Markets, Research Division - Senior Equity Research Analyst of Base Metals [27]

--------------------------------------------------------------------------------

Okay. And then just finally, I think just Labrador Trough, the issue here on the fiscal Q1 with the COVID-related shutdowns. But should we assume that your unit costs have probably gone way up in April and maybe the first half of May because of the impact of running at much lower rates. I'm just curious how to think about that. If anything you can quantify there would be helpful.

--------------------------------------------------------------------------------

David Cataford, Champion Iron Limited - CEO & Director [28]

--------------------------------------------------------------------------------

Yes. Thanks for the question. There has been some increased costs. But at the same time, there has been some areas where we've been able to improve. So just a fact of only flying in the operations people and everything related to planning to engineering to different work, everyone is working from home. So that reduces also our fly-in, fly-out costs. And even if we had to double the amount of planes to be able to keep social distancing because we changed from a 14 days on, 14 days off schedule to a 21 days on, 21 days off, well, that's reduced the amount of flights in and out. So when you combine all of these, there has been an impact on our cost, that's for sure, but it's not as...

--------------------------------------------------------------------------------

William Michael O’Keeffe, Champion Iron Limited - Executive Chairman [29]

--------------------------------------------------------------------------------

Extreme.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Large or extreme as you might have thought initially.

--------------------------------------------------------------------------------

Operator [31]

--------------------------------------------------------------------------------

Next question comes from Craig Hutchison from TD Bank.

--------------------------------------------------------------------------------

Craig Hutchison, TD Securities Equity Research - Research Analyst [32]

--------------------------------------------------------------------------------

Just a follow-up. You mentioned before I guess kind of the shutdown, you're running at about 90% of nameplate capacity. Is that sort of the level we should expect you guys to be kind of operating at as you ramp up year? Or do you think you can kind of get back to the full 100%?

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Yes. We're doing everything we can to get back to that 100%. But with the restrictions on the logistics and with our personnel, until we've trained all of the sort of seasonal worker because during this COVID situation, there are some employees that cannot come to site, either because of preexisting conditions or their age. So not that we want to discriminate by age, but we have taken a decision to limit the age of the employees and to not fly in anybody that has sort of preexisting conditions that could make COVID situation more complicated. So we're now training seasonal employees to be able to pick up the workflow from these employees. So when you combine these together with the logistics, we're working with the IOC to be able to have a plan to get this back up to 100%, and we could expect in the coming weeks to be able to get to that level.

--------------------------------------------------------------------------------

Craig Hutchison, TD Securities Equity Research - Research Analyst [34]

--------------------------------------------------------------------------------

Okay. And then just on the shipping, the freight portfolio you're seeing right now. Can you give us a rough estimate in terms of what price you're kind of realizing on current freight rates?

--------------------------------------------------------------------------------

David Cataford, Champion Iron Limited - CEO & Director [35]

--------------------------------------------------------------------------------

Yes. So we typically see freight rates sort of misaligned with the C3 index by about -- depending of the quarters and how quickly we've booked the vessels between 4 to 10 weeks. So let's say on that is about 6 to 8 weeks. And right now, what we're seeing in the market is vessels that are close to about $11, $11 50 per tonne. So we could see that the prices are much more favorable now compared to the previous quarter.

--------------------------------------------------------------------------------

Craig Hutchison, TD Securities Equity Research - Research Analyst [36]

--------------------------------------------------------------------------------

Okay. And maybe just one last question for me. Do you guys anticipate doing any more basically DR pellet feeds in the current quarter or in the coming quarters?

--------------------------------------------------------------------------------

David Cataford, Champion Iron Limited - CEO & Director [37]

--------------------------------------------------------------------------------

We don't expect to do any in the coming quarters. So the -- we've now qualified what is the impact on our recovery versus the product that we produce. Although we can do it. If a customer would come and offer us the right price for the DR grate type material, we would produce it. But right now, we're still pretty much sold out for the year with our blast furnace type material. We wanted to execute that test just to prove to customers around the world that we can do it. And it's mostly targeted with our Phase 2 expansion. But if the right customer would come with the right pricing, it's something that we could realize right now.

--------------------------------------------------------------------------------

Operator [38]

--------------------------------------------------------------------------------

The next question comes from Lucas Pipes from B. Riley FBR.

--------------------------------------------------------------------------------

Lucas Nathaniel Pipes, B. Riley FBR, Inc., Research Division - Senior VP & Equity Analyst [39]

--------------------------------------------------------------------------------

Good job on last year in managing this pandemic on site. I wanted to ask a higher-level question on the demand side. You mentioned, you wanted, as it relates to Phase 2, take a look at kind of how Europe comes out of this and Japan. What are you seeing in those regions today? Kind of from your vantage point, how dramatic has the decline been? There've been somewhat different opinions on that. I would be curious where you stand on that.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Yes. Thanks for the question. Michael, you want to tackle this one? Or you want me to?

--------------------------------------------------------------------------------

William Michael O’Keeffe, Champion Iron Limited - Executive Chairman [41]

--------------------------------------------------------------------------------

Look, it's such a moving piece when you look at Europe. Obviously, they've cut back. Just Japan has cut back significantly. You saw Nippon really driving back. But obviously, China has picked up and a lot of the tonnes going into China. But look, the balancing thing has really been Brazil. And what's happened in Brazil with, first of all, the dam closures. We've now had in Sweden, there is an earthquake, and they've shut their mine. So the supply leading into this that I was talking earlier or in the last presentation that I was always very bullish on high-grade iron ore. And the demand would be there because there's going to be a huge amount of supply disruption and -- for our material.

Now we focus most of our tonnes would be the -- into China, Japan or to Bahrain, some tonnes into Europe, some tonnes into India and other Fortescue. But we don't make the market. So the effect on us has been a lot less than people who had long-term contracts into Europe, which is mainly Brazil because of freight. And Australia doesn't make big impacts into Europe.

So what you're seeing is a balancing out there. Well, people have been shutting down production in Europe because of the pandemic, Brazil hasn't been able to supply those tonnes anyway. So that sort of balances itself out. But the biggest offtaker is China. And their stimulus packages is getting them going. And we're receiving phone calls all the time on can we deliver more tonnes into China? We also have a policy whereby we -- because of the voyage time that we have, obviously, Europe would be better for us to go so that we can sell tonnes into Asia at the same if not better terms than what we can into Europe.

So I'm sort of talking our own book a little bit here. But -- so if you look at the balancing out in Europe, I see Brazil as being the main supplier. So that's leveled itself out. Demand is coming in from China in a big way. Let's hope that continues. And we're in a good position. But what we also do, we set a lot of tonnes down at the port, which is something -- the initiative that we started with Glencore some time ago. And it's paid off handsomely for us because we were able to place tonnes in a lot of the smaller mills. Our product is becoming good demand in that part of the world, and it's worked quite nicely for us. But Michael Marcotte assists and watches a lot of what happens on the day-to-day in the market as well. So Michael, are you seeing anything different to what I've said?

--------------------------------------------------------------------------------

David Cataford, Champion Iron Limited - CEO & Director [42]

--------------------------------------------------------------------------------

(inaudible) Go ahead, Michael.

--------------------------------------------------------------------------------

Michael Marcotte, Champion Iron Limited - VP of IR [43]

--------------------------------------------------------------------------------

No, no, I think that does sum it up. I mean it's quite amazing how concentrated the key players globally are. And I think that's something everybody needs keep being mindful of because any disruption in some of the very large key hubs can have big outweighted effects globally.

--------------------------------------------------------------------------------

Lucas Nathaniel Pipes, B. Riley FBR, Inc., Research Division - Senior VP & Equity Analyst [44]

--------------------------------------------------------------------------------

Very helpful. I appreciate that perspective. And I'm not sure if you put a number around it. You spoke to the lower kind of fuel costs. Is there a sensitivity that we can apply to kind of your cost going forward on lower oil prices?

--------------------------------------------------------------------------------

David Cataford, Champion Iron Limited - CEO & Director [45]

--------------------------------------------------------------------------------

Well, oil prices mainly affect the shipping route. When you look at our site, about 65% of the energy that we consume is from renewable energy. So there's not that much fuel consumption apart from our trucks and a few auxiliary equipment. So it doesn't have as big impact on our operating costs as other operators.

--------------------------------------------------------------------------------

Operator [46]

--------------------------------------------------------------------------------

The next question comes from Jon Scholtz from Macquarie.

--------------------------------------------------------------------------------

Jon Scholtz, Macquarie Research - Analyst [47]

--------------------------------------------------------------------------------

Just one on your cash holdings. Just wondering, are they all held in Canadian dollars. And is the hedging program in place over there?

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Natacha, you want to go through the cash position, please?

--------------------------------------------------------------------------------

Michael Marcotte, Champion Iron Limited - VP of IR [49]

--------------------------------------------------------------------------------

Natacha?

--------------------------------------------------------------------------------

Natacha Garoute, Champion Iron Limited - CFO [50]

--------------------------------------------------------------------------------

Can you -- sorry, can you just repeat the question, please?

--------------------------------------------------------------------------------

Jon Scholtz, Macquarie Research - Analyst [51]

--------------------------------------------------------------------------------

Yes. I'm just wondering if it's all held in Canadian dollars? Or do you hold it in U.S. dollars as well? And is there a hedging program in place around your cash? I mean I do note that the debt, the U.S. dollar face value. So I'm just trying to reconcile those?

--------------------------------------------------------------------------------

Natacha Garoute, Champion Iron Limited - CFO [52]

--------------------------------------------------------------------------------

Yes. So we actually have about like $130 million of the U.S. currency on [M] . The rest was in Canadian. And at the moment, we don't have an hedging policy in place. What we do is we have some minimum cash balance that the management wants to keep, which is around USD 50 million. And as you could see from our financial statement, we're more (inaudible). And with respect to our long-term debt, we don't have to -- just want to remind, we don't have to repay capital until June 2021. So we're -- we have a good natural hedge position from that standpoint.

--------------------------------------------------------------------------------

William Michael O’Keeffe, Champion Iron Limited - Executive Chairman [53]

--------------------------------------------------------------------------------

And I've resisted hedging. And for us, if we were have hedged, you cause yourself a lot of pain. I don't be sitting up here saying that shareholders, look, the results should have been this. But unfortunately, we've just hedged our currency at $0.76. And it takes a bit of explaining. And what I've always experienced running mining companies and the shareholders always come to us and said, look, there's enough risk in mining without management adding more risk by hedging. Now if you -- there are different ways of hedging. There's different ways to look at it. But if you -- it's leading into this, always, you can -- but the big -- the 3 big variables for us is iron ore price, shipping and currency. So if you look at anyone that talks about iron ore price, I'm sure you all understand, everyone said pessimistic that the forward curve always calls away. And everyone said we're going to get back to $38 a tonne, Monday. Well, that's great. And on the other side, shippers are always very optimistic and all their forward prices always increase. So you can hedge yourself into obliteration, but I've always found sitting up and talking to shareholders, they are less sophisticated enough to know what an iron ore price is, what an exchange rate is and what a shipping rate is and they can do the calculation. So they expect you produce x amount of tonnes. This should be the revenue against your cost. And if you don't deliver at that because you've hedged currency or done something else, it takes a bit of explaining. So we're very comfortable with the position that we've adopted, and we'll continue to adopt.

--------------------------------------------------------------------------------

Operator [54]

--------------------------------------------------------------------------------

There are no other questions at this time. You may proceed.

--------------------------------------------------------------------------------

David Cataford, Champion Iron Limited - CEO & Director [55]

--------------------------------------------------------------------------------

Well, thank you very much, everyone, for attending the call today and looking forward to chatting with all of you during the quarter and at the end of the next quarter. It looks pretty exciting for us. So thanks a lot for your support, and everyone, have a great day.

--------------------------------------------------------------------------------

Operator [56]

--------------------------------------------------------------------------------

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