Capital markets firm Fraser Mackenzie has initiated coverage on Champion Minerals (TSE:CHM) with a "strong buy" rating and a $3.50 per share price target.
In a research note, Fraser Mackenzie mining analyst Wojtek Nowak said that the Canada-focused explorer was a "promising iron ore development story".
Champion Minerals is an iron ore exploration and development company with properties in Canada’s premier iron ore district, the Labrador Trough. Core properties near Fermont, Quebec contain an estimated 2.2 billion tonnes of iron ore resources grading 26 percent iron, as well as 620 million tonnes of non-NI 43-101 historical resources grading 30.5 percent iron.
A 60,000 metre drilling program is currently underway at Fermont - which literally means "Iron Mountain" in French - expected to upgrade and increase the resource.
Champion’s most advanced project is Fire Lake North in Quebec, where a preliminary economic assessment (PEA) was completed in 2010 for a mine and concentrator designed to produce 7 million tonnes per year of hematite concentrate.
According to Fraser Mackenzie's Nowak, key catalysts for Champion's stock include a forthcoming updated PEA in November, a potential offtake or joint venture agreement with a large partner, resource updates in the coming months, and a full feasibility study targeted for the second quarter of 2012.
Nowak said Champion could also unlock value by selling non-core properties where iron ore resources are currently being defined - such as assets within Clusters 2 and 3 of the Fermont property.
"We think ArcelorMittal (NYSE:MT) is the closest neighbour and the most logical taker for these properties," Nowak said.
A major source of upside, according to Nowak, would be the expansion of Fire Lake to 16 million tonnes per year.
"Given the smaller incremental capex requirement and potential to finance the expansion using debt and internal cash flows, we believe the returns to shareholders could be exceptional," Fraser Mackenzie's Nowak said.
The key risks to Champion Minerals' story include the overall level of iron ore prices, potentially high capex and execution risk associated with a planned rail link and access to rail and port capacity.
Champion is mitigating these risks by developing several infrastructure options in parallel, with an objective to maintain or reduce the capex per tonne of annual production outlined in the initial PEA, the research note said.
The Fraser Mackenzie analyst also noted it was possible that total production could be ramped up to 16 million tonnes per year during the first four years of operation "given the size of the resource".
Champion Minerals was up 0.7 percent Tuesday afternoon at $1.38.