KeyStone’s Stock Talk Show, Episode 237.
It’s great to be back with you again this week and even better to be welcoming a key member of the Killer B’s back, Mr. Brennan Habetler, fresh off a friend’s stag to Vegas and his subsequent liver replacement surgery. In honor of his return, we let Brennan kick off the show this week — briefly touching on the Q4 results of a few Canadian Banks, discussing how the banks’ mortgages by remaining amortization schedules are progressing, and looking at the Canadian housing market generally. I will present a quick segment from my Canadian Money Show talk last week in which I talked about how the Market Bifurcation has led to a potential opportunity in high-quality Small-Cap stocks – something we have seen already playing out in some tremendous gains in our Canadian Small-Cap Focus Buy Portfolio in November. Aaron has a YSOT for viewers on – kicking off with Aaron answering a viewer question on Element Fleet Management Corp. (EFN:TSX), the world’s largest automotive fleet manager. The company has produced positive financial performance in 2022 and 2023, and has a positive outlook for growth over the next year, and a growing dividend, but does it offer value – Aaron will let you know. Brett will take a look at Champion Iron Limited (CIA:TSX), an Iron Ore producer that owns and operates the Bloom Lake Mining Complex, located in the Labrador Trough, north of Fermont, Québec. The company recently reported its Q2 results that showed record production, not yet to levels anticipated but in a more stable pricing environment. Brett revisits Champion Iron to see if this metal miner is strong enough to hold a position in your portfolio.
3 Banks & Canadian Mortgage Ammort. (Dec 2023)
I have been doing a recurring segment on the podcast since May, which was spurred when I discovered that Canadian Banks were beginning to extend mortgage amortization periods on outstanding mortgages to help ease the pain of some Canadian’s facing higher interest rates and ongoing inflationary pressures.
So now that the banks have reported their Q4 2023 results, I thought that I would go over some a few points from their financials, look at how their MORTGAGES BY REMAINING AMORTIZATION schedules are progressing, and have a quick discussion about the housing market.
Slide 2 TD
Slide 3 TD
We are seeing the number of mortgages with an amortization period of greater >30 years come down to about 21% of all Canadian mortgages. This is down from 29% y/y if we compared it to Oct 2022, but again, just a reminder, there were 0 mortgages which had an amortization of >30 years in Oct 2021. So while it is improving, if we compare it to two years ago when rates were significantly lower, we continue to be at elevated levels.
Slide 4 CIBC
Slide 5 CIBC
CIBC’s amortization schedule shows a slight improvement as well, with mortgages with an amortization of >30 years now at 24%, down from 30% y/y.
Slide 6 RBC
Slide 7 RBC
RBC’s amortization schedule also shows an improvement, with mortgages with an amortization of >30 years now at 23%, down from 27% y/y.
Now I touched on this when I did the segment in August, so I will briefly mention it, but the Financial Consumer Agency of Canada (FCAC) – said two-thirds of mortgage holders in Canada are having trouble meeting their financial commitments. And as such in July the FCAC provided new guidelines for banks on how to deal with “at-risk-consumers” dealing with financial stress. With the aim of standardizing how lenders implement policies and procedures. So seeing the slight improvement with each of the bank’s mortgages by remaining amortization, these new guidelines may be helping banks from placing mortgage holders on >30 year amortizations.
Switching gears to the housing market, affordability declined further in the fall, driven by elevated rates and tight supply. Looking at the chart I have up on the screen from National Bank, the median resident in Vancouver is paying 100% of their median income on their mortgage payment. While Toronto is approximately 85%, and Montreal and Calgary remaining above 40%.
With elevated interest rates, lack of supply, and horrible housing affordability, it is no surprise that we are seeing residential sales continue to pull back. With the Seasonally adjusted Residential sales at about 36,000 across Canada.
Housing starts have shown some resiliency, especially within Multiple-dwelling properties, but even in the commentary from National bank, we will need to see several months of these elevated starts before there is a notable improvement on supply.
Lastly, before I open it up to the boys, I just wanted to briefly mentioned the new Federal Government tax measure coming into effect on January 1st which will no longer allow AirBnb & VRBO hosts to claim expenses against the income they make from their rentals. Chrystia Freeland believes that this new measure could free up as many as 30,000 homes.
I am somewhat skeptical on whether it could and will free up 30,000 homes. There was also a research report from the Conference Board of Canada think-tank which concluded that the number of Airbnbs in Canada is too small to make a tangible dent in Canada’s low housing stock.
So will it help housing prices?? I guess we will have to just wait and see…
YSOT Champion Iron Ltd. CIA:TSX
Champion Iron symbol CIA on the TSX currently trades at a price of $6.89 and a market cap of $3.6 Billion being materially flat year to date. The company pays a dividend yield of 2.8%.
Champion Iron is an Iron Ore producer which owns and operates the Bloom Lake Mining Complex, located on the south end of the Labrador Trough, approximately 13 km north of Fermont, Québec. Bloom Lake is an open pit Iron ore operation with a mine life of 20 years and a concentrator that primarily sources energy from renewable hydroelectric power.
We last looked at the company in May, when it had higher cash costs due to inflation and fixed costs related to Bloom Lake’s expansion. Shortly after a major fire disrupted operations in fiscal Q1. Let’s see where the company is today.
Looking at fiscal Q2 2024 which ended September 30th, 2023.
The company reported a record quarterly production of 3.45 million wet metric tonnes or wmt of 66.1% Fe concentrate a year-over-year increase of 21% largely attributed to the Phase II concentrator which came into production at the end of last year. Despite the record, production was still lower than desired due to an unscheduled outage in one of the company’s conveyor belts affecting the phase II concentrator. The company is still working towards its target of 15 million tonnes per annum.
The company’s revenue of $388 million a 29% increase. Net average realized selling price increased 25% to $134.4 per dmt from $107.6.
Cash costs came in at $73.7 per dry metric tonne or dmt sold up 12% from $65.9 in the prior year, however, costs dropped by 9% from the prior quarter’s $81.3. The company benefitted from lower fuel costs and higher volumes lowering the impact of fixed costs. However, the company still saw higher all in sustaining costs which includes Capex required to sustain production of $99.1 per dmt from $81.9 last year and $94.1 last quarter. So, Capex has a larger spend during the quarter. The result of higher selling price and increased costs resultinged in a cash operating margin of $35.3 per dmt up from $25.7 in the prior year, with a cash profit margin of 26% and 24% respectively.
EBITDA increased to $155 million from $84 million.
A quick look at iron ore prices, volatility has been lower over the past year compared to 2021 and 2022 trading between $100 and $130 for most of the year. Like we always warn with commodity-driven stocks, the shares can only do as well as the underlying commodity in this case iron allows the shares to do. If we were to see a macroeconomic shock that brought the price of iron down to let’s say the 2015 low no matter how strong the company’s operations are the financials would be dismal and of course the opposite if the price shoots up.
After the quarter’s end the company raised $230 million US through a 5 year term loan and extended its $400 million revolver to 2026. The funds will be used to fund additional organic growth specifically its direct reduction pellet feed production which increases the grade of iron output to be used in electric arc furnaces. The net debt position sits at $230.5 million and a net debt to EBITDA of 0.43 times.
The company is trading at a trailing EV/ EBITDA of 7.2 times, which is not cheap but not absurd and likely around fair value at this time.
The company is set up for organic growth in the coming quarters as Phase II production laps lower production and in the medium term from the Direct Reduction Pellet Feed production slated for the second half of 2025. Leverage is not a concern at this time but would emphasize the impact of a sudden negative swing in iron ore prices, so it is a risk that needs to be watched just due to the nature of the business. If one is bullish on the outlook of Iron Champion is a suitable way to play given its underlying operations.