When it comes to iron ore, BHP Group Ltd (ASX: BHP) and Rio Tinto Ltd (ASX: RIO) are the obvious names. However, if you're looking for serious share price upside, junior companies can be worth a look.
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ASX iron ore junior with potential
UBS has just initiated coverage of Champion Iron Ltd (ASX: CIA), and believes there is significant share price appreciation to be had over the next 12 months.
I'll get to their specific share price target shortly. Firstly let's have a look at why UBS likes the company.
The broker said broadly, they expect iron ore markets to remain balanced over the medium term, "with benchmark prices supported by cost inflation and resilient, albeit moderating, steel demand''.
With regards to Champion in particular, UBS said the company's iron ore grades were the key differentiator.
The broker added:
Growing demand for premium steelmaking inputs, declining seaborne ore quality, and increasing blending requirements support structurally attractive economics for ultra high-grade iron ore producers. In our view, the market underappreciates CIA's premium-grade product suite and the potential for improved premium capture as the Direct Reduction Pellet Feed (DRPF) facility ramps up.
UBS said the company's pellet feed facility lifts the grade of its products from 66.2% to 69%, increasing the company's exposure to premium markets.
The broker added:
Our CIA investment case rests on the market underestimating the scarcity value of CIA's ultra-high-grade product suite, and the price realisation/earnings leverage from DRPF. As a result, we expect earnings to move above consensus from FY30.
UBS said Champion's Bloom Lake mining operation, "benefits from a large, consistent orebody and established rail and port infrastructure, supporting reliable production and cost visibility''.
And they said the company was less vulnerable to price volatility due to the premium product being produced.
As they said:
Product quality and integrated logistics should underpin cash generation through the cycle, though fixed logistics costs reduce flexibility in weaker markets. Margin durability therefore remains tied to supportive high-grade premiums.
ASX iron ore shares looking cheap
UBS has a price target of $4.15 on Champion shares compared to $3.06 currently, and is also forecasting a 4% dividend yield.
Champion Iron is valued at $1.71 billion.
UBS recently raised its long-term iron ore forecast to US$93 per tonne from US$85 per tonne.
The broker said:
While consensus remains focused on Simandou's supply addition and weaker Chinese construction activity, we believe the market is underestimating three structural supports to iron ore prices: resilient steel demand led by China's manufacturing and export complex and the emergence of the Global South, a tighter iron-unit market balance once depletion and Fe grade decline are incorporated, and cost curve support that remains materially higher than in prior cycles.
