Labrador Iron Ore Royalty Corporation ("LIORC") is a Canadian corporation resulting from the conversion of the Labrador Iron Ore Royalty Income Fund (the "Fund") under an Arrangement effective on July 1, 2010. LIORC is also the successor by amalgamation under the Arrangement of Labrador Mining Company Limited, formerly a wholly-owned subsidiary of the Fund. Under the Arrangement, the Fund distributed $248 million of subordinated notes to its unitholders and the unitholders exchanged their units of the Fund for common shares of LIORC.
Effective on October 3, 2012 the subordinated notes were exchanged for common shares and the common shares were consolidated, with the result that each holder ended up holding the same number of common shares as before the exchange, and LIORC had 64 million common shares outstanding. The common shares trade on The Toronto Stock Exchange under the symbol LIF. Interest on the subordinated notes ceased to accrue on September 30, 2012.
LIORC, directly and through its wholly-owned subsidiary Hollinger-Hanna Limited ("Hollinger-Hanna"), holds a 15.10% equity interest in Iron Ore Company of Canada ("IOC") and receives a 7% gross overriding royalty and a 10 cent per tonne commission on all iron ore products produced, sold and shipped by IOC.
Generally, LIORC pays cash dividends from its net income to the maximum extent possible, subject to the maintenance of appropriate levels of working capital. The common shareholders receive quarterly dividends on the common shares on the 25th day of the month following the end of each quarter.
The common shares are qualified investments under the Income Tax Act (Canada) for deferred plans, including registered retirement savings plans, registered retirement income funds and deferred profit sharing plans.
LIORC has a Board of ten directors, an Audit Committee, a Compensation Committee and a Nominating Committee. The Committees are composed of independent directors. Scotia Managed Companies Administration Inc., pursuant to an administration agreement, acts as the administrator of LIORC.
About Iron Ore Company of Canada
The income of LIORC is entirely dependent on IOC, as the only assets of LIORC and its subsidiary are related to IOC and its operations. IOC is Canada's largest iron ore producer, operating a mine, concentrator and pellet plant at Labrador City, Newfoundland and Labrador, and is among the top five producers of iron ore pellets in the world. It has been producing and processing iron ore concentrate and pellets since 1954. IOC is strategically situated to serve the markets of the Great Lakes and the balance of the world from its year-round port facilities at Sept-Iles, Quebec.
IOC has ore reserves sufficient for at least 29 years at the current rate of production, with additional resources of a greater magnitude. Currently it has the capacity to extract around 55 million tonnes of crude ore annually. The crude ore is processed into iron ore concentrate and then either sold or converted into different qualities of iron ore pellets to meet its customers needs. The iron ore concentrate and pellets are transported to IOC's port facilities at Sept-Iles, Quebec via its wholly-owned Quebec North Shore and Labrador Railway, a 418 kilometer rail line which links the mine and the port. From there, the products are shipped to markets throughout North America, Europe, the Middle East and the Asia–Pacific region.
IOC's 2013 sales totalled 14.8 million tonnes comprised of 6.2 million tonnes of iron ore concentrate and 8.6 million tonnes of iron ore pellets. Concentrate production in 2013 had been expected to exceed 19 million tonnes. However, wildfires in June and July and a power outage resulted in substantial production losses. Operations gradually recovered and by November were approaching a 20 million tonne per annum operating rate. Unfortunately, extremely cold weather in December resulted in further losses of production. IOC generated revenues of $2,194 million in 2013 (2012 - $1,963 million). IOC sales traditionally are approximately 35% in North America, 35% in Europe, 25% in the Asia-Pacific region and minor amounts in other areas. The strong recovery in Europe and continuing strength in China offset continuing weakness in North America.
Iron ore prices were higher than market expectations in 2013, primarily due to strong demand from China.
The first stage of IOC's expansion program to increase annual concentrate production capacity was completed in 2012 and the second stage was completed in April, 2014. Available capacity is 23.3 million tonnes of concentrate per annum.
In March 2012, IOC successfully secured a six-year labour contract with its unions, without disruption. The contract will enable IOC to be competitive and attract and retain necessary skills.
LIORC holds certain mining leases and mining licenses covering approximately 18,200 hectares of land near Labrador City. IOC has leased certain portions of these lands from which it currently mines iron ore. In return, IOC pays LIORC a 7% gross overriding royalty on all sales of iron ore products produced from these lands. A 20% tax on the royalty is payable to the Government of Newfoundland and Labrador. For the five years prior to 2013, the average royalty (net of the 20% tax) had been approximately $109.3 million per year and in 2013 was $110.0 million (2012 – $98.0 million).
Because the royalty is "off-the-top", it is not dependent on the profitability of IOC. However, it is affected by changes in sales volumes, iron ore prices and, because iron ore prices are denominated in US dollars, the United States – Canadian dollar exchange rate.
In addition to the royalty interest, LIORC, directly and through Hollinger-Hanna, owns a 15.10% equity interest in IOC. The other shareholders of IOC are Rio Tinto Limited with 58.72% and Mitsubishi Corporation with 26.18%. A $40.0 million IOC dividend was received in 2013 (2012 - nil).
Hollinger-Hanna has the right to receive a payment of 10 cents per tonne on the products sold by IOC. Pursuant to an agreement, IOC is obligated to make the payment to Hollinger-Hanna so long as Hollinger-Hanna is in existence and solvent. In 2013, Hollinger-Hanna received a total of $1.4 million in commissions from IOC (2012 - $1.4 million).
LIORC is a taxable corporation under the Income Tax Act (Canada) and is subject to income tax on its net income. The primary income of LIORC is royalties from IOC. Expenses of LIORC include interest and administrative expenses. Dividends from IOC and Hollinger-Hanna are received by LIORC tax free.
All dividends paid by LIORC on its common shares are eligible dividends under the Act.