Labrador Iron Ore Royalty Corporation ("LIORC") is a Canada 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. From July 1, 2010, the common shares of LIORC and the subordinated notes have traded together as stapled units on The Toronto Stock Exchange under the symbol LIF.UN.
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 makes cash distributions from its net income to the maximum extent possible, subject to the maintenance of appropriate levels of working capital. The stapled unitholders will continue to receive quarterly distributions of interest on the notes and dividends on the common shares on the 25th day of the month following the end of each quarter.
As at December 31, 2010, LIORC had 32 million stapled units outstanding. The subordinated notes and common shares comprising the stapled units 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 seven 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 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 30 years with additional resources of a greater magnitude. Currently it has the capacity to extract around 43 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 2010 sales totalled 15.1 million tonnes comprised of 3.0 million tonnes of iron ore concentrate and 12.1 million tonnes of iron ore pellets. IOC generated revenues of $2,522 million in 2010 (2009 - $1,144 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.
In 2010, sales of iron ore products recovered from the low levels of 2009, as steel companies rebuilt their inventories and demand increased. The partial shut down of pellet production during 2009 enabled IOC to increase the amount of concentrate available for sale. This allowed IOC to take advantage of demand in Asia which partially offset reduced demand for pellets from its regular customers. With markets improving in the third quarter, production returned to full capacity.
In May, 2010 IOC announced that it was resuming phase one of its three phase expansion program which was originally approved in May 2008 but halted later in the year because of the market downturn. This phase will increase production of concentrates by 4 million tonnes to an annual rate of 22 million tonnes. It will cost a further $435 million and is expected to be completed by the end of 2011. On February 8, 2011, IOC also announced that it was restarting phase two of its expansion program which was also halted in 2008. This will further increase production to 23.3 million tonnes of concentrate and is expected to be completed by the end of 2012 at a cost of $289 million. The third phase to increase production to 26 million tonnes is still in the planning stage.
IOC Royalty
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 2010, the average royalty (net of the 20% tax) had been approximately $74.0 million per year and in 2010 was $130.1 million (2009 – $60.4 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.
IOC Equity
In addition to the royalty interest, LIORC, directly and through its wholly owned subsidiary, 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%. Dividends of U.S. $11.3 million or approximately Cdn. $11.9 million and U.S. $60.4 million or approximately Cdn. $62.7 million were received in 2010 (2009 – Cdn. $8.2 million).
IOC Commissions
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 2010, Hollinger-Hanna received a total of $1.5 million in commissions from IOC (2009 - $1.4 million).
Taxation
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 $30.0 million a year of interest payments on the $248 million notes held by unitholders, interest on any bank loans 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.