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LABRADOR IRON ORE ROYALTY CORPORATION - 2010 RESULTS OF OPERATIONS

March, 03, 2011

TORONTO, March 3 /CNW/ - Labrador Iron Ore Royalty Corporation (TSX: LIF.UN) announced the results of its operations for the year ended December 31, 2010.

To the Holders of Stapled Units of Labrador Iron Ore Royalty Corporation 

Since inception in 1995, we have reported to our unitholders as an income trust. With the 2010 annual report, we are reporting to the holders of stapled units (the "Unitholders") as Labrador Iron Ore Royalty Corporation ("LIORC" or the "Corporation"). The conversion from a trust to a corporation took place with effect on July 1, 2010. Stapled units consist of subordinated notes and common shares of LIORC. Unitholders will notice differences in the financial statements, in that previously the reported income of the trust was also the net income to its unitholders. Under the stapled unit arrangement, the income of the Unitholders will be the total of the net income of LIORC plus the interest from the $248 million LIORC subordinated notes. Thus all net income, adjusted cash flow and per unit figures referred to in this report use the totals according to the financial statements plus (where applicable) the $14,878,000 ($0.468 per stapled unit) interest on the subordinated notes for the period July 1 to December 31, 2010.

Financial Performance

The Unitholders' adjusted cash flow (see Management's Discussion & Analysis for definition and calculation) for the year ended December 31, 2010 was $170.6 million or $5.33 per stapled unit as compared to $58.3 million or $1.82 per unit for 2009. 

Iron ore sales of IOC amounted to 15.1 million tonnes compared to 14.2 million tonnes in 2009.  Iron ore markets which had been very weak in 2009 as a result of the world wide recession, started to firm up in late 2009 due to continuing strength in China and by early 2010 had returned to the pre-recession levels of 2008. Due to the resulting higher prices and volumes, 2010 royalty revenue was 215% of the 2009 level and marginally higher than the record year of 2008. A major change in the method of pricing iron ore contracts took place in 2010. The majority of seaborne traded iron ore contract volumes is reported to have moved from being priced on an annual to a quarterly basis (generally quarterly prices are based on spot prices for the three months preceding the month before the start of the quarter) to better reflect the significantly increased volatility in iron demand and contract servicing of customers in recent years. After reviewing industry pricing trends and extensive discussions with a range of customers, IOC has, for most of its customers, moved to use quarterly pricing for term contract shipments, together with spot pricing for non-term contract sales. Prices for 2010 varied slightly from quarter to quarter but generally increased by more than 100% as compared to 2009. IOC sees 2010 as a period of transition for iron ore pricing mechanisms and it is not yet clear how these may further evolve in the future. The Canadian dollar which had strengthened against its U.S. counterpart in 2009 continued to strengthen averaging about 10% higher in 2010. Had this not occurred, royalty revenue would have been even higher. The Unitholders' adjusted cash flow includes a dividend from IOC of $74.0 million (2009 - $8.2 million). 

The Unitholders' consolidated net income for the year ended December 31, 2010 was $211.7 million or $6.61 per unit compared to $75.1 million or $2.35 per unit in 2009.  Equity earnings from IOC amounted to $126.7 million compared to $31.7 million in 2009. 

IOC Developments

In May, 2010 IOC announced that it was resuming phase 1 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.

The re-evaluation of reserves during the year (after mining 39 million tonnes) resulted in a increase of 121 million tonnes to 1,489 million tonnes at year-end.  Resources totalled 2,373 million tonnes after transfers to reserves and some reduction in inferred resources. Details of IOC's reserves and resources are provided in the LIORC Annual Information Form.

Outlook

The iron ore markets remain very firm especially in Asia with firming continuing in the rest of the world. Under current market conditions IOC expects to sell all the pellets and concentrates it can produce in 2011. Pricing remains firm with prices for the first quarter of 2011 increasing from the fourth quarter of 2010 and a further increase indicated for the second quarter. The Canadian dollar remains firm and if it continues to trade around par or above against its U.S. counterpart it will negatively affect our results but should only marginally offset the gains from the higher prices and increased volume expected.

I would like to take this opportunity to thank our Unitholders for their interest and loyalty and my fellow Directors for their wisdom and support.

Respectfully submitted on behalf of the
Directors of Labrador Iron Ore Royalty Corporation,

Bruce C. Bone
President and Chief Executive Officer
March 3, 2011

Corporate Structure

On July 1, 2010 Labrador Iron Ore Royalty Income Fund (the "Fund") completed its conversion to a corporation named Labrador Iron Ore Royalty Corporation ("LIORC" or the "Corporation") pursuant to a plan of arrangement (the "Arrangement"). Effective on the closing of the Arrangement and related transactions, the Corporation now directly owns and operates, along with its subsidiary, the businesses which were held and operated by the Fund prior to the closing of the Arrangement.  The Corporation is also the successor by amalgamation under the Arrangement of Labrador Mining Company Limited, formerly a wholly-owned subsidiary of the Fund.

After giving effect to the Arrangement, there are 32,000,000 common shares and $248,000,000 12.08% subordinated notes issued and outstanding and held by the holders of stapled units of the Corporation. The Corporation directly holds a 7% gross overriding royalty on IOC's sales revenue, a 9.56% equity interest in IOC and 100% of Hollinger-Hanna Limited.  Hollinger-Hanna holds a 5.54% equity interest in IOC.  It also receives a commission of 10 cents per tonne on all iron ore products sold by IOC. Net income earned from these investments is used by the Corporation to service interest payments on the $248 million of notes held by the Unitholders, with any excess after expenses and working capital requirements being distributed in the form of dividends.

Seven Directors are responsible for the governance of the Corporation and also serve as directors of Hollinger-Hanna. The Directors, in addition to managing the affairs of the Corporation and Hollinger-Hanna, oversee the Corporation's interests in IOC. Two of the seven Directors sit on the board of IOC and the four independent Directors serve as members of the Audit, Nominating and Compensation Committees. Scotia Managed Companies Administration Inc. pursuant to an administration agreement acts as the administrator of the Corporation and Hollinger-Hanna.

Taxation

The Corporation is a taxable corporation. Dividend income received from IOC and Hollinger-Hanna is received tax free while royalty income is subject to income tax and Newfoundland royalty tax.  Expenses of the Corporation include $30 million a year in interest payments relating to the $248 million notes held by the Corporation plus interest on any bank loans. Hollinger-Hanna is a taxable corporation.

Income Taxes

Distributions to a Unitholder that are paid within a particular year are to be included in the calculation of the Unitholder's taxable income for that year. Quarterly distributions are normally comprised of both an interest and a dividend component. The dividend component will be eligible for the dividend tax credit and, accordingly, will be subject to a lower effective tax rate than that applicable to the interest component.  The dividends paid in 2010 were "eligible dividends" under the Income Tax Act.

Quarterly Distributions

Distributions of $4.50 per unit including special distributions of $2.50 per unit were declared in 2010 (2009 - $2.00 per unit). These distributions were allocated as follows:

           
    Dividend Interest   Total
Period
Ended
Payment
Date
Income
per Unit
Income
Per Unit
Distribution
Per Unit
Distribution
($ Million)
           
  Mar. 31, 2010 Apr. 25, 2010 $ 0.250 $ 0.250 $ 0.500 $ 16.0
  Special Distribution Apr. 25, 2010 0.250 - 0.250 8.0
  Jun.  30, 2010 Jul. 25, 2010 0.301 0.199 0.500 16.0
  Special Distribution Jul. 25, 2010 0.250 - 0.25 8.0
  Sep. 30, 2010 Oct. 25, 2010 0.266 0.234 0.500 16.0
  Special Distribution Oct. 25, 2010 0.500 - 0.500 16.0
  Dec. 30, 2010 Jan. 25, 2011 0.266 0.234 0.500 16.0
  Special Distribution Jan. 25, 2011 1.500 - 1.500 48.0
           
           
Distribution to Unitholders -2010 $ 3.583 $ 0.917 $ 4.50 $ 144.0
           
  Mar. 31, 2009 Apr. 24, 2009 $ 0.250 $ 0.250 $ 0.500 $ 16.0
  Jun. 30, 2009 Jul. 25, 2009 0.250 0.250 0.500 16.0
  Sep. 30, 2009 Oct. 25, 2009 0.250 0.250 0.500 16.0
  Dec. 30, 2009 Jan. 25, 2010 0.348 0.152 0.500 16.0
           
Distribution to Unitholders -2009  $ 1.098 $ 0.902 $ 2.00 $ 64.0

The quarterly distributions are payable to all Unitholders of record on the last day of each calendar quarter and are paid on the 25th day of the following month. 

Review of Operations

Iron Ore Company of Canada

The income of the Corporation is entirely dependent on IOC as the only assets of the Corporation and its subsidiaries 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-Îles, Quebec.

IOC has ore reserves sufficient for at least 30 years at current production rates with additional resources of a greater magnitude.  It currently has the nominal 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 many 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-Îles, 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 totaled 15.1 million tonnes comprised of 3.0 million tonnes of iron ore concentrate and 12.1 million tonnes of iron ore pellets. Production in 2010 was 11.9 million tonnes of pellets and 2.8 million tonnes of concentrates.  This was lower than budget due to some mine equipment problems, severe weather conditions and shortages of supplies due to the shut down of the railway as a result of a track washout during a severe December storm. IOC generated revenues of $2,522 million in 2010 (2009 -$1,144 million). IOC sales traditionally are approximately 35% in Europe, 35% in North America and 25% in Asia with minor amounts to other areas. The strong market in Asia with some weakness in North America resulted in more sales to Asia in 2010.  Under optimum production conditions IOC currently has the capacity to produce 13 million tonnes of pellets leaving about 4 million tonnes of concentrates for sale.

Selected IOC Financial Information

  2010 2009 2008 2007 2006
      ($ in thousands)    
Revenue 2,521,935 1,144,2041 2,199,908 1,014,843 1,197,378
Cash flow from operating activities   911,637   42,450 1,195,472 218,315 274,690
Net income2 845,164 215,254 567,122 206,2673 261,115
Capital expenditures 237,977 190,467 262,861 175,874 169,252
           

1 Revenue in 2009 was reduced by idling of pellet machines and a shut down of Carol Lake operations from July 7 to August 10.
2 Net income includes unrealized foreign exchange gains before tax on U.S. debt translation of $10,033 in 2010, $11,494 in 2009, $8,643 in 2008, $31,639 in 2007, and $473 in 2006.
Revenue in 2007 was negatively affected by the strike by IOC's unionized work force which closed down all production facilities from March 9 until April 27.

IOC Royalty

The Corporation holds certain leases and 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 the Corporation 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 the net royalty 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, the Corporation 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%.  

IOC Commissions

Hollinger-Hanna has the right to receive a payment of 10 cents per tonne on the products produced and 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).

Management's Discussion and Analysis

The following is a discussion of the consolidated financial condition and results of operations of the Corporation for the years ended December 31, 2010 and 2009.  This discussion should be read in conjunction with the Consolidated Financial Statements of the Corporation and notes thereto for the years ended December 31, 2010 and 2009.  This information is prepared in accordance with Canadian Generally Accepted Accounting Principles ("GAAP") and all amounts are shown in Canadian dollars unless otherwise indicated.

Labrador Iron Ore Royalty Income Fund ("Fund") was converted into a Canada corporation named Labrador Iron Ore Royalty Corporation on July 1, 2010. The Corporation is also the successor by amalgamation of Labrador Mining Company Limited ("Labmin"), formerly a wholly-owned subsidiary of the Fund. Under the arrangement, the Fund distributed $248 million of subordinated notes of Labmin to its unitholders and the unitholders exchanged their trust units of the Fund for common shares of the Corporation. From July1, 2010, the common shares and the subordinated notes have traded together as stapled units on the Toronto Stock Exchange under the symbol LIF.UN. For financial reporting purposes, this reorganization has been accounted for on a continuity of interest basis which recognizes the Corporation as the successor entity to the Fund. Income, expense and cash flow results shown for the year include the results of the Fund for the first six months and the Corporation for the last six months. Comparative 2009 numbers are those of the Fund.

General

The Corporation is dependent on the operations of IOC. IOC's earnings and cash flows are affected by the volume and mix of iron ore products sold and the prices received. Iron ore demand and prices fluctuate and are affected by numerous factors which include demand for steel and steel products, the relative exchange rate of the US dollar, global and regional demand and production, political and economic conditions and production costs in major producing areas.

Liquidity and Capital Resources

Operating cash flow of the Corporation is sourced entirely from IOC through the Corporation's 7% royalty, 10 cents commission per tonne and dividends from its 15.10% equity interest in IOC. The Corporation intends to make cash distributions of the net income derived from IOC to the maximum extent possible, subject to the maintenance of appropriate levels of working capital and debt.

The Corporation has a $50 million revolving credit facility with a term ending September 18, 2013 with provision for annual one-year extensions.  No amount is currently drawn under this facility leaving $50.0 million available to provide for any capital required by IOC or requirements of the Corporation.

Since inception in 1995, we have reported to our unitholders as an income trust. With the 2010 annual report, we are reporting to the holders of stapled units (the "Unitholders") as Labrador Iron Ore Royalty Corporation. Thus all net income, adjusted cash flow and per unit figures referred to in this report use the totals according to the financial statements plus (where applicable) the $14,978,000 ($0.468 per stapled unit) interest on the subordinated notes for the period July 1 to December 31, 2010.

Operating Results

The following table summarizes the Corporation's 2010 operating results as compared to 2009 results.

Revenue     2010   2009
IOC royalties (net of 20% Newfoundland royalty tax)     $130,140,944   $60,391,033
IOC commissions     1,481,702   1,401,277
Other     239,625   138,857
      131,862,271   61,931,167
Expenses          
Administrative expenses     3,045,583   1,813,279
Interest expense:          
    Credit facility     374,997   374,998
    Subordinated notes     14,976,000   -
Income taxes expense - current     31,819,348   9,641,122
      50,215,928   11,829,399
Net Income before undernoted items     81,646,343   50,101,768
Non cash revenue (expense)          
Equity earnings in IOC     126,661,281   31,698,054
Future income taxes     (5,920,000)   (1,940,000)
Amortization     (5,687,449)   (4,790,822)
      115,053,832   24,967,232
           
Net income and comprehensive income     $196,700,175   $75,069,000

Iron ore markets which had been very weak in 2009 as a result of the world wide recession, started to firm up in late 2009 due to continuing strength in China and by early 2010 had returned to the pre-recession levels of 2008. Due to the resulting higher prices and volumes, 2010 royalty revenue was 215% of the 2009 level and marginally higher than the record year of 2008. A major change in the method of pricing iron ore contracts took place in 2010. The majority of seaborne traded iron ore contract volumes is reported to have moved from being priced on an annual to a quarterly basis (generally quarterly prices are based on spot prices for the three months preceding the month before the start of the quarter) to better reflect the significantly increased volatility in iron demand and contract servicing of customers in recent years. After reviewing industry pricing trends and extensive discussions with a range of customers, IOC has, for most of its customers, moved to use quarterly pricing for term contract shipments, together with spot pricing for non-term contract sales. Prices for 2010 varied slightly from quarter to quarter but generally increased by more than 100% as compared to 2009. IOC sees 2010 as a period of transition for iron ore pricing mechanisms and it is not yet clear how these may further evolve in the future. The Canadian dollar which had strengthened against its U.S. counterpart in 2009 continued to strengthen averaging about 10% higher in 2010. Had this not occurred, royalty revenue would have been even higher.

The increase in administrative expenses of $1.2 million was due to legal and other costs incurred in relation to the reorganization. Current income taxes represent federal and provincial income taxes payable by the Corporation on IOC royalties, net of interest, royalty taxes and administrative expenses.  The Corporation's share of IOC's earnings amounted to $126.7 million as compared to $31.7 million in 2009. The substantial increase in earnings resulted mainly from the substantial price increase from last year's level.   

The operating cash flow of the Corporation is dependent on the royalty, commission and dividend payments from IOC. Royalty payments to the Corporation vary considerably from quarter to quarter. This is because sales revenue of IOC is not constant throughout the year, being lower during the winter months when the St. Lawrence Seaway is closed, and can vary because of the timing of ship loadings and market conditions.

It is IOC's policy to declare annual dividends, the amounts of which vary according to the estimated profits and cash flows for the year. The Corporation's share of IOC's dividends amounted to $74.0 million ($2.31 per unit) in 2010 as compared to $8.2 million ($0.26 per unit) in 2009.

Fourth quarter sales at 4.8 million tonnes were slightly above 2009 levels. The increased volume and much higher prices, partially offset by the higher value of the Canadian dollar against its US counterpart, produced royalty income of $53.7 million (2009 - $24.5 million) or more than double last year's fourth quarter. Adjusted cash flow from operations was $31.9 million ($1.00 per unit) compared to 2009 of $15.8 million ($0.49 per unit). Production in the fourth quarter was adversely affected by extreme weather conditions and the availability of mine equipment (mainly trucks) which caused a shortage of feed in the concentrator affecting both concentrate and pellet production, which were below last year's fourth quarter production during which some production records were established.

Selected Consolidated Financial Information

The following table sets out financial data from a Unitholder's perspective for the three years ended December 31, 2010, 2009 and 2008.

  Years Ended December 31
Description 2010   2009   2008
  (in millions except per Unit information)
Revenue $164.4   $77.0      $163.4 
Net Income(1) $211.7   $75.1   $176.5
Net Income per Unit(1) $6.61   $2.35   $5.52
Adjusted Cash Flow(1) (2) $170.6   $58.3   $174.9 
Adjusted Cash Flow per Unit(1) (2) $5.33   $1.82   $5.46
Total Assets $680.8   $539.9   $554.3 
Cash Distribution per Unit $4.50   $2.00   $4.85 
Number of  Units outstanding (millions)    32.0   32.0   32.0
             
Notes: (1)
Includes interest income for the six months ended December 31, 2010 of
$14,878,000 ($0.468 per stapled unit) on the subordinated notes of the Corporation
  (2) "Adjusted cash flow" ( see below)

The following table sets out quarterly revenue, net income and cash flow data for 2010 and 2009.

  Revenue Net
Income
Net
Income
per Unit
Adjusted Cash
Flow(1)
Adjusted Cash
Flow
per Unit(1)
Distributions
Declared
per Unit
             
  (in millions except per Unit information)
2010            
First Quarter $16.7 $15.4 $0.48 $22.3 (3) $0.70 $0.75
Second Quarter $52.5 $69.1 $2.16 $30.5 $0.95 $0.75
Third Quarter (2) $40.9 $64.4 $2.01 $85.9 (4) $2.68 $1.00
Fourth Quarter(2) $54.3 $62.8 $1.96 $31.9 $1.00 $2.00
2009            
First Quarter $16.6 $16.5 $0.52 $11.1 $0.35 $0.50
Second Quarter $19.7 $17.8 $0.55 $12.6 $0.39 $0.50
Third Quarter $15.8 $13.6 $0.43 $18.8 (5) $0.59 $0.50
Fourth Quarter $24.9 $27.2 $0.85 $15.8 $0.49 $0.50
             
Notes: (1) "Adjusted cash flow" (see below) 
  (2) Commencing with third quarter 2010, net income, adjusted cash flow, distributions and per unit figures referred to in this table use the totals according to the financial statements plus (where applicable) the $7,488,000 ($0.234 per unit) interest on the subordinated notes
  (3) Includes a $11.5 million IOC dividend 
  (4) Includes a $62.5 million IOC dividend
  (5) Includes an $8.2 million IOC dividend

Standardized Cash Flow and Adjusted Cash Flow

For the Corporation, standardized cash flow is the same as cash flow from operating activities as recorded in the Corporation's cash flow statements as the Corporation does not incur capital expenditures or have any restrictions on distributions.  Standardized cash flow per unit was $4.87 for 2010 (2009 - $1.33).  Cumulative standardized cash flow from inception of the Corporation is $28.44 per unit and total cash distributions since inception are $27.43 per unit, for a payout ratio of 96%.

"Adjusted cash flow" is defined as cash flow from operating activities after adjustments for changes in amounts receivable, accounts and interest payable and income taxes payable. It is not a recognized measure under Canadian GAAP.  The Directors believe that adjusted cash flow is a useful analytical measure as it better reflects cash available for distributions to Unitholders.

The following reconciles standardized cash flow from operating activities to adjusted cash flow.

  2010   2009
Standardized cash flow from operating activities $155,920,875   $42,407,443
Changes in amounts receivable, accounts and interest payable and
income taxes payable
(309,816)   15,894,421
Adjusted cash flow $155,611,059   $58,301,864
Adjusted cash flow per unit $4.86   $1.82

Disclosure Controls and Internal Control over Financial Reporting

The President and CEO and the CFO are responsible for establishing and maintaining disclosure controls and procedures and internal control over financial reporting for the Corporation.  Two officers serve as directors of IOC and IOC provides monthly reports on its operations to them.  The Corporation also relies on financial information provided by IOC, including its audited financial statements, and other material information provided to the President and CEO, the Executive Vice President and Secretary and the CFO by officers of IOC.  IOC is a private corporation, and its financial statements are not publicly available.

The Directors are informed of all material information relating to the Corporation and its subsidiaries by the officers of the Corporation on a timely basis and approve all core disclosure documents including the Management Information Circular, the annual and interim financial statements and related Management's Discussion and Analysis, the Annual Information Form, any prospectuses and all press releases.  An evaluation of the design and operating effectiveness of the Corporation's disclosure controls and procedures was conducted under the supervision of the CEO and CFO.  Based on their evaluation, they concluded that the Corporation's disclosure controls and procedures were effective in ensuring that material information relating to the Corporation was accumulated and communicated for the year ended December 31, 2010.

The President and CEO and the CFO have designed internal control over financial reporting to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with Canadian GAAP.  An evaluation of the design and operating effectiveness of the Corporation's internal control over financial reporting was conducted under the supervision of the CEO and CFO.  Based on their evaluation, they concluded that the Corporation's internal control over financial reporting was effective and that there were no material weaknesses therein for the year ended December 31, 2010. 

No material change in the Corporation's internal control over financial reporting occurred during the year ended December 31, 2010.

Transition to International financial reporting standards ("IFRS")

The CICA Accounting Standards Board requires all Canadian publicly accountable enterprises to adopt International Financial Reporting Standards for the years beginning on or after January 1, 2011. The Corporation is adopting IFRS commencing January 1, 2011 with its interim financial statements for the three month period ended March 31, 2011.  These financial statements will also include comparative IFRS results for the three month period ended March 31, 2010.

The following discussion has been organized on a basis consistent with the presentation and classification under Canadian GAAP. Additionally, as we continue to assess the impact of our transition to IFRS, additional differences may be identified which could impact the amounts.

IFRS are premised on a conceptual framework similar to Canadian GAAP. However, significant differences exist in certain matters of recognition, measurement and disclosure.  While we believe that the adoption of IFRS will not have an impact on our reported cash flows, it will have an impact on our consolidated balance sheets and statements of income.

IFRS Conversion Plan

The Corporation is continuing to execute its IFRS conversion plan which addresses changes in accounting policies including for IOC, the restatement of comparative periods, various education and training sessions on the adoption of IFRS, as well as required changes to business processes and internal controls. 

A reconciliation of the Corporation's 2010 historical cost Canadian GAAP financial statements to IFRS has not been finalized. Accordingly, the impact of adopting IFRS on the Corporation's financial position and results of operations as at and for the year ended December 31, 2010 cannot be fully quantified at this time. However, the Corporation generally expects the nature of the adjustments to be consistent with those described herein, and has provided a description and, where possible, the approximate annual impact for the more significant recurring IFRS differences affecting net income.

IFRS 1: First-Time Adoption of IFRS

The Corporation's adoption of IFRS requires the application of IFRS 1, "First-time Adoption of International Financial Reporting Standards" ("IFRS 1"), which provides guidance for an entity's initial adoption of IFRS. IFRS 1 generally requires that an entity apply all IFRS effective at the end of its first IFRS reporting period retrospectively. However, IFRS 1 does require certain mandatory exceptions and permits limited optional exemptions.  The following is the optional exemption available under IFRS 1 which is most significant to the Corporation and which the Corporation will apply in preparation of its first financial statements under IFRS: 

Business combinations
IFRS 1 states that a first-time adopter may elect not to apply IFRS 3, "Business Combinations" ("IFRS 3") retrospectively to business combinations that occurred before the date of transition to IFRS. The exemption for past business combinations also applies to past acquisitions of investments in associates.  The Corporation intends to make this election in order to only apply IAS 28 to investment in associates prospectively (i.e., to those that occur on or after January 1, 2010) and not restate its investment in IOC. 

Impact of IFRS on Balance Sheet

The following quantifies and describes the expected impact of significant differences between the balance sheet under Canadian GAAP and the balance sheet under IFRS for both the January 1, 2010 opening balance sheet and the December 31, 2010 balance sheet.

Investment in IOC
We expect the Investment in IOC at January 1, 2010 to decrease by approximately $12-15 million and as at December 31, 2010 to be lower by approximately $10-13 million under IFRS rather than under Canadian GAAP.  The decrease at January 1, 2010 primarily relates to an adjustment to IOC's employee benefits in accordance with IFRS which will see vested actuarial gains/losses and past service costs recognized with an offsetting reduction to opening retained earnings.   Other items previously noted including deferred stripping costs and asset retirement obligations will change somewhat but are not expected to have a material impact.

Our estimate of the impact to the Shareholders' Equity as at January 1, 2010, after related changes to tax liabilities of $2 million, is a net decrease in Shareholders' Equity of $10-13 million.

Impact of IFRS on the Statement of Income

Equity earnings in IOC
Under IFRS, IOC's earnings will be impacted by the following:

  1. Whereas unamortized actuarial gain/loss and past service costs are currently recognized in income on a straight-line basis over their vesting periods, IOC intends to recognize these costs immediately and with such election, no amounts will be subsequently recorded in the statement of income.  This will result in decreased pension and post-retirement costs of approximately $11-13 million in 2010.
  2. Under IFRS, asset retirement obligations will be re-measured annually including the effect of changes of the discount rate used.  The calculation of a new accretion expense will result in a decreased cost of approximately $0.5 - 1 million in 2010.

Based on the Corporation's 15.1% ownership interest in IOC, for the year ended December 31, 2010 we expect the Corporation's after tax earnings to increase approximately $1-2 million under IFRS.

Outlook

The iron ore markets remain very firm especially in Asia with firming continuing in the rest of the world. Under current market conditions, IOC expects to sell all the pellets and concentrates it can produce in 2011. Pricing remains firm with prices for the first quarter of 2011 increasing from the fourth quarter of 2010 and a further increase indicated for the second quarter. The Canadian dollar remains firm and if it continues to trade around par or above against its U.S. counterpart, it will negatively affect our results but should only marginally offset the gains from the higher prices and increased volume expected.

Additional information

Additional information relating to the Corporation, including the Annual Information Form, is on SEDAR at www.sedar.com. Additional information is also available on the Corporation's website at www.labradorironore.com.

Bruce C. Bone
President and Chief Executive Officer
Toronto, Ontario
March 3, 2011



LABRADOR IRON ORE ROYALTY CORPORATION
CONSOLIDATED BALANCE SHEETS
         
             
   
 
     
 
As at December 31          
    2010     2009
Assets          
Current          
  Cash and cash equivalents  $ 73,611,888   $ 6,203,013
  Amounts receivable   51,420,285     24,987,043
    125,032,173     31,190,056
           
Deferred charges   227,333     310,000
           
Iron Ore Company of Canada ("IOC"), royalty and commission interests   291,885,160     297,489,943
           
Investment in IOC   263,646,657     210,950,091
  $ 680,791,323   $ 539,940,090
           
             
             
Liabilities and Shareholders'/Unitholders' Equity          
Current          
  Accounts payable $ 10,482,603   $ 5,233,229
  Income taxes payable   14,515,246     509,562
  Interest payable on subordinated notes   7,488,000     -
  Distributions payable to shareholders/unitholders   56,512,000     16,000,000
    88,997,849     21,742,791
           
Subordinated notes   248,000,000     -
           
Future income tax liability   110,970,000     105,050,000
    447,967,849     126,792,791
Equity          
  Share capital / Trust units   69,708,147     317,708,147
  Retained earnings   163,115,327     95,439,152
    232,823,474     413,147,299
  $ 680,791,323   $ 539,940,090

 


LABRADOR IRON ORE ROYALTY CORPORATION          
CONSOLIDATED STATEMENTS OF INCOME AND          
COMPREHENSIVE INCOME AND RETAINED EARNINGS          
           
For the years ended December 31          
           
    2010     2009
           
Revenue          
  IOC royalties $ 162,723,775   $ 75,488,791
  IOC commissions   1,481,702     1,401,277
  Interest and other income   239,625     138,857
    164,445,102     77,028,925
Expenses          
  Newfoundland royalty taxes   32,582,831     15,097,758
  Amortization of royalty and commission interests   5,604,783     4,708,156
  Administrative expenses   3,045,583     1,813,279
  Interest expense:          
    Credit facility   457,663     457,664
    Subordinated notes   14,976,000     -
    56,666,860     22,076,857
           
Income before equity earnings and income taxes   107,778,242     54,952,068
Equity earnings in IOC   126,661,281     31,698,054
Income before income taxes   234,439,523     86,650,122
           
Provision for income taxes          
  Current   31,819,348     9,641,122
  Future   5,920,000     1,940,000
    37,739,348     11,581,122
           
Net income and comprehensive income for the year   196,700,175     75,069,000
           
Retained earnings, beginning of year   95,439,152     84,370,152
           
Dividends/distributions to shareholders/unitholders   (129,024,000)     (64,000,000)
           
Retained earnings, end of year $ 163,115,327   $ 95,439,152
           
Net income per common share / unit $ 6.15   $ 2.35






LABRADOR IRON ORE ROYALTY CORPORATION          
CONSOLIDATED STATEMENTS OF CASH FLOWS          
           
           
For the years ended December 31          
           
    2010     2009
Net inflow (outflow) of cash related to the following activities          
           
Operating          
  Net income for the year $ 196,700,175   $ 75,069,000
  Items not affecting cash:          
    Equity earnings in IOC   (126,661,281)     (31,698,054)
    Future income taxes   5,920,000     1,940,000
    Amortization of royalty and commission interests   5,604,783     4,708,156
    Amortization of deferred charges   82,667     82,666
  Common share dividend from IOC   73,964,715     8,200,096
  Change in amounts receivable, accounts and income taxes
payable and interest payable on subordinated notes
  309,816     (15,894,421)
  Cash flow from operating activities   155,920,875     42,407,443
           
Financing          
  Distributions paid to unitholders   (88,512,000)     (64,000,000)
  Cash flow used in financing activities   (88,512,000)     (64,000,000)
           
Increase/(decrease) in cash and cash equivalents during the year   67,408,875     (21,592,557)
           
Cash and cash equivalents, beginning of year   6,203,013     27,795,570
           
Cash and cash equivalents, end of year $ 73,611,888   $ 6,203,013
           
           
Cash and cash equivalents are comprised of:          
  Cash in bank $ 73,611,888   $ 4,364,062
  Term deposits   -     1,838,951
  $ 73,611,888   $ 6,203,013
           
Cash income taxes paid $ 17,813,664   $ 34,773,452
           
Cash interest paid $ 7,863,000   $ 375,000