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Labrador Iron Ore Royalty Corporation - Results for the Second Quarter Ended June 30, 2011

August, 09, 2011

TORONTO, Aug. 9, 2011 /CNW/ - Labrador Iron Ore Royalty Corporation ("LIORC") (TSX: LIF.UN) announced the results of its operations for the second quarter ended June 30, 2011.

On July 1, 2011 the 2-for-1 split of the stapled units approved by the unitholders on May 30, 2011, became effective. The stapled units started trading on a split basis on the Toronto Stock Exchange on June 28, 2011. Accordingly, all per unit figures in this report are based on 64 million units outstanding rather than the 32 million in previous statements, with all prior per unit figures being restated.

Royalty income for the second quarter of 2011 amounted to $37.8 million as compared to $52.1 million for the second quarter of 2010. The unitholder's cash flow from operating activities after adjustments for changes in amounts receivable, accounts payable and income taxes payable (adjusted cash flow) for the second quarter was $23.0 million or $0.36 per unit as compared to $30.5 million or $0.48 per unit for the same period in 2010.  Net income was $48.2 million or $0.75 per unit compared to $69.3 million or $1.08 per unit for the same period in 2010. Equity earnings from IOC amounted to $30.4 million or $0.48 per unit as compared to $46.7 million or $0.73 per unit in 2010. Had the price adjustments which occurred in the second quarter of 2010 and related to the first quarter not been included, 2010 royalty income would have been reduced by $10.4 million or $0.33 per unit and equity earnings from IOC by $14.2 million or $0.44 per unit. Without the inclusion of these amounts, second quarter of 2010 net income would have been $0.84 per unit and adjusted cash flow $0.38 per unit.

Prior to the July 1, 2010 conversion of Labrador Iron Ore Royalty Corporation ("LIORC") from an income trust, the net income of the unitholders was the same as the trust's net income. Since the unitholders now own the $248 million LIORC subordinated notes directly, the net income of the unitholders consists of the net income of LIORC plus the interest paid on the 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 $7,488,000 ($0.117 per stapled unit) and $14,976,000 ($0.234 per stapled unit) interest on the subordinated notes for the three months and six months period ended June 30, 2011, respectively.

Royalty income for the quarter was slightly below the adjusted second quarter of 2010 due to lower IOC sales and a higher Canadian dollar (against its U.S. counterpart) offset by higher iron ore prices in 2011. The lower IOC sales were the result of a shortage of products due to production shortfalls and timing of shipments.

Results for the three months and six months ended June 30 are summarized below:

        3 Months Ended
June 30,
2011
    3 Months Ended
June 30,
2010
    6 Months Ended
June 30,
2011
  6 Months Ended
June 30,
2010
              (Unaudited)          
                         
Revenue (in millions)       $38.1     $52.5     $68.8   $69.2
Adjusted cash flow (in millions)       $23.0     $30.5     $71.0   $52.8
Adjusted cash flow per unit       $  0.36     $  0.48     $  1.11   $  0.83
Net income (in millions)       $ 48.2     $ 69.3     $ 87.1   $ 85.0
Net income per unit       $  0.75     $  1.08     $  1.36   $  1.33
                         

"Adjusted cash flow" (defined as cash flow from operating activities as shown on the attached financial statements adjusted for changes in amounts receivable, accounts payable and income taxes payable) is not a recognized measure under Canadian GAAP or IFRS.  The Directors believe that adjusted cash flow is a useful analytical measure as it better reflects cash available for distributions to unitholders.

Iron Ore Company of Canada

Second quarter saleable iron ore production was 14 per cent lower than the same quarter of 2010 as a result of truck and labour availability issues, but 31 per cent higher than the first quarter of 2011 as progress was made to stabilize and improve production capability. Concentrate for sinter production was maximized in the quarter to respond to market demand, and this resulted in lower pellet production relative to the first quarter. While the overall pellet capacity was temporarily reduced, it enabled significant plant maintenance work to be undertaken.

The Concentrator Expansion Project Phase 1, increasing capacity to 22Mt/a, is on track for completion in late 2011 and Phase 2, improving the magnetite recovery circuit, which will increase capacity to 23Mt/a, is progressing as planned, with first production expected in late 2012.

A summary of IOC's sales in millions of tonnes is as follows:

            3 Months Ended
June 30,
2011
    3 Months Ended
June 30,
2010
    6 Months Ended
June 30,
2011
    6 Months Ended
June 30,
2010
    Year
Ended
Dec. 31, 2010
 
                                       
Pellets           1.90     3.00     4.17     5.67     12.05  
Concentrates           1.05     1.08 (1)   1.33         1.39 (1)         3.02 (1)
                                       
Total           2.95     4.08     5.50     7.06     15.07  

Note:  (1) Excludes third party ore sales

Proposed Tax Changes

On July 20, 2011, the Ministry of Finance announced proposed amendments to the Income Tax Act concerning stapled securities. Under the proposal, when debt and equity are stapled together and trade as a unit, the interest on the debt portion of the stapled security would not be deductible in computing income for tax purposes. The directors are studying the effect of this announcement on LIORC.

Outlook

Iron ore markets and pricing remain firm and IOC expects to be able to sell all the pellets and concentrate it can produce. IOC believes that the production problems faced in the first half of the year have been substantially remedied and production for the balance of the year will be at normal levels, with the first benefits from Phase 1 of the expansion occurring late in the year. The continued strength of the Canadian dollar against its U.S. counterpart is a negative but is more than offset by increased prices for iron ore.

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

Bruce C. Bone
President and Chief Executive Officer
August 9, 2011

Management's Discussion and Analysis

The following discussion and analysis should be read in conjunction with the Management's Discussion and Analysis section of the Corporation's 2010 Annual Report and the interim financial statements and notes contained in this report.  Although management believes that expectations reflected in forward-looking statements are reasonable, such statements involve risk and uncertainties including the factors discussed in the Corporation's 2010 Annual Report.

The Corporation's revenues are entirely dependent on the operations of Iron Ore Company of Canada (IOC) as its principal assets relate to the operations of IOC and its principal source of revenue is the 7% royalty it receives on all sales of iron ore products by IOC.  In addition to the volume of iron ore sold, the Corporation's royalty revenue is affected by the price of iron ore and the Canadian - U.S. dollar exchange rate.

The sales of IOC are usually 15% - 20% of the annual volume in the first quarter, with the balance spread fairly evenly throughout the other three quarters.  Because of the size of individual shipments some quarters may be affected by the timing of the loading of ships that can be delayed from one quarter to the next.

On July 1, 2011 the 2-for-1 split of the stapled units approved by the unitholders on May 30, 2011, became effective. The stapled units started trading on a split basis on the Toronto Stock Exchange on June 28, 2011. Accordingly, all per unit figures in this report (except distributions declared) are based on 64 million units outstanding rather than the 32 million in previous statements, with all prior per unit figures being restated.

Royalty income for the second quarter of 2011 amounted to $37.8 million as compared to $52.1 million for the second quarter of 2010. The unitholder's cash flow from operating activities after adjustments for changes in amounts receivable, accounts payable and income taxes payable (adjusted cash flow) for the second quarter was $23.0 million or $0.36 per unit as compared to $30.5 million or $0.48 per unit for the same period in 2010.  Net income was $48.2 million or $0.75 per unit compared to $69.3 million or $1.08 per unit for the same period in 2010. Equity earnings from IOC amounted to $30.4 million or $0.48 per unit as compared to $46.7 million or $0.73 per unit in 2010. Had the price adjustments which occurred in the second quarter of 2010 and related to the first quarter not been included, 2010 royalty income would have been reduced by $10.4 million or $0.33 per unit and equity earnings from IOC by $14.2 million or $0.44 per unit. Without the inclusion of these amounts, second quarter of 2010 net income would have been $0.84 per unit and adjusted cash flow $0.38 per unit.

Prior to the July 1, 2010 conversion of Labrador Iron Ore Royalty Corporation ("LIORC") from an income trust, the net income of the unitholders was the same as the trust's net income. Since the unitholders now own the $248 million LIORC subordinated notes directly, the net income of the unitholders consists of the net income of LIORC plus the interest paid on the 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 $7,488,000 ($0.117 per stapled unit) and $14,976,000 ($0.234 per stapled unit) interest on the subordinated notes for the three months and six months period ended June 30, 2011, respectively.

Royalty income for the quarter was slightly below the adjusted second quarter of 2010 due to lower IOC sales and a higher Canadian dollar (against its U.S. counterpart) offset by higher iron ore prices in 2011. The lower IOC sales were the result of a shortage of products due to production shortfalls and timing of shipments.

The six month results were affected by the same factors as the second quarter with the decreased sales volume and higher Canadian dollar being offset by higher prices for pellets and concentrates.

The following table sets out quarterly revenue, net income and cash flow data for 2011, 2010 and 2009.

      Revenue     Net
Income
    Net Income
per Unit(1)
  Adjusted Cash
Flow(2)
  Adjusted
Cash Flow
per Unit)(1)(2)
  Distributions
Declared
per Unit
        (in millions except per Unit information)  
2011                              
First Quarter(3)     $30.7     $38.9     $0.61   $48.02(6)   $0.75   $1.50
Second Quarter(3)     $38.1     $48.2     $0.75   $23.0   $0.36   $0.75
2010(4)                              
First Quarter(5)     $16.7     $15.7     $0.25   $22.3(7)   $0.35   $0.75
Second Quarter(5)     $52.5     $69.3     $1.08   $30.5   $0.48   $0.75
Third Quarter (3)     $40.9     $64.4     $1.01   $85.9(8)   $1.34   $1.00
Fourth Quarter(3)     $54.3     $62.8     $0.98   $31.9   $0.50   $2.00
2009                              
First Quarter     $16.6     $16.5     $0.26   $11.1   $0.17   $0.50
Second Quarter     $19.7     $17.8     $0.28   $12.6   $0.20   $0.50
Third Quarter     $15.8     $13.6     $0.21   $18.8(9)   $0.29   $0.50
Fourth Quarter     $24.9     $27.2     $0.43   $15.8   $0.25   $0.50

      Notes: (1) Per unit amounts have been retroactively adjusted to reflect the two-for-one share subdivision completed on July 1, 2011         
      (2) "Adjusted cash flow" (see below)         
      (3) 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 ($0.117 per unit) interest on the subordinated notes        
      (4) Except as noted, the figures have not been restated to conform with IFRS        
      (5) Restated to conform with IFRS        
      (6) Includes a $29.0 million IOC dividend        
      (7) Includes a $11.5 million IOC dividend        
      (8) Includes a $62.5 million IOC dividend        
      (9) Includes a $8.2 million IOC dividend

Iron Ore Company of Canada

Second quarter saleable iron ore production was 14 per cent lower than the same quarter of 2010 as a result of truck and labour availability issues, but 31 per cent higher than the first quarter of 2011 as progress was made to stabilize and improve production capability. Concentrate for sinter production was maximized in the quarter to respond to market demand, and this resulted in lower pellet production relative to the first quarter. While the overall pellet capacity was temporarily reduced, it enabled significant plant maintenance work to be undertaken.

The Concentrator Expansion Project Phase 1, increasing capacity to 22Mt/a, is on track for completion in late 2011 and Phase 2, improving the magnetite recovery circuit, which will increase capacity to 23Mt/a, is progressing as planned, with first production expected in late 2012.

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 $0.67(1) for the quarter (2010 - $0.16). Cumulative standardized cash flow from inception of the Corporation is $15.12 per unit and total cash distributions since inception are $14.37(1) per unit, for a payout ratio of 95%.

(1) Excludes interest on subordinated notes paid directly to unitholders of $0.234 and $0.468, respectively.

"Adjusted cash flow" is defined as cash flow from operating activities as shown on the attached financial statements adjusted for changes in amounts receivable, accounts payable and income taxes payable.  It is not a recognized measure under Canadian GAAP or IFRS.  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 cash flow from operating activities to adjusted cash flow.

    3 Months Ended
June 30, 2011
3 Months Ended
June 30, 2010
6 Months Ended
June 30, 2011
6 Months Ended
June 30, 2010
Standardized cash flow from operating activities   $42,731,031 $10,042,659 $57,452,557 $37,901,972
Excluding: changes in amounts receivable, accounts payable
and income taxes payable
  (27,229,486) 20,437,593 (1,417,676) 14,910,576
Adjusted cash flow(1)   $15,501,545 $30,480,252 $56,034,881 $52,812,548
Adjusted cash flow per unit(1)   $0.24 $0.95 $0.88 $0.83

(1) Three months and six months ended June 30, 2011 exclude interest on subordinated notes paid directly to unitholders of $7,488,000 ($0.117 per unit) and $14,976,000 ($0.234) respectively.

Liquidity

The Corporation has a $50 million revolving credit facility to September 18, 2013 with provision for annual one-year extensions.  No amounts are currently drawn under this facility (2010 - nil) leaving $50 million available to provide for any capital required by IOC or other Corporation requirements.

International Financial Reporting Standards ("IFRS")

The Corporation adopted IFRS effective January 1, 2010 and has prepared the current interim financial statements using IFRS Accounting Policies.  Prior to the adoption of IFRS, the financial statements were prepared in accordance with Canadian Generally Accepted Accounting Principles ("Canadian GAAP").  The Corporation's financial statements for the year ending December 31, 2011 will be the first annual financial statements that comply with IFRS.

IFRS are premised on a conceptual framework similar to Canadian GAAP. However, significant differences exist in certain matters of recognition, measurement and disclosure. The adoption had a small impact on the consolidated balance sheets and statements of comprehensive income.  The overall impact was to reduce the carrying value of the Corporation's investment in IOC and its retained earnings and accumulated other comprehensive income by $11.8 million at January 1, 2010 and $13.7 million at December 31, 2010.  For the six months ended June 30, 2011, the Corporation's share of net income and comprehensive income from IOC has not materially changed from what would have been reported under Canadian GAAP. The change to IFRS has no impact on the Corporation's royalty and commission income and no impact on cash flows for the quarter.

Proposed Tax Changes

On July 20, 2011, the Ministry of Finance announced proposed amendments to the Income Tax Act concerning stapled securities. Under the proposal, when debt and equity are stapled together and trade as a unit, the interest on the debt portion of the stapled security would not be deductible in computing income for tax purposes. The directors are studying the effect of this announcement on LIORC.

Outlook

Iron ore markets and pricing remain firm and IOC expects to be able to sell all the pellets and concentrate it can produce. IOC believes that the production problems faced in the first half of the year have been substantially remedied and production for the balance of the year will be at normal levels, with the first benefits from Phase 1 of the expansion occurring late in the year. The continued strength of the Canadian dollar against its U.S. counterpart is a negative but is more than offset by increased prices for iron ore.

Bruce C. Bone
President and Chief Executive Officer
Toronto, Ontario
August 9, 2011 

LABRADOR IRON ORE ROYALTY CORPORATION
CONSOLIDATED BALANCE SHEETS
         
As at
June 30 December 31
Canadian $  2011   2010  
(Unaudited)
Assets
Current
Cash and cash equivalents  $          34,040,445  $         73,611,888
Amounts receivable               38,640,427             51,420,285
             72,680,872           125,032,173
Iron Ore Company of Canada ("IOC"),
royalty and commission interests             289,713,922           291,885,160
Investment in IOC             267,744,796           247,925,657
 $        630,139,590  $       664,842,990
Liabilities and Shareholders’ Equity
Current
Accounts payable  $            7,964,741  $         10,482,603
Income taxes payable                5,670,926             14,515,246
Interest payable on subordinated notes                 7,488,000               7,488,000
Distributions payable to shareholders              16,512,000             56,512,000
             37,635,667             88,997,849
Subordinated notes             248,000,000           248,000,000
Deferred income taxes             110,970,000           108,690,000
           396,605,667           445,687,849
Equity 
Share capital                69,708,147             69,708,147
Retained earnings             168,846,776           153,724,994
Accumulated other comprehensive loss              (5,021,000)               (4,278,000)
           233,533,923           219,155,141
 $        630,139,590  $       664,842,990



  

 LABRADOR IRON ORE ROYALTY CORPORATION        
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME      
           
  For the Three Months   
    Ended June 30,  
Canadian $  2011   2010  
    (Unaudited)  
Revenue        
  IOC royalties  $ 37,754,213    $ 52,103,871  
  IOC commissions 290,334   401,261  
  Interest and other income  104,172   44,392  
    38,148,719   52,549,524  
Expenses        
  Newfoundland royalty taxes 7,550,843   10,458,850  
  Amortization of royalty and commission interests 1,112,870   1,497,889  
  Administrative expenses  705,404   718,405  
  Interest expense:        
    Credit facility 93,494   93,491  
    Subordinated notes  7,488,000   -  
    16,950,611   12,768,635  
           
Income before equity earnings and income taxes 21,198,108   39,780,889  
Equity earnings in IOC  30,431,486   46,680,120  
           
Income before income taxes  51,629,594   86,461,009  
         
Provision for income taxes         
  Current  6,809,433   10,798,526  
  Deferred 4,102,000   6,322,000  
  10,911,433   17,120,526  
         
Net income for the period 40,718,161   69,340,483  
         
Other comprehensive income        
  Share of other comprehensive loss of IOC (371,000)   (263,000)  
         
Comprehensive income for the period  $ 40,347,161    $ 69,077,483  
         
Net income per common share/unit (1)  $ 0.64    $ 1.08  
         
(1) Per share/unit amounts have been retroactively adjusted to reflect the two-for-one share subdivision completed on July 1, 2011.

 

LABRADOR IRON ORE ROYALTY CORPORATION        
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME      
           
    For the Six Months   
    Ended June 30,  
Canadian $  2011   2010  
    (Unaudited)  
Revenue        
  IOC royalties  $ 68,034,430    $ 68,478,362  
  IOC commissions 541,303   694,986  
  Interest and other income  236,961   49,135  
    68,812,694   69,222,483  
Expenses        
  Newfoundland royalty taxes 13,606,886   13,733,748  
  Amortization of royalty and commission interests 2,171,238   2,795,359  
  Administrative expenses  1,105,556   1,440,635  
  Interest expense:        
    Credit facility 185,959   185,953  
    Subordinated notes  14,976,000   -  
    32,045,639   18,155,695  
           
Income before equity earnings and income taxes 36,767,055   51,066,788  
Equity earnings in IOC  49,682,954   51,486,535  
           
Income before income taxes  86,450,009   102,553,323  
           
Provision for income taxes         
  Current  11,898,227   12,554,651  
  Deferred 2,406,000   4,974,000  
    14,304,227   17,528,651  
           
Net income for the period 72,145,782   85,024,672  
           
Other comprehensive income        
  Share of other comprehensive loss of IOC (743,000)   (526,000)  
           
Comprehensive income for the period  $ 71,402,782    $ 84,498,672  
           
           
Net income per common share/unit (1)  $ 1.13    $ 1.33  
           
(1) Per share/unit amounts have been retroactively adjusted to reflect the two-for-one share subdivision completed on July 1, 2011.

  

LABRADOR IRON ORE ROYALTY CORPORATION      
CONSOLIDATED STATEMENTS OF CASH FLOWS      
             
  For the Six Months
  Ended June 30,
Canadian $    2011   2010
  (Unaudited)
Net inflow (outflow) of cash related to the following activities      
       
Operating      
  Net income for the period  $ 72,145,782    $ 85,024,672
  Items not affecting cash:      
      Equity earnings in IOC (49,682,954)   (51,486,535)
      Deferred income taxes 2,406,000   4,974,000
      Amortization of royalty and commission interests 2,171,238   2,795,359
  Common share dividend from IOC 28,994,815   11,505,052
  Change in amounts receivable, accounts and income taxes payable
   and interest payable on subordinated notes
1,417,676   (14,910,576)
  Cash flow from operating activities 57,452,557   37,901,972
             
Financing        
  Distributions paid to unitholders (97,024,000)   (40,000,000)
  Cash flow used in financing activities (97,024,000)   (40,000,000)
             
Decrease in cash and cash equivalents during the period (39,571,443)   (2,098,028)
             
Cash and cash equivalents, beginning of period 73,611,888   6,203,013
             
Cash and cash equivalents, end of period  $ 34,040,445    $ 4,104,985
             
Cash and cash equivalents are comprised of:      
  Cash in bank  $ 34,040,445    $ 1,770,744
  Term deposits -   2,334,241
   $ 34,040,445    $ 4,104,985
             
             
Cash income taxes paid  $ 20,680,545    $ 5,096,000
             
Cash interest paid  $ 15,161,959    $ 186,987

 

LABRADOR IRON ORE ROYALTY CORPORATION        
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY      
           
  Capital Trust Retained Accumulated Total
  stock Units earnings other   
        comprehensive   
Canadian $        loss  
  (Unaudited)
           
Balance as at December 31, 2010  $ -  $ 317,708,147  $ 83,634,152  $ -  $ 401,342,299
           
Net income for the period - - 85,024,672 - 85,024,672
Distributions to unitholders - - (48,000,000) - (48,000,000)
Other comprehensive loss - - - (526,000) (526,000)
Balance as at June 30, 2010  $ -  $ 317,708,147  $ 120,658,824  $ (526,000)  $ 437,840,971
           
           
           
Balance as at December 31, 2011  $ 69,708,147 -  $ 153,724,994  $ (4,278,000)  $ 219,155,141
           
Net income for the period - - 72,145,782   72,145,782
Dividends to shareholders  - - (57,024,000)   (57,024,000)
Other comprehensive loss - -   (743,000) (743,000)
Balance as at June 30, 2011  $ 69,708,147  $ -  $ 168,846,776  $ (5,021,000)  $ 233,533,923