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Labrador Iron Ore Royalty Corporation - 2011 Results of Operations

March, 07, 2012

TORONTO, March 7, 2012 /CNW/ - Labrador Iron Ore Royalty Corporation (TSX: LIF.UN) announced the results of its operations for the year ended December 31, 2011.

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

On July 1, 2011 the 2-for-1 subdivision of the stapled units approved by the holders of stapled units (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, with all prior per unit figures being restated.

Prior to the July 1, 2010 conversion of Labrador Iron Ore Royalty Corporation ("LIORC" or the "Corporation") 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 $29,952,000 ($0.468 per stapled unit) interest on the subordinated notes for each quarter and the year ended December 31, 2011, respectively.

Transition to International financial reporting standards

The 2011 consolidated financial statements of the Corporation are prepared in accordance with International Financial Reporting Standards ("IFRS") as issued by the International Accounting Standards Board ("IASB") and are the Corporation's first annual financial statements prepared in accordance with IFRS. Prior to the adoption of IFRS, the financial statements were prepared in accordance with Canadian Generally Accepted Accounting Principles ("Canadian GAAP").

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 its retained earnings by $22.0 million at January 1, 2010 and to increase 2010 comprehensive income by $2.5 million. For the year ended December 31, 2011, the Corporation's share of comprehensive income from IOC is $4.0 million lower than 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 year.

Financial Performance

The Unitholders' adjusted cash flow (see Management's Discussion & Analysis for definition and calculation) for the year ended December 31, 2011 was $158.1 million or $2.47 per stapled unit as compared to $170.6 million or $2.67 per unit for 2010.

Iron ore sales of IOC amounted to 13.2 million tonnes compared to 15.1 million tonnes in 2010. Sales were constrained by lower than expected concentrate production due to mine equipment problems and weather related operating problems in the winter months. In 2011, approximately 32% of IOC's concentrate production was sold as concentrate while the remaining production was converted into pellets at IOC's pelletizing plant before sale. IOC's pellet sales were lower year over year in 2011 as pellet production was curtailed in order to perform extensive maintenance work at the pellet plant, meet contractual commitments for concentrate and take advantage of higher margins on spot sales of concentrate.  Sales to IOC's traditional markets (North America and Europe) represented 61% of IOC's shipments in 2011. Iron ore prices were very strong in the first six months of 2011 due to the market recovery in the advanced economies and solid growth in the emerging and developing economies particularly in the Asian-Pacific region. In the last half of the year, Europe's sovereign debt problems and tightening credit policies of the Chinese government moderated iron ore demand and iron ore spot prices, especially in the fourth quarter.  Despite struggling in the second half of 2011, the spot price index of seaborne iron ore rose 15% year over year to average $169.20 per dry metric ton CFR China in 2011 (according to Platts). As a result in spite of the lower sales volume in 2011 and a higher Canadian dollar, royalty revenue was only slightly below 2010. Until 2009, iron ore prices had been negotiated annually with IOC's customers with prices being denominated in U.S. dollars.  In early 2010, the world's major iron ore producers transitioned to index-based shorter term pricing, breaking a 40-year tradition of benchmark annual pricing. The index-based pricing is premised on daily spot iron ore indices adjusted by factors such as freight, and quality. Effective in the fourth quarter of the year, the pricing, which had been based on the previous quarter's spot prices, has been changed to the current quarter's spot prices. The Canadian dollar remained strong against the U.S. dollar averaging $1.01 against $0.97 in 2010.

The Unitholders' consolidated net income for the year ended December 31, 2011 was $209.3 million or $3.27 per unit compared to $214.1 million or $3.34 per unit in 2010.  Equity earnings from IOC amounted to $124.0 million compared to $129.4 million in 2010.

IOC Developments

On May 6, 2010, IOC announced the resumption of its expansion program, with a proposed $435 million investment to increase its annual concentrate production capacity by 4 million tonnes by 2012.  The investment was the first stage of a three-stage expansion program that could increase concentrate annual capacity by at least 8 million tonnes resulting in a capacity to produce 26 to 30 million tonnes of concentrate pending final scoping of the third stage.  The first stage comprised an overland conveyor to remove bottlenecks in the current ore delivery system, a fourth autogenous grinding mill to increase primary grinding capacity and associated mine and rail equipment.

The commissioning of the new primary crusher and conveyor system commenced on November 30, 2011. On February 8, 2011, IOC announced the restart of the second stage of its expansion program which can increase IOC's annual concentrate capacity by 1.3 million tonnes. IOC will invest $289 million during the second stage to expand its magnetite processing facility and add new spiral lines to the gravity separation circuit. The second stage will also include the purchase of additional mining equipment, railway cars and a locomotive, as well as upgrades at the Wabush terminal sub-substation.  The third stage scope is still under study. On August 16, 2011, IOC announced it would undertake a study to evaluate options to increase concentrate production to 50 million tonnes from 2016, as well as consider the pathway for further expansions beyond this capacity.

The re-evaluation of reserves during the year (after mining 33 million tonnes) resulted in a decrease of 115 million tonnes to 1,374 million tonnes at year-end. Resources totaled 2,463 million tonnes. Revisions to pit designs transferred 61 million tonnes of reserves to resources, with mineral resources increasing by 91 million tonnes due primarily to the transfer from reserves.  It is anticipated that further pit design work will reverse this reserve to resource transfer in 2012. Details of IOC's reserves and resources are provided in the LIORC Annual Information Form.

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 announcement has an effective date of July 20, 2012. The directors are studying the effect of this announcement on LIORC, while they await the details of the proposed legislation.

Outlook

Consensus forecasts for iron ore markets in 2012 expect that prices will remain near current levels for the first half of the year with higher levels expected in the second half. With the commissioning of phase two of the expansion, IOC should have substantially increased production in 2012 and expects to be able to sell all the iron ore it can produce. 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 pricing 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 7, 2012

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.

Prior to the conversion to the Corporation, there were 32 million trust units issued and outstanding. Under the Arrangement, the Fund distributed $248,000,000 of 12.08% subordinated notes to its unitholders and unitholders exchanged their units of the Fund for common shares of the Corporation. Each unitholder received one common share and one $7.75 12.08% subordinated note for each unit held. 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.

Effective on July 1, 2011, the Corporation completed the subdivision of the stapled units on a two-for-one basis.  All common share and per common share amounts including comparative information have been restated to reflect the two-for-one subdivision. Following completion of the subdivision, the number of outstanding common shares and subordinated note receipts represented by stapled units are increased from 32 million to 64 million and each stapled unit consists of (a) one subordinated note receipt representing a $3.875 principal amount of subordinated notes of the Corporation and entitled to interest payments of $0.468 per annum, and (b) one common share of the Corporation.

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 of 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 2011 were "eligible dividends" under the Income Tax Act.

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 2011 sales totaled 13.2 million tonnes comprised of 4.5 million tonnes of iron ore concentrate and 8.7 million tonnes of iron ore pellets. Production in 2011 was 8.7 million tonnes of pellets and 4.8 million tonnes of concentrate. This was lower than budget due to some mine equipment problems and severe weather conditions during the winter months, IOC generated ore sales revenues of $2,335 million in 2011 (2010 - $2,420 million). IOC sales traditionally have been 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 and Europe resulted in more sales to Asia in 2011.


Selected IOC Financial Information

            2011     2010     2009     2008     2007
                              ($ in thousands)      
Operating Revenues           2,443,195     2,521,935     1,144,2041     2,199,908     1,014,843
Cash flow from operating activities           946,240       911,637       42,450     1,195,472     218,315
Net income2           826,677     863,226     215,254     567,122     206,2673
Capital expenditures           647,209     237,977     190,467     262,861     175,874
                                     

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 ($4,122) in 2011, $10,033 in 2010, $11,494 in 2009, $8,643 in 2008, and $31,639 in 2007. 2011 and 2010 presented in accordance with IFRS.
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 2011, the average royalty (net of the 20% tax) had been approximately $87.6 million per year and in 2011 the net royalty was $128.6 million (2010 - $130.1 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 2011, Hollinger-Hanna received a total of $1.3 million in commissions from IOC (2010 - $1.5 million).

Quarterly Distributions

Distributions of $2.25 per unit, including special distributions of $1.25 per unit, were declared in 2011 (2010 - $1.25 per unit). These distributions were allocated as follows:

           
Period Payment Dividend
Income
Interest
Income
Distribution Total
Distribution
Ended Date per Unit Per Unit Per Unit ($ Million)
           
Mar. 31, 2011 Apr. 25, 2011 $  0.133 $ 0.117 $ 0.250 $ 16.0
Special Distribution Apr. 25, 2011 0.500 - 0.500 32.0
Jun.  30, 2011 Jul. 25, 2011 0.133    0.117 0.250 16.0
Special Distribution     Jul. 25, 2011 0.125   - 0.125 8.0
Sep. 30, 2011 Oct. 25, 2011 0.133    0.117 0.250 16.0
Special Distribution     Oct. 25, 2011 0.500 - 0.500 32.0
Dec. 31, 2011 Jan. 25, 2012 0.133    0.117 0.250 16.0
Special Distribution      Jan. 25, 2012 0.125 - 0.125 8.0
           
Distribution to Unitholders -2011                 $ 1.782   $ 0.468         $  2.25         $144.0
Mar. 31, 2010 Apr. 25, 2010   $  0.125   $ 0.125       $ 0.250          $ 16.0
Special Distribution Apr. 25, 2010       0.125   -       0.125     8.0
Jun.  30, 2010 Jul. 25, 2010       0.150      0.100       0.250   16.0
Special Distribution     Jul. 25, 2010   0.125     -       0.125      8.0
Sep. 30, 2010 Oct. 25, 2010   0.133      0.117       0.250   16.0
Special Distribution     Oct. 25, 2010   0.250   -       0.250   16.0
Dec. 31, 2010 Jan. 25, 2011     0.133      0.117       0.250   16.0
Special Distribution      Jan. 25, 2011     0.750   -       0.750   48.0
           
Distribution to Unitholders -2010   $ 1.791 $ 0.459 $  2.25 $ 144.0

           

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.

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, 2011 and 2010.  This discussion should be read in conjunction with the Consolidated Financial Statements of the Corporation and notes thereto for the years ended December 31, 2011 and 2010.  This information is prepared in accordance with International Financial Reporting Standards ("IFRS") as issued by the International Accounting Standards Board ("IASB") and all amounts are shown in Canadian dollars unless otherwise indicated.

On July 1, 2011 the 2-for-1 subdivision of the stapled units, approved by the holders of stapled units (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, with all prior per unit figures being restated.

Transition to International financial reporting standards

The 2011 consolidated financial statements of the Corporation are prepared in accordance with IFRS as issued by the IASB and are the Corporation's first annual financial statements prepared in accordance with IFRS. Prior to the adoption of IFRS, the financial statements were prepared in accordance with Canadian Generally Accepted Accounting Principles ("Canadian GAAP").

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 its retained earnings by $22.0 million at January 1, 2010 and to increase 2010 comprehensive income by $2.5 million. For the year ended December 31, 2011, the Corporation's share of comprehensive income from IOC is $4.0 million lower than 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 year.

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, 2014 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.

Prior to the July 1, 2010 conversion of 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 $29,952,000 ($0.468 per stapled unit) interest on the subordinated notes for each quarter and the year ended December 31, 2011, respectively.


Operating Results

The following table summarizes the Corporation's 2011 operating results as compared to 2010 results.

Revenue                     2011           2010
IOC royalties (net of 20% Newfoundland royalty tax)                            $128,584,113                  $130,140,944
IOC commissions                     1,334,301           1,481,702
Other                     482,845           239,625
                      130,401,259            131,862,271
Expenses                                  
Administrative expenses                     2,121,968           3,045,583
Interest expense:                                  
    Credit facility                     495,365           374,996
    Subordinated notes                                   29,952,000                       14,976,000
Income taxes expense - current                     29,844,763           31,819,348
                      62,414,096           50,215,927
Net Income before undernoted items                     67,987,163           81,646,344
Non cash revenue (expense)                                  
Equity earnings in IOC                     124,015,087           129,388,281
Deferred income taxes                     (7,934,000)           (6,315,000)
Amortization                     (4,753,868)           (5,604,783)
                      111,327,219           117,468,498
                                   
Net income for the year                             $179,314,382                   $199,114,842
Other comprehensive (loss) income                                  (4,916,000)                          129,000
Comprehensive income for the year                            $174,398,382                 $199,243,842


Sales were constrained by lower than expected concentrate production due to mine equipment problems and weather related operating problems in the winter months. In 2011, approximately 32% of IOC's concentrate production was sold as concentrate while the remaining production was converted into pellets at IOC's pelletizing plant before sale. IOC's pellet sales were lower year over year in 2011 as pellet production was curtailed in order to perform extensive maintenance work at the pellet plant, meet contractual commitments for concentrate and take advantage of higher margins on spot sales of concentrate.  Sales to IOC's traditional markets (North America and Europe) represented 61% of IOC's shipments in 2011. Iron ore prices were very strong in the first six months of 2011 due to the market recovery in the advanced economies and solid growth in the emerging and developing economies particularly in the Asian-Pacific region. In the last half of the year, Europe's sovereign debt problems and tightening credit policies of the Chinese government moderated iron ore demand and iron ore spot prices, especially in the fourth quarter.  Despite struggling in the second half of 2011, the spot price index of seaborne iron ore rose 15% year over year to average $169.20 per dry metric ton CFR China in 2011 (according to Platts). As a result in spite of the lower sales volume in 2011 and a higher Canadian dollar, royalty revenue was only slightly below 2010. Until 2009, iron ore prices had been negotiated annually with IOC's customers with prices being denominated in U.S. dollars.  In early 2010, the world's major iron ore producers transitioned to index-based shorter term pricing, breaking a 40-year tradition of benchmark annual pricing. The index-based pricing is premised on daily spot iron ore indices adjusted by factors such as freight, and quality. Effective in the fourth quarter of the year, the pricing, which had been based on the previous quarter's spot prices, has been changed to the current quarter's spot prices. The Canadian dollar remained strong against the U.S. dollar averaging $1.01 against $0.97 in 2010.

The decrease in administrative expenses of $0.9 million was mainly due to reorganization costs included in 2010 expenses. 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 $124.0 million as compared to $129.4 million in 2010. The decrease in earnings resulted mainly from lower sales volume in 2011 offset by spot price increases from last year's level. The other comprehensive loss for 2011 represents the Corporation's share of the actuarial losses for employee pension and benefit plans at IOC for the year offset by a reduction in the plans' future minimum funding requirement as a result of additional contributions made by IOC.

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 $60.2 million ($0.94 per unit) in 2011 as compared to $74.0 million ($1.16 per unit) in 2010.

Fourth quarter sales at 3.9 million tonnes were below 2010 levels. As a result, the lower sales volume in 2011 and a higher Canadian dollar, produced royalty income of $38.3 million (2010 - $53.7 million). Adjusted cash flow from operations was $23.4 million ($0.37 per unit) compared to 2010 of $31.9 million ($0.50 per unit). Production in the fourth quarter was adversely affected by mine equipment problems and weather related operating problems.


Selected Consolidated Financial Information

The following table sets out financial data from a Unitholder's perspective for the three years ended December 31, 2011, 2010 and 2009. (See note 1 to the financial statements.)

          Years Ended December 31(3)
Description         2011   2010   2009
          (in millions except per Unit information)
Revenue         $162.5   $164.4   $77.0
Net Income(1)         $209.3           $214.1       $75.1
Net Income per Unit(1)         $3.27               $3.34         $1.18
Adjusted Cash Flow(1) (2)         $158.1           $170.6        $58.3
Adjusted Cash Flow per Unit(1) (2)         $2.47               $2.67         $0.91
Total Assets         $669.0           $658.1     $514.3
Cash Distribution per Unit         $2.25               $2.25       $1.00
Number of  Units outstanding (millions)            64.0                64.0          64.0
Notes: (1) Includes interest income for the year ended December 31, 2011 of $29,952,000 or $0.468 per stapled
unit (2010 includes $14,976,000 or $0.234 per stapled unit) on the subordinated notes of the
Corporation.
  (2) "Adjusted cash flow" ( see below)
  (3) 2011 and 2010 presented in accordance with IFRS


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

  Revenue Net
Income
Net
Income
per Unit(1)
Adjusted Cash
Flow(2)
  Adjusted Cash
Flow
per Unit(1) (2)
Distributions
Declared
per Unit(1)
  (in millions except per Unit information
2011              
First Quarter(3) $30.7 $38.9 $0.61 $48.0 (5) $0.75 $0.75
Second Quarter(3) $38.1 $48.2 $0.75 $23.0   $0.36 $0.375
Third Quarter(3) $54.9 $76.3 $1.19     $63.7 (6) $0.99 $0.75
Fourth Quarter(3) $38.8 $45.9 $0.72 $23.4   $0.37 $0.375
2010(4)              
First Quarter $16.7 $15.7 $0.25 $22.3 (7) $0.35 $0.375
Second Quarter $52.5 $69.3 $1.08 $30.5   $0.48 $0.375
Third Quarter(3) $40.9 $65.4 $1.02     $85.9 (8) $1.34 $0.50
Fourth Quarter(3) $54.3 $63.7 $0.99 $31.9   $0.50 $1.00
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 consolidated financial statements plus (where applicable) the $7,488,000 ($0.117 per unit) interest on the subordinated notes        
  (4)
Restated to conform with IFRS
  (5) Includes a $29.0 million IOC dividend
  (6) Includes a $31.2 million IOC dividend
  (7) Includes a $11.5 million IOC dividend
  (8) Includes a $62.2 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 share/unit was $1.91(1) for 2011 (2010 - $2.43(1)).  Cumulative standardized cash flow from inception of the Corporation is $16.13 per unit and total cash distributions since inception are $15.26 per unit, for a payout ratio of 95%.

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

"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 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 standardized cash flow from operating activities to adjusted cash flow.

                      2011           2010
Standardized cash flow from operating activities                             $121,934,296                   $155,920,875
Changes in amounts receivable, accounts and interest payable and
income taxes payable
                    6,220,128           (309,816)
Adjusted cash flow (1)                     $128,154,424           $155,611,059
Adjusted cash flow per share/unit (1)                                       $2.00                             $2.43
      (1)      The year ended December 31, 2011 excludes interest on subordinated notes paid directly to
unitholders of $29,952,000 or $0.468 per unit (2010 - $14,976,000 or $0.234 per unit).


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 subsidiary 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 Analyses, 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 all material information relating to the Corporation was accumulated and communicated for the year ended December 31, 2011.

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 IFRS.  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, 2011.

No material change in the Corporation's internal control over financial reporting occurred during the year ended December 31, 2011.

Outlook

Consensus forecasts for iron ore markets in 2012 expect that prices will remain near current levels for the first half of the year with higher levels expected in the second half. With the commissioning of phase two of the expansion, IOC should have substantially increased production in 2012 and expects to be able to sell all the iron ore it can produce. 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 pricing 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 7, 2012

LABRADOR IRON ORE ROYALTY CORPORATION                              
CONSOLIDATED BALANCE SHEETS                                      
                                         
                                       
                    As at
                        December 31,       December 31,       January 1,
Canadian $                      2011       2010       2010
                                         
Assets                                      
Current Assets                                      
  Cash and cash equivalents                   $   41,498,184       73,611,888      $   6,203,013
  Amounts receivable                     40,669,780       51,420,285       24,987,043
  Income taxes recoverable                     392,173       -        
Total Current Assets                     82,560,137       125,032,173       31,190,056
                                         
Non-Current Assets                                      
Iron Ore Company of Canada ("IOC"),                                      
  royalty and commission interests                     287,131,292       291,885,160       297,489,943
Investment in IOC                     299,280,483       241,161,657       185,588,091
Total Non-Current Assets                     586,411,775       533,046,817       483,078,034
                                         
Total Assets                    $ 668,971,912     $    658,078,990     $   514,268,090
                                         
                                         
Liabilities and Shareholders'/Unitholders' Equity                                      
Current Liabilities                                      
  Accounts payable                   $   8,419,389     $   10,482,603      $   5,233,229
  Income taxes payable                     -       14,515,246       509,562
  Interest payable on subordinated notes                      7,488,000       7,488,000       -
  Distributions payable to shareholders/unitholders                     16,512,000       56,512,000       16,000,000
Total Current Liabilities                     32,419,389       88,997,849       21,742,791
                                         
Non-Current Liabilities                                      
Deferred income taxes                     114,830,000       107,709,000       101,373,000
Subordinated notes                     248,000,000         248,000,000       -
Total Non-Current Liabilities                     362,830,000         355,709,000       101,373,000
                                         
Total Liabilities                     395,249,389       444,706,849       123,115,791
                                         
Equity                                       
  Share capital/Trust units                     69,708,147       69,708,147       317,708,147
  Retained earnings                      219,001,376       147,934,994       73,444,152
  Accumulated other comprehensive income (loss)                     (14,987,000)       (4,271,000)       -
                        273,722,523       213,372,141       391,152,299
                                         
Total Equity and Liabilities                   $ 668,971,912     $      658,078,990     $   514,268,090
                                         
                                         
Approved by the Directors,                                      
                                         
                                         
Bruce C. Bone                     Alan R. Thomas                
Director                     Director                

 

LABRADOR IRON ORE ROYALTY CORPORATION      
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME    
                                     
                                     
                                     
                  For the years ended
                  December 31,
Canadian $                  2011       2010
                                     
Revenue                                  
  IOC royalties                   $   160,730,141         $   162,723,775
  IOC commissions                     1,334,301           1,481,702
  Interest and other income                      482,845           239,625
                        162,547,287           164,445,102
Expenses                                  
  Newfoundland royalty taxes                     32,146,028           32,582,831
  Amortization of royalty and commission interests                     4,753,868           5,604,783
  Administrative expenses                      2,121,968           3,045,583
  Interest expense:                                    
      Credit facility                     495,365           374,996
      Subordinated notes                     29,952,000           14,976,000
                        69,469,229           56,584,193
                                     
Income before equity earnings and income taxes                     93,078,058           107,860,909
Equity earnings in IOC                     124,015,087           129,388,281
                                     
Income before income taxes                      217,093,145           237,249,190
                                   
Provision for income taxes                                  
  Current                      29,844,763           31,819,348
  Deferred                     7,934,000           6,315,000
                      37,778,763           38,134,348
                                   
Net income for the year                     179,314,382           199,114,842
                                   
Other comprehensive income (loss)                                    
  Share of other comprehensive income (loss) of IOC,                                   
  net of taxes                     (4,916,000)           129,000
                                   
Comprehensive income for the year                   $   174,398,382         $   199,243,842
                                   
Net income per common share/unit (1)                   $   2.80         $   3.11

 

(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 years ended
                  December 31,
Canadian $                      2011         2010
                                   
Net inflow (outflow) of cash related                                  
to the following activities                                  
                                         
Operating                                    
  Net income for the year                   $   179,314,382         $    199,114,842
  Items not affecting cash:                                  
      Equity earnings in IOC                       (124,015,087)           (129,388,281)
      Current income taxes                     29,844,763           31,819,348
      Deferred income taxes                     7,934,000           6,315,000
      Amortization of royalty and commission interests                     4,753,868           5,604,783
      Interest expense                     30,447,365           15,350,996
  Common share dividend from IOC                     60,167,261           73,964,715
  Change in amounts receivable and accounts payable                     8,687,291           (21,183,868)
  Interest paid                      (30,447,365)           (7,863,000)
  Income taxes paid                      (44,752,182)           (17,813,660)
  Cash flow from operating activities                     121,934,296           155,920,875
                                       
Financing                                    
  Distributions paid to unitholders/shareholders                       (154,048,000)           (88,512,000)
  Cash flow used in financing activities                       (154,048,000)           (88,512,000)
                                   
(Decrease)/increase in cash during the year                     (32,113,704)           67,408,875
                                   
Cash and cash equivalents, beginning of year                     73,611,888           6,203,013
                                     
Cash, end of year                   $   41,498,184         $   73,611,888

 




LABRADOR IRON ORE ROYALTY CORPORATION        
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY      
                                     
                            Accumulated      
                            other       
          Capital   Trust   Retained   comprehensive     
Canadian $          stock   units   earnings   income (loss)   Total
                                     
                                     
Balance as at January 1, 2010          $   -   $   317,708,147   $   73,444,152   $   -   $   391,152,299
                                     
Subordinated notes distributed to trust unitholders pursuant                                    
to the Arrangement on July 1, 2010           -     (248,000,000)     -     -     (248,000,000)
Exchange of trust units for common shares on July 1, 2010           69,708,147     (69,708,147)     -     -     -
Net income for the year           -     -     199,114,842     -     199,114,842
Distributions/dividends declared to unitholders/shareholders           -     -     (129,024,000)     -     (129,024,000)
Share of other comprehensive income from investment in IOC           -     -     -     129,000     129,000
Transfer of actuarial gains(losses) on defined benefit plans                       4,400,000     (4,400,000)     -
Balance as at December 31, 2010           69,708,147     -     147,934,994     (4,271,000)     213,372,141
                                     
Net income for the year           -     -     179,314,382     -     179,314,382
Dividends declared to shareholders            -     -     (114,048,000)     -     (114,048,000)
Share of other comprehensive loss from investment in IOC           -     -           (4,916,000)     (4,916,000)
Transfer of actuarial gains(losses) on defined benefit plans                       5,800,000     (5,800,000)     -
Balance as at December 31, 2011         $ 69,708,147   $   -   $   219,001,376   $   (14,987,000)   $   273,722,523

 


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