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Labrador Iron Ore Royalty Corporation - Results for the Second Quarter Ended June 30, 2012

August, 08, 2012

TORONTO, Aug. 8, 2012 /CNW/ - Labrador Iron Ore Royalty Corporation (TSX: LIF.UN) announced today its operation and cash flow results for the second quarter ended June 30, 2012.

Royalty income for the second quarter of 2012 amounted to $36.0 million as compared to $37.8 million for the second quarter of 2011. The unitholders' cash flow from operating activities after adjustments for changes in amounts receivable, accounts payable and income taxes payable (adjusted cash flow) for the quarter was $22.3 million or $0.35 per unit compared to last year's $23.0 million or $0.36 per unit.  Net income was $36.8 million or $0.57 per unit compared to $48.2 million or $0.75 per unit for the same period in 2011. Equity earnings from Iron Ore Company of Canada (IOC) amounted to $18.2 million or $0.28 per unit as compared to $30.4 million or $0.48 per unit in 2011.

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 periods, respectively.

IOC production and sales volumes for the quarter were above last year's second quarter but were still somewhat affected by the commissioning of the new ore delivery system and the additional grinding mill. We reported last quarter that the commissioning, which started at the beginning of the year, was expected to be completed by mid-year. This has now occurred and we expect to see the resultant increased production in the third quarter. The lower revenue and cash flow for the quarter in spite of the increased sales volumes resulted from lower prices for iron ore in the quarter. Equity earnings from IOC were substantially lower in the quarter mainly due to the lower iron ore prices.

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

  3 Months Ended
June 30,
2012
3 Months Ended
June 30,
2011
6 Months Ended
June 30,
2012
  6 Months Ended
June 30,
2011
                                                   (Unaudited)    
           
Revenue (in millions) $36.4 $38.1 $58.8   $68.8
Adjusted cash flow (in millions) $22.3 $23.0 $36.7   $71.0
Adjusted cash flow per unit $0.35 $ 0.36 $0.57   $  1.11
Net income (in millions) $ 36.8 $ 48.2 $ 59.8   $ 87.1
Net income per unit $  0.57 $  0.75 $  0.93   $  1.36
       

"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 IFRS.  The Directors believe that adjusted cash flow is a useful analytical measure as it better reflects cash available for distributions to unitholders.

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

  3 Months Ended
June 30,
2012
3 Months Ended
June 30,
2011
  6 Months Ended
June 30,
2012
6 Months Ended
June 30,
2011
  Year
Ended
Dec. 31, 2011
               
Pellets 2.74 1.90   4.59 4.17   8.71
Concentrates 0.70 1.05   1.20 1.33   4.85
               
Total 3.44 2.95   5.79 5.50   13.56
               

Proposed Tax Changes

On July 25, 2012 the Department of Finance released the proposed legislative amendments to the Income Tax Act concerning stapled securities originally announced on July 20, 2011. It appears that the effect of the legislative changes on the Corporation is to deny the deduction of interest on the $248 million subordinated notes after July 20, 2012. The Board of Directors has been considering the alternatives available to the Corporation and expects to call a meeting of the unitholders in the near future to consider a response to the legislative changes.

Outlook

With the commissioning of the new ore delivery system and the additional grinding mill completing the first phase of the IOC's expansion and phase two expected to be completed early next year, the increased production capacity bodes well for increased royalty revenue. Currently offsetting the gains expected from increased volumes is weakness in the pricing of iron ore. The general market consensus seems to be that prices will recover later in the year.

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

Bruce C. Bone
President and Chief Executive Officer
August 8, 2012

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 2011 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 2011 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.  For 2012, because of the coming on stream of the phase one expansion, we expect the first two quarters' sales to total less than 40% of sales for the year. 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.

Royalty income for the second quarter of 2012 amounted to $36.0 million as compared to $37.8 million for the second quarter of 2011. The unitholders' cash flow from operating activities after adjustments for changes in amounts receivable, accounts payable and income taxes payable (adjusted cash flow) for the quarter was $22.3 million or $0.35 per unit compared to last year's $23.0 million or $0.36 per unit.  Net income was $36.8 million or $0.57 per unit compared to $48.2 million or $0.75 per unit for the same period in 2011. Equity earnings from IOC amounted to $18.2 million or $0.28 per unit as compared to $30.4 million or $0.48 per unit in 2011.

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 periods, respectively.

IOC production and sales volumes for the quarter were above last year's second quarter but were still somewhat affected by the commissioning of the new ore delivery system and the additional grinding mill. We reported last quarter that the commissioning, which started at the beginning of the year, was expected to be completed by mid-year. This has now occurred and we expect to see the resultant increased production in the third quarter. The lower revenue and cash flow for the quarter in spite of the increased sales volumes resulted from lower prices for iron ore in the quarter. Equity earnings from IOC were substantially lower in the quarter mainly due to the lower iron ore prices.

The six months results were affected by the same factors as the second quarter and, in addition, the adjusted cash flow was substantially lower because IOC did not pay a dividend in the first quarter of 2012 (2011 - $29 million).

The following table sets out quarterly revenue, net income and cash flow data for 2012, 2011 and 2010.

  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)  
2012            
First Quarter(2) $22.4 $23.0 $0.36 $14.4 $0.23 $0.375
Second Quarter(2) $36.4 $36.8 $0.57 $22.3 $0.35 $0.375
2011            
First Quarter(2) $30.7 $38.9 $0.61 $48.0 (3) $0.75 $0.75
Second Quarter(2) $38.1 $48.2 $0.75 $23.0 $0.36 $0.375
Third Quarter (2) $54.9 $76.3 $1.19 $63.7 (4) $0.99 $0.75
Fourth Quarter(2) $38.8 $45.9 $0.72 $23.4 $0.37 $0.375
2010            
First Quarter $16.7 $15.7 $0.25 $22.3 (5) $0.35 $0.375
Second Quarter $52.5 $69.1 $1.08 $30.5 $0.48 $0.375
Third Quarter(2) $40.9 $64.4 $1.02 $85.9 (6) $1.34 $0.50
Fourth Quarter(2) $54.3 $62.8 $0.99 $31.9 $0.50 $1.00
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 ($0.117 per unit) interest on the subordinated notes   
  (3) Includes a $29.0 million IOC dividend  
  (4) Includes a $31.2 million IOC dividend  
  (5) Includes a $11.5 million IOC dividend  
  (6) 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 unit was $0.04(1) for the quarter (2011 - $0.67(1)). Cumulative standardized cash flow from inception of the Corporation is $16.43 per unit and total cash distributions since inception are $15.90 per unit, for a payout ratio of 97%.

"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 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 cash flow from operating activities to adjusted cash flow.

  3 Months Ended
June 30, 2012
3 Months Ended
June 30, 2011
6 Months Ended
June 30, 2012
6 Months Ended
June 30, 2011
Standardized cash flow from operating activities $2,343,296 $42,731,031 $19,171,109 $57,452,557
Excluding: changes in amounts receivable, accounts payable and income taxes payable 12,477,896 (27,229,486) 2,557,205 (1,417,676)
Adjusted cash flow(1) $14,821,192  $15,501,545  $21,728,314  $56,034,881 
Adjusted cash flow per unit(1) $0.23 $0.24 $0.34 $0.88

(1) Excludes note interest on subordinated notes paid directly to unitholders of $7,488,000 ($0.117 per stapled unit) and $14,976,000 ($0.234 per stapled unit) for the three months and six months periods, respectively.

Liquidity

The Corporation has a $50 million revolving credit facility to September 18, 2014 with provision for annual one-year extensions.  No amounts are currently drawn under this facility (2011 - nil) leaving $50 million available to provide for any capital required by IOC or other Corporation requirements.

Proposed Tax Changes

On July 25, 2012 the Department of Finance released the proposed legislative amendments to the Income Tax Act concerning stapled securities originally announced on July 20, 2011. It appears that the effect of the legislative changes on the Corporation is to deny the deduction of interest on the $248 million subordinated notes after July 20, 2012. This would increase LIORC's taxes payable for 2012 by approximately $4.0 million and $8.7 million annually thereafter. The Board of Directors has been considering the alternatives available to the Corporation and expects to call a meeting of the unitholders in the near future to consider a response to the legislative changes.

Outlook

With the commissioning of the new ore delivery system and the additional grinding mill completing the first phase of the IOC's expansion and phase two expected to be completed early next year, the increased production capacity bodes well for increased royalty revenue. Currently offsetting the gains expected from increased volumes is weakness in the pricing of iron ore. The general market consensus seems to be that prices will recover later in the year.

Bruce C. Bone
President and Chief Executive Officer
Toronto, Ontario
August 8, 2012

LABRADOR IRON ORE ROYALTY CORPORATION      
INTERIM CONDENSED CONSOLIDATED BALANCE SHEETS  
           
           
     
    As at
    June 30,    December 31,  
Canadian $  2012   2011  
      (Unaudited)     
Assets        
Current Assets        
  Cash  $ 27,645,293    $ 41,498,184  
  Amounts receivable (note 4)   36,541,047     40,669,780  
  Income taxes recoverable   6,173,958     392,173  
Total Current Assets   70,360,298     82,560,137  
               
Non-Current Assets            
Iron Ore Company of Canada ("IOC"),            
  royalty and commission interests    284,364,064     287,131,292  
Investment in IOC (note 5)   327,683,177     299,280,483  
Total Non-Current Assets   612,047,241     586,411,775  
               
Total Assets  $ 682,407,539    $   668,971,912  
               
               
Liabilities and Shareholders' Equity            
Current Liabilities            
  Accounts payable  $ 7,515,236    $ 8,419,389  
  Interest payable on subordinated notes    7,488,000     7,488,000  
  Dividend payable   16,512,000     16,512,000  
Total Current Liabilities   31,515,236     32,419,389  
               
Non-Current Liabilities            
Deferred income taxes (note 6)   118,200,000     114,830,000  
Subordinated notes   248,000,000     248,000,000  
Total Non-Current Liabilities   366,200,000     362,830,000  
               
Total Liabilities   397,715,236     395,249,389  
               
Equity             
  Share capital    69,708,147     69,708,147  
  Retained earnings    230,806,156     219,001,376  
  Accumulated other comprehensive loss    (15,822,000)     (14,987,000)  
      284,692,303     273,722,523  
               
Total Equity and Liabilities  $ 682,407,539    $   668,971,912  
           
           
           
Approved by the Directors,        
           
           
(signed) Bruce C. Bone (signed) Alan R. Thomas  
Director Director      

 

LABRADOR IRON ORE ROYALTY CORPORATION      
INTERIM CONDENSED CONSOLIDATED STATEMENTS     
OF COMPREHENSIVE INCOME        
         
         
    For the Three Months 
    Ended June 30,
Canadian $  2012   2011
    (Unaudited)
Revenue      
  IOC royalties  $ 35,996,161    $ 37,754,213
  IOC commissions   337,774     290,334
  Interest and other income    93,949     104,172
      36,427,884     38,148,719
Expenses          
  Newfoundland royalty taxes   7,199,232     7,550,843
  Amortization of royalty and commission interests   1,425,808     1,112,870
  Administrative expenses    495,322     705,404
  Interest expense:          
    Credit facility   94,521     93,494
    Subordinated notes    7,488,000     7,488,000
      16,702,883     16,950,611
             
Income before equity earnings and income taxes   19,725,001     21,198,108
Equity earnings in IOC    18,174,251     30,431,486
             
Income before income taxes    37,899,252     51,629,594
             
Provision for income taxes           
  Current    6,329,617     6,809,433
  Deferred   2,275,772     4,102,000
      8,605,389     10,911,433
             
Net income for the period   29,293,863     40,718,161
             
Other comprehensive loss          
  Share of other comprehensive loss of IOC, net of tax   (433,000)     (371,000)
             
Comprehensive income for the period  $ 28,860,863    $ 40,347,161
             
Net income per common share  $ 0.46    $ 0.64
           
 

 

LABRADOR IRON ORE ROYALTY CORPORATION      
INTERIM CONDENSED CONSOLIDATED STATEMENTS     
OF COMPREHENSIVE INCOME        
         
         
    For the Six Months Ended
    June 30, 
Canadian $  2012   2011
      (Unaudited)  
Revenue      
  IOC royalties  $ 58,006,234    $ 68,034,430
  IOC commissions   568,777     541,303
  Interest and other income    216,161     236,961
      58,791,172     68,812,694
Expenses          
  Newfoundland royalty taxes   11,601,247     13,606,886
  Amortization of royalty and commission interests   2,767,228     2,171,238
  Administrative expenses    1,079,382     1,105,556
  Interest expense:          
    Credit facility   188,014     185,959
    Subordinated notes    14,976,000     14,976,000
      30,611,871     32,045,639
             
Income before equity earnings and income taxes   28,179,301     36,767,055
Equity earnings in IOC (note 5)   29,379,694     49,682,954
             
Income before income taxes    57,558,995     86,450,009
             
Provision for income taxes (note 6)          
  Current    9,218,215     11,898,227
  Deferred   3,512,000     2,406,000
      12,730,215     14,304,227
             
Net income for the period   44,828,780     72,145,782
             
Other comprehensive loss          
  Share of other comprehensive loss of IOC, net of tax   (835,000)     (743,000)
             
Comprehensive income for the period  $ 43,993,780    $ 71,402,782
         
Net income per common share  $ 0.70    $ 1.13
         
 

 

LABRADOR IRON ORE ROYALTY CORPORATION      
INTERIM CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
             
             
     
             
        For the Six Months Ended
        June 30,
Canadian $    2012   2011
          (Unaudited)  
Net inflow (outflow) of cash related      
  to the following activities      
             
Operating        
  Net income for the period  $ 44,828,780    $ 72,145,782
  Items not affecting cash:      
    Equity earnings in IOC (29,379,694)   (49,682,954)
    Current income taxes 9,218,215   11,898,227
    Deferred income taxes 3,512,000   2,406,000
    Amortization of royalty and commission interests 2,767,228   2,171,238
    Interest expense 15,164,014   15,161,959
  Common share dividend from IOC -   28,994,815
  Change in amounts receivable and accounts payable 3,224,580   10,261,996
  Interest paid  (15,164,014)   (15,161,959)
  Income taxes paid  (15,000,000)   (20,742,547)
  Cash flow from operating activities 19,171,109   57,452,557
             
Financing        
  Dividends paid to shareholders (33,024,000)   (97,024,000)
  Cash flow used in financing activities (33,024,000)   (97,024,000)
             
Decrease in cash, during the period (13,852,891)   (39,571,443)
             
Cash, beginning of period 41,498,184   73,611,888
             
Cash, end of period  $ 27,645,293    $ 34,040,445
       

 

LABRADOR IRON ORE ROYALTY CORPORATION      
INTERIM CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
         
      Accumulated  
      other   
  Capital Retained comprehensive   
Canadian $  stock earnings income (loss) Total
    (Unaudited)    
         
Balance as at December 31, 2010  $ 69,708,147  $ 147,934,994  $ (4,271,000)  $ 213,372,141
Net income for the period   -   72,145,782   -   72,145,782
Dividends declared to shareholders   -   (57,024,000)   -   (57,024,000)
Share of other comprehensive loss from investment in IOC   -   -   (743,000)   (743,000)
Balance as at June 30, 2011   69,708,147   163,056,776   (5,014,000)   227,750,923
                 
Balance as at December 31, 2011   69,708,147   219,001,376   (14,987,000)   273,722,523
Net income for the period   -   44,828,780   -   44,828,780
Dividends declared to shareholders    -   (33,024,000)   -   (33,024,000)
Share of other comprehensive loss from investment in IOC   -   -   (835,000)   (835,000)
Balance as at June 30, 2012  $ 69,708,147  $ 230,806,156  $ (15,822,000)  $ 284,692,303

 

The complete consolidated financial statements for the second quarter ended June 30, 2012, including notes thereto, are posted on sedar.com and labradorironore.com.