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Labrador Iron Ore Royalty Corporation - Results for the Third Quarter Ended September 30, 2012

November, 01, 2012

TORONTO, Nov. 1, 2012 /CNW/ - Labrador Iron Ore Royalty Corporation (TSX: LIF) announced today its operation and cash flow results for the third quarter ended September 30, 2012.

Royalty income for the third quarter of 2012 amounted to $32.1 million as compared to $54.4 million for the third quarter of 2011. 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 third quarter was $18.5 million or $0.28 per unit as compared to $63.7 million or $0.99 per unit for the same period in 2011. Net income was $29.7 million or $0.47 per unit compared to $76.3 million or $1.19 per unit for the same period in 2011. Equity earnings from IOC amounted to $14.2 million or $0.22 per unit as compared to $47.0 million or $0.73 per unit in 2011.

In the third quarter IOC started to see the positive results of the first phase of its expansion program. The commissioning of the new ore delivery system and in-pit crusher is basically complete and the additional grinding mill is being commissioned, resulting in increased production and thus sales as compared to the first two quarters of this year and the corresponding 2011 quarter. The full benefits of this phase of the expansion will progressively be incorporated into production output, with the most significant benefits likely in the second quarter of 2013. Unfortunately, the positive increase in sales volume was more than offset by the sharp decrease in the price of iron ore which occurred in the quarter, resulting in our royalty revenue for the quarter being substantially less than last year's third quarter. Although the price drop took iron ore to levels not seen since 2009, prices have since made a substantial recovery and are currently more than 30% higher than the low reached in the quarter, which further demonstrates the current market volatility.  Phase 2 of the expansion program is expected to be commissioned in the first half of next year. As a result of its ongoing capital program and the sharp price drop which affected IOC's cash flow and earnings, in order to preserve cash to cover its capital program and in view of the market volatility, IOC did not pay a dividend during the quarter (2011 - $31.2 million) which along with the lower royalty substantially reduced our cash flow as compared to last year's third quarter.

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 $22,464,000 ($0.351 per stapled unit) interest on the subordinated notes for the three months and nine months periods, respectively.

Results for the three months and nine months ended September 30 are summarized below:

  3 Months Ended
Sept. 30,
2012
3 Months Ended
Sept. 30,
2011
9 Months Ended
Sept. 30,
2012
  9 Months Ended
Sept. 30,
2011
                                                   (Unaudited)    
           
Revenue (in millions) $32.6 $ 54.9 $91.4   $ 123.7
Adjusted cash flow (in millions) $18.5 $ 63.7 $55.2   $ 134.7
Adjusted cash flow per unit $0.28 $ 0.99 $0.86   $ 2.10
Net income (in millions) $29.7 $ 76.3 $89.5   $ 163.4
Net income per unit $0.47 $ 1.19 $1.40   $ 2.55
                 

"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
Sept. 30,
2012
3 Months Ended
Sept. 30,
2011
  9 Months Ended
Sept. 30,
2012
9 Months Ended
Sept. 30,
2011
  Year
Ended
Dec. 31, 2011
               
Pellets 2.77 2.24   7.37 6.41   8.71
Concentrates 1.72 1.94   2.92 3.27   4.85
               
Total 4.49 4.18   10.29 9.68   13.56

Capital Restructuring

At the special meeting of holders of stapled units held on September 28, 2012, the holders approved the exchange of subordinated notes for common shares of LIORC and the consolidation of common shares. Approximately 99.9% of the votes cast at the meeting were in favour of the exchange. The transactions were completed with effect on October 3, 2012 and each holder ended up holding the same number of common shares as before the transactions and LIORC had 64 million common shares outstanding. The common shares trade on The Toronto Stock Exchange under the symbol LIF.

Subordinated Notes

This will be the last quarter which will have interest on the subordinated notes as an expense, as under the restructuring interest ceased to accrue after September 30, 2012. Also the payment made on October 25 to unitholders of record September 30 will be the last distribution that will be comprised of dividends and interest. Future distributions will be entirely dividends.

Outlook

We should see improved results in the fourth quarter, as we expect to see further increased sales volume as a result of the expected increased production and, if the price recovery of iron ore from its summer lows can be sustained, we should see increased royalty income and IOC should have increased earnings. Going forward, we expect to see increased sales from IOC as they get the full benefit of the increased production from the completed phases 1 and 2 of the expansion program.

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

Bruce C. Bone
President and Chief Executive Officer
November 1, 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 1 expansion, we expect the percentage of sales to be higher than normal in the latter part of 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 third quarter of 2012 amounted to $32.1 million as compared to $54.4 million for the third quarter of 2011. 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 third quarter was $18.5 million or $0.28 per unit as compared to $63.7 million or $0.99 per unit for the same period in 2011. Net income was $29.7 million or $0.47 per unit compared to $76.3 million or $1.19 per unit for the same period in 2011. Equity earnings from IOC amounted to $14.2 million or $0.22 per unit as compared to $47.0 million or $0.73 per unit in 2011. Cash flow for the quarter was lower than last year as a result of lower royalty revenue and further because IOC did not pay a dividend this quarter (2011 - $31.2 million).

In the third quarter IOC started to see the positive results of the first phase of its expansion program. The commissioning of the new ore delivery system and in-pit crusher is basically complete and the additional grinding mill is being commissioned, resulting in increased production and thus sales as compared to the first two quarters of this year and the corresponding 2011 quarter. The full benefits of this phase of the expansion will progressively be incorporated into production output, with the most significant benefits likely in the second quarter of 2013. Unfortunately, the positive increase in sales volume was more than offset by the sharp decrease in the price of iron ore which occurred in the quarter, resulting in our royalty revenue for the quarter being substantially less than last year's third quarter. Although the price drop took iron ore to levels not seen since 2009, prices have since made a substantial recovery and are currently more than 30% higher than the low reached in the quarter, which further demonstrates the current market volatility.  Phase 2 of the expansion program is expected to be commissioned in the first half of next year. As a result of its ongoing capital program and the sharp price drop which affected IOC's cash flow and earnings, in order to preserve cash to cover its capital program and in view of the market volatility, IOC did not pay a dividend during the quarter (2011 - $31.2 million) which along with the lower royalty substantially reduced our cash flow as compared to last year's third quarter.

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 $22,464,000 ($0.351 per stapled unit) interest on the subordinated notes for the three months and nine months periods, respectively.

The same factors affecting the quarter affected the nine months with the additional factors of the start-up and integration of the phase 1 expansion into the operations along with the usual winter operating conditions during the first two quarters. Cash flow was substantially reduced because IOC did not pay any dividends during the period (2011- $60.2 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)
Third Quarter(2)
$36.4
$32.6
$36.8
$29.7
$0.57
$0.47
$22.3
$18.5
$0.35
$0.28
$0.375
$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 $0.22(1) for the quarter (2011 - $0.80(1)). Cumulative standardized cash flow from inception of the Corporation is $16.65 per unit and total cash distributions since inception are $16.27 per unit, for a payout ratio of 98%.

"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
Sept. 30, 2012
3 Months Ended
Sept. 30, 2011
9 Months Ended
Sept. 30, 2012
9 Months Ended
Sept. 30, 2011
Standardized cash flow from operating activities $13,860,481 $51,667,679 $33,031,588 $109,120,236
Excluding: changes in amounts receivable, accounts payable and income taxes payable (2,892,094) 4,520,122   (334,889) 3,102,446
Adjusted cash flow(1) $10,968,387           $56,187,801    $32,696,699 $112,222,682
Adjusted cash flow per unit(1) $0.17                      $0.88 $0.51 $1.75

(1) Excludes note interest on subordinated notes paid directly to unitholders of $7,488,000 ($0.117 per stapled unit) and $22,464,000 ($0.351 per stapled unit) for the three months and nine 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.

Capital Restructuring

At the special meeting of holders of stapled units held on September 28, 2012, the holders approved the exchange of subordinated notes for common shares of LIORC and the consolidation of common shares. Approximately 99.9% of the votes cast at the meeting were in favour of the exchange. The transactions were completed with effect on October 1, 2012 and each holder ended up holding the same number of common shares as before the transactions and LIORC had 64 million common shares outstanding. The common shares trade on The Toronto Stock Exchange under the symbol LIF.

Subordinated Notes

This will be the last quarter which will have interest on the subordinated notes as an expense, as under the restructuring interest ceased to accrue after September 30, 2012. Also the payment made on October 25 to unitholders of record September 30 will be the last distribution that will be comprised of dividends and interest. Future distributions will be entirely dividends.

Outlook

We should see improved results in the fourth quarter, as we expect to see further increased sales volume as a result of the expected increased production and if the price recovery of iron ore from its summer lows can be sustained, we should see increased royalty income and IOC should have increased earnings. Going forward, we expect to see increased sales from IOC as they get the full benefit of the increased production from the completed  phases 1and 2 of the expansion program.

Bruce C. Bone
President and Chief Executive Officer
Toronto, Ontario
November 1, 2012

LABRADOR IRON ORE ROYALTY CORPORATION          
INTERIM CONDENSED CONSOLIDATED BALANCE SHEETS      
               
               
         
      As at
      September 30,     December 31,  
Canadian $    2012     2011  
        (Unaudited)
Assets            
Current Assets            
  Cash  $ 24,993,772    $ 41,498,184  
  Amounts receivable (note 4)   32,259,832     40,669,780  
  Income taxes recoverable   6,840,871     392,173  
Total Current Assets   64,094,475     82,560,137  
               
Non-Current Assets            
Iron Ore Company of Canada ("IOC"),            
  royalty and commission interests    283,008,577     287,131,292  
Investment in IOC   341,336,012     299,280,483  
Total Non-Current Assets   624,344,589     586,411,775  
               
Total Assets  $ 688,439,064    $   668,971,912  
               
               
Liabilities and Shareholders' Equity            
Current Liabilities            
  Accounts payable  $ 6,793,028    $ 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   30,793,028     32,419,389  
               
Non-Current Liabilities            
Deferred income taxes (note 6)   119,690,000     114,830,000  
Subordinated notes   248,000,000     248,000,000  
Total Non-Current Liabilities   367,690,000     362,830,000  
               
Total Liabilities   398,483,028     395,249,389  
               
Equity             
  Share capital    69,708,147     69,708,147  
  Retained earnings    236,499,889     219,001,376  
  Accumulated other comprehensive loss    (16,252,000)     (14,987,000)  
      289,956,036     273,722,523  
               
Total Equity and Liabilities  $ 688,439,064    $   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 September 30,
Canadian $    2012     2011
    (Unaudited)
Revenue          
  IOC royalties  $ 32,117,891    $ 54,421,894
  IOC commissions   442,043     411,443
  Interest and other income    78,363     107,890
      32,638,297     54,941,227
Expenses          
  Newfoundland royalty taxes   6,423,578     10,884,379
  Amortization of royalty and commission interests   1,355,487     1,313,290
  Administrative expenses    720,569     525,507
  Interest expense:          
    Credit facility   93,493     94,521
    Subordinated notes    7,488,000     7,488,000
      16,081,127     20,305,697
             
Income before equity earnings and income taxes   16,557,170     34,635,530
Equity earnings in IOC    14,155,835     46,984,091
             
Income before income taxes    30,713,005     81,619,621
             
Provision for income taxes           
  Current    6,944,270     10,933,465
  Deferred   1,563,000     1,923,000
      8,507,270     12,856,465
             
Net income for the period   22,205,735     68,763,156
             
Other comprehensive loss          
  Share of other comprehensive loss of IOC, net of tax   (430,000)     (372,000)
             
Comprehensive income for the period  $ 21,775,735    $ 68,391,156
             
Net income per common share  $ 0.35    $ 1.07

 

LABRADOR IRON ORE ROYALTY CORPORATION          
INTERIM CONDENSED CONSOLIDATED STATEMENTS         
OF COMPREHENSIVE INCOME            
             
             
    For the Nine Months Ended
    September 30, 
Canadian $    2012     2011
      (Unaudited)  
Revenue          
  IOC royalties  $ 90,124,124    $ 122,456,324
  IOC commissions   1,010,820     952,746
  Interest and other income    294,522     344,851
      91,429,466     123,753,921
Expenses          
  Newfoundland royalty taxes   18,024,825     24,491,265
  Amortization of royalty and commission interests   4,122,715     3,484,528
  Administrative expenses    1,799,950     1,631,063
  Interest expense:          
    Credit facility   281,507     280,480
    Subordinated notes    22,464,000     22,464,000
      46,692,997     52,351,336
             
Income before equity earnings and income taxes   44,736,469     71,402,585
Equity earnings in IOC (note 5)   43,535,529     96,667,045
             
Income before income taxes    88,271,998     168,069,630
             
Provision for income taxes (note 6)          
  Current    16,162,485     22,831,692
  Deferred   5,075,000     4,329,000
      21,237,485     27,160,692
             
Net income for the period   67,034,513     140,908,938
             
Other comprehensive loss          
  Share of other comprehensive loss of IOC, net of tax   (1,265,000)     (1,115,000)
             
Comprehensive income for the period  $ 65,769,513    $ 139,793,938
             
Net income per common share  $ 1.05    $ 2.20

 

LABRADOR IRON ORE ROYALTY CORPORATION          
INTERIM CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS    
                 
                 
         
                 
        For the Nine Months Ended
        September 30,
Canadian $      2012     2011
        (Unaudited)
Net inflow (outflow) of cash related          
  to the following activities          
                 
Operating            
  Net income for the period  $ 67,034,513    $ 140,908,938
  Items not affecting cash:          
    Equity earnings in IOC   (43,535,529)     (96,667,045)
    Current income taxes   16,162,485     22,831,692
    Deferred income taxes   5,075,000     4,329,000
    Amortization of royalty and commission interests   4,122,715     3,484,528
    Interest expense   22,745,507     22,744,480
  Common share dividend from IOC   -     60,167,261
  Change in amounts receivable and accounts payable   6,783,587     (3,266,591)
  Interest paid    (22,745,507)     (22,744,480)
  Income taxes paid    (22,611,183)     (22,667,547)
  Cash flow from operating activities   33,031,588     109,120,236
                 
Financing            
  Dividends paid to shareholders   (49,536,000)     (113,536,000)
  Cash flow used in financing activities   (49,536,000)     (113,536,000)
                 
Decrease in cash, during the period   (16,504,412)     (4,415,764)
                 
Cash, beginning of period   41,498,184     73,611,888
                 
Cash, end of period  $ 24,993,772    $ 69,196,124

 

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   -   140,908,938   -   140,908,938
Dividends declared to shareholders   -   (97,536,000)   -   (97,536,000)
Share of other comprehensive loss from investment in IOC   -   -   (1,115,000)   (1,115,000)
Balance as at September 30, 2011   69,708,147   191,307,932   (5,386,000)   255,630,079
                 
Balance as at December 31, 2011   69,708,147   219,001,376   (14,987,000)   273,722,523
Net income for the period   -   67,034,513   -   67,034,513
Dividends declared to shareholders    -   (49,536,000)   -   (49,536,000)
Share of other comprehensive loss from investment in IOC   -   -   (1,265,000)   (1,265,000)
Balance as at September 30, 2012  $ 69,708,147  $ 236,499,889  $ (16,252,000)  $ 289,956,036

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

 

Bruce C. Bone
President & Chief Executive Officer
(416) 863-7133
E-mail: investor.relations@labradorironore.com