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Labrador Iron Ore Royalty Corporation - RESULTS FOR THE THIRD QUARTER ENDED SEPTEMBER 30, 2013

November, 01, 2013

Labrador Iron Ore Royalty Corporation (TSX: LIF) announced today its operation and cash flow results for the third quarter ended September 30, 2013.

 

Royalty income for the third quarter of 2013 amounted to $35.6 million as compared to $32.1 million for the third quarter of 2012. The shareholders’ 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 $20.0 million or $0.31 per share compared to last year’s $18.5 million or $0.28 per unit.  Equity earnings from Iron Ore Company of Canada (IOC) amounted to $25.8 million or $0.40 per share as compared to $14.2 million or $0.22 per unit in 2012. Net income was $41.2 million or $0.65 per share compared to $29.7 million or $0.47 per unit for the same period in 2012. Earnings and cash flow for the quarter, although higher than last year were reduced due to higher income taxes, a result of the elimination of interest expense on the subordinated notes that were cancelled last September (see the reorganization referred to below).

 

As reported last quarter, the wildfires in the area, mine ore quality issues and power outages resulted in reduced production in June and July. The reduced production in June and July resulted in lower sales for the quarter, due to the lack of available product for shipment. Production for August and September returned to May levels and is approaching the levels expected, now that the first phase of the expansion has been completed. Barring unforeseen circumstances, we should see these production levels continue going forward, subject to the usual production reduction that occurs during the winter months. Royalty income for the quarter was positively affected by iron ore prices that remained relatively firm during the quarter and the weaker Canadian dollar against its U.S. counterpart. Revenue for the quarter was substantially improved from last year, mainly due to the higher prices received but was lower than the preceding quarter, because of the lack of product available for sale. Equity earnings from IOC for the quarter were substantially above last year’s corresponding quarter and an improvement over the preceding quarter of this year.

 

At a special meeting held on September 28, 2012, the holders of stapled units approved an exchange of their subordinated notes for common shares of Labrador Iron Ore Royalty Corporation (“LIORC”) and a consolidation of common shares. The $248 million subordinated notes were cancelled and each holder of common shares ended up holding the same number of common shares as before the transactions, and LIORC continued to have 64 million common shares outstanding. Interest on the subordinated notes ceased to accrue after September 30, 2012. For the purposes of this report, all references to shareholders and per share figures may refer to holders of stapled units and per stapled units, respectively, as applicable. Prior to the transactions, the net income attributed to the holders of stapled units consisted of the net income of LIORC plus the interest paid on the subordinated notes. Thus 2012 net income, adjusted cash flow and per share figures referred to in this report use the totals according to the financial statements plus 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,

2013

3 Months Ended

Sept. 30,

2012

9 Months Ended

Sept. 30,

2013

 

9 Months Ended

Sept. 30,

2012

 

 

(Unaudited)

 

 

 

 

 

 

 

 

 

Revenue (in millions)

$36.1

$32.6

$104.7

 

$91.4

 

Adjusted cash flow (in millions)

$20.0

$18.5

$57.8

 

$55.2

 

Adjusted cash flow per share/unit

$0.31

$0.28

$0.90

 

$0.86

 

Net income (in millions)

$41.2

$29.7

$102.1

 

$89.5

 

Net income per share/unit

$0.65

$0.47

$1.60

 

$1.40

 

 

 

 

 

 

“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 shareholders.

 

 

 

 

 

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

 

3 Months Ended

Sept. 30,

2013

3 Months Ended

Sept. 30,

2012

 

9 Months Ended

Sept. 30,

2013

9 Months Ended

Sept. 30,

2012

 

Year

Ended Dec. 31, 2012

 

 

 

 

 

 

 

 

Pellets

2.27

2.77

 

6.57

7.37

 

9.90

Concentrates

1.47

1.72

 

4.65

2.92

 

4.22

 

 

 

 

 

 

 

 

Total

3.74

4.49

 

11.22

10.29

 

14.12

 

IOC Expansion

 

Phase two of IOC's concentrate expansion program (CEP2), which was temporarily suspended in February 2013, was approved for completion by IOC on August 5. CEP2 will increase concentrate production capacity from 22.0 to 23.3 million tonnes per annum (“mtpa”). At the time of suspension, project completion was above 80%, and available capacity was 22.7 mtpa. It is expected that the project will be completed in the first quarter of 2014 with the full 23.3 mtpa capacity becoming available in the second quarter. To date, $393 million has been spent with a further $86 million expenditure required to complete the project.

 

Potential Sale by Rio Tinto

On April 18, 2013, a letter was sent to shareholders advising about Rio Tinto’s potential sale of its interest in IOC and the Board’s consideration of strategic alternatives available to LIORC. We understand from media reports that several expressions of interest were received by Rio Tinto but no agreement has been reached. Media reports indicate that most potential bidders have withdrawn from the process and that Rio Tinto is re-evaluating its proposed sale.

 

Outlook

With the successful integration of phase 1 of the expansion program, the price of iron ore seeming to have stabilized from lower levels, a weaker Canadian dollar and IOC expecting to sell all the iron ore it can produce, the balance of the year should see satisfactory results.

 

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

 

Bruce C. Bone

President and Chief Executive Officer 

October 31, 2013

 

 

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 2012 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 2012 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 first quarter sales of IOC are traditionally adversely affected by the closing of the St. Lawrence Seaway and general winter operating conditions and are usually 15% – 20% of the annual volume, 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.

 

Royalty income for the third quarter of 2013 amounted to $35.6 million as compared to $32.1 million for the third quarter of 2012. The shareholders’ 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 $20.0 million or $0.31 per share compared to last year’s $18.5 million or $0.28 per unit.  Equity earnings from IOC amounted to $25.8 million or $0.40 per share as compared to $14.2 million or $0.22 per unit in 2012. Net income was $41.2 million or $0.65 per share compared to $29.7 million or $0.47 per unit for the same period in 2012. Earnings and cash flow for the quarter, although higher than last year were reduced due to higher income taxes, a result of the elimination of interest expense on the subordinated notes that were cancelled last September (see the reorganization referred to below).

 

As reported last quarter, the wildfires in the area, mine ore quality issues and power outages resulted in reduced production in June and July. The reduced production in June and July resulted in lower sales for the quarter, due to the lack of available product for shipment. Production for August and September returned to May levels and is approaching the levels expected, now that the first phase of the expansion has been completed. Barring unforeseen circumstances, we should see these production levels continued going forward, subject to the usual production reduction that occurs during the winter months. Royalty income for the quarter was positively affected by iron ore prices that remained relatively firm during the quarter and the weaker Canadian dollar against its U.S. counterpart. Revenue for the quarter was substantially improved from last year, mainly due to the higher prices received but was lower than the preceding quarter, because of the lack of product available for sale. Equity earnings from IOC for the quarter were substantially above last year’s corresponding quarter and an improvement over the preceding quarter of this year.

 

The improvement in the nine months results reflect higher royalty revenue due to IOC's increased production and sales volume as a result of the completion of Phase 1 of the expansion and higher iron ore prices. The weather and operating problems that occurred in June and July resulted in the improvement being less than was otherwise expected. Had they not occurred, production and sales would have been at least 1million tonnes higher. Administrative expenses were higher mainly due to financial and legal expenses incurred to examine the implications of Rio Tinto's proposed sale of its IOC holdings, and to obtain advice on possible action going forward, should a sale result. Amortization expense is lower this year, because of the increase in ore reserves resulting from last year's resource assessment program at IOC, which will result in lower amortization going forward. The increase in income taxes this year is the result of the interest on the previously outstanding $248 million notes no longer being payable. The nine months comprehensive income was positively affected by our share of a $70 million reduction in IOC's unfunded pension liability due to an actuarial revaluation of the liability using current long term interest rates.

 

At a special meeting held on September 28, 2012, the holders of stapled units approved an exchange of their subordinated notes for common shares of LIORC and a consolidation of common shares. The $248 million subordinated notes were cancelled and each holder of common shares ended up holding the same number of common shares as before the transactions, and LIORC continued to have 64 million common shares outstanding. Interest on the subordinated notes ceased to accrue after September 30, 2012. For the purposes of this report, all references to shareholders and per share figures may refer to holders of stapled units and per stapled units, respectively, as applicable. Prior to the transactions, the net income attributed to the holders of stapled units consisted of the net income of LIORC plus the interest paid on the subordinated notes. Thus 2012 net income, adjusted cash flow and per share figures referred to in this report use the totals according to the financial statements plus 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 following table sets out quarterly revenue, net income and cash flow data for 2013, 2012 and 2011.

 



Revenue


Net
Income

Net
Income
per
Share/Unit(1)


Adjusted Cash Flow(
2)


Adjusted Cash Flow
per
Share/Unit(1) (2)

Distributions Declared
per
Share/Unit(1)

 

 

(in millions except per Share/Unit information)

 

 

 

 

 

2013

 

 

 

 

 

 

 

First Quarter

$26.4

$21.7

$0.34

$14.4

$0.22

$0.375

 

Second Quarter

$42.2

$39.2

$0.61

$23.4

$0.37

$0.375

 

Third Quarter

$36.1

$41.2

$0.65

$20.0

$0.31

$0.375

 

2012

 

 

 

 

 

 

 

First Quarter(3)

$22.4

$23.0

$0.36

$14.4

$0.23

$0.375

 

Second Quarter(3)

$36.4

$36.8

$0.57

$22.3

$0.35

$0.375

 

Third Quarter (3)

$32.6

$29.7

$0.47

$18.5

$0.28

$0.375

 

Fourth Quarter

$32.8

$32.3

$0.50

$19.9

$0.31

$0.375

 

 

 

2011

 

 

 

 

 

 

 

First Quarter(3)

$30.7

$38.9

$0.61

$48.0 (4)

$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 (5)

$0.99

$0.75

 

Fourth Quarter(3)

$38.8

$45.9

$0.72

$23.4

$0.37

$0.375

 

Notes:

(1)

Per share 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)

Prior to the fourth quarter of 2012, 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)

Includes a $29.0 million IOC dividend

 

 

 

 

 

(5)

Includes a $31.2 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 was $0.47 for the quarter (2012 - $0.22(1)). Cumulative standardized cash flow from inception of the Corporation is $17.87 per share and total cash distributions since inception are $17.54 per share, 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 shareholders.

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

 

3 Months Ended Sept. 30, 2013

3 Months Ended Sept. 30, 2012

9 Months Ended Sept. 30, 2013

9 Months Ended Sept. 30, 2012

Standardized cash flow from operating activities

$30,326,112

$13,860,481

$59,566,734

$33,031,588

Excluding: changes in amounts receivable, accounts payable and income taxes payable

 

(10,340,712)

 

(2,892,094)

 

(1,805,797)

 

(334,889)

Adjusted cash flow

$19,985,400

$10,968,387(1)

$57,760,937

$32,696,699(1)

Adjusted cash flow per share

$0.31

$0.17(1)

$0.90

$0.51(1)

 

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

 

Liquidity

The Corporation has a $50 million revolving credit facility to September 18, 2016 with provision for annual one-year extensions.  No amounts are currently drawn under this facility (2012 – nil) leaving $50 million available to provide for any capital required by IOC or other Corporation requirements. 

 

IOC Expansion

 

Phase two of IOC's concentrate expansion program (CEP2), which was temporarily suspended in February 2013, was approved for completion by IOC on August 5. CEP2 will increase concentrate production capacity from 22.0 to 23.3 million tonnes per annum (“mtpa”). At the time of suspension, project completion was above 80%, and available capacity was 22.7 mtpa. It is expected that the project will be completed in the first quarter of 2014 with the full 23.3 mtpa capacity becoming available in the second quarter. To date, $393 million has been spent with a further $86 million expenditure required to complete the project.

 

Outlook

With the successful integration of phase 1 of the expansion program, the price of iron ore seeming to have stabilized from lower levels, a weaker Canadian dollar and IOC expecting to sell all the iron ore it can produce, the balance of the year should see satisfactory results.

 

Bruce C. Bone

President and Chief Executive Officer

Toronto, Ontario

October 31, 2013

 

Notice:

The following unaudited interim condensed consolidated financial statements of the Corporation have been prepared by and are the responsibility of the Corporation’s management. The Corporation’s independent auditor has not reviewed these financial statements.

LABRADOR IRON ORE ROYALTY CORPORATION
INTERIM CONDENSED CONSOLIDATED BALANCE SHEETS
As at
September 30, December 31,
Canadian $ 2013 2012
(Unaudited)
Assets
Current Assets
Cash $ 14.490.155 $ 26.923.421
Amounts receivable 32.515.181 29.308.484
Income taxes recoverable - 3.130.130
Total Current Assets 47.005.336 59.362.035
Non-Current Assets
Iron Ore Company of Canada ("IOC"),
royalty and commission interests 280.179.816 283.263.500
Investment in IOC 413.225.654 351.770.591
Total Non-Current Assets 693.405.470 635.034.091
Total Assets $ 740.410.806 $ 694.396.126
Liabilities and Shareholders’ Equity
Current Liabilities
Accounts payable $ 6.915.768 $ 6.167.138
Dividend payable 24.000.000 24.000.000
Taxes Payable 1.133.734 -
Total Current Liabilities 32.049.502 30.167.138
Non-Current Liabilities
Deferred income taxes 129.440.000 121.360.000
Total Liabilities 161.489.502 151.527.138
Shareholders' Equity
Share capital 317.708.147 317.708.147
Retained earnings 274.860.157 244.758.841
Accumulated other comprehensive loss (13.647.000) (19.598.000)
578.921.304 542.868.988
Total Liabilities and Shareholders' Equity $ 740.410.806 $ 694.396.126




LABRADOR IRON ORE ROYALTY CORPORATION
INTERIM CONDENSED CONSOLIDATED STATEMENTS
OF COMPREHENSIVE INCOME
For the Three Months
Ended September 30,
Canadian $ 2013 2012
(Unaudited)
Revenue
IOC royalties $ 35.625.687 $ 32.117.891
IOC commissions 368.180 442.043
Interest and other income 44.288 78.363
36.038.155 32.638.297
Expenses
Newfoundland royalty taxes 7.125.137 6.423.578
Amortization of royalty and commission interests 1.093.530 1.355.487
Administrative expenses 679.358 720.569
Interest expense:
Credit facility 94.521 93.493
Subordinated notes - 7.488.000
8.992.546 16.081.127
Income before equity earnings and income taxes 27.045.609 16.557.170
Equity earnings in IOC 25.791.779 14.155.835
Income before income taxes 52.837.388 30.713.005
Provision for income taxes
Current 8.153.739 6.944.270
Deferred 3.453.000 1.563.000
11.606.739 8.507.270
Net income for the period 41.230.649 22.205.735
Other comprehensive loss
Share of other comprehensive loss of IOC that will not be
reclassified subsequently to profit or loss (net of taxes) (544.000) (430.000)
Comprehensive income for the period $ 40.686.649 $ 21.775.735
Net income per share $ 0,65 $ 0,35




LABRADOR IRON ORE ROYALTY CORPORATION
INTERIM CONDENSED CONSOLIDATED STATEMENTS
OF COMPREHENSIVE INCOME
For the Nine Months Ended
September 30,
Canadian $ 2013 2012
(Unaudited)
Revenue
IOC royalties $ 103.423.572 $ 90.124.124
IOC commissions 1.104.149 1.010.820
Interest and other income 139.222 294.522
104.666.943 91.429.466
Expenses
Newfoundland royalty taxes 20.680.878 18.024.825
Amortization of royalty and commission interests 3.083.684 4.122.715
Administrative expenses 2.385.653 1.799.950
Interest expense:
Credit facility 280.479 281.507
Subordinated notes - 22.464.000
26.430.694 46.692.997
Income before equity earnings and income taxes 78.236.249 44.736.469
Equity earnings in IOC 54.495.063 43.535.529
Income before income taxes 132.731.312 88.271.998
Provision for income taxes
Current 23.558.996 16.162.485
Deferred 7.071.000 5.075.000
30.629.996 21.237.485
Net income for the period 102.101.316 67.034.513
Other comprehensive gain/(loss)
Share of other comprehensive income/(loss) of IOC that will not be
reclassified subsequently to profit or loss (net of taxes) 5.951.000 (1.265.000)
Comprehensive income for the period $ 108.052.316 $ 65.769.513
Net income per share $ 1,60 $ 1,05



LABRADOR IRON ORE ROYALTY CORPORATION
INTERIM CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Nine Months Ended
September 30,
Canadian $ 2013 2012
(Unaudited)
Net inflow (outflow) of cash related
to the following activities
Operating
Net income for the period $ 102.101.316 $ 67.034.513
Items not affecting cash:
Equity earnings in IOC (54.495.063) (43.535.529)
Current income taxes 23.558.996 16.162.485
Deferred income taxes 7.071.000 5.075.000
Amortization of royalty and commission interests 3.083.684 4.122.715
Interest expense 280.479 22.745.507
Change in amounts receivable and accounts payable (2.458.067) 6.783.587
Interest paid (280.479) (22.745.507)
Income taxes paid (19.295.132) (22.611.183)
Cash flow from operating activities 59.566.734 33.031.588
Financing
Dividends paid to shareholders (72.000.000) (49.536.000)
Cash flow used in financing activities (72.000.000) (49.536.000)
Decrease in cash, during the period (12.433.266) (16.504.412)
Cash, beginning of period 26.923.421 41.498.184
Cash, end of period $ 14.490.155 $ 24.993.772





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, 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 (net of taxes) - - (1.265.000) (1.265.000)
Balance as at September 30, 2012 69.708.147 236.499.889 (16.252.000) 289.956.036
Balance as at December 31, 2012 317.708.147 244.758.841 (19.598.000) 542.868.988
Net income for the period - 102.101.316 - 102.101.316
Dividends declared to shareholders - (72.000.000) - (72.000.000)
Share of other comprehensive income from investment in IOC (net of taxes) - - 5.951.000 5.951.000
Balance as at September 30, 2013 $ 317.708.147 $ 274.860.157 $ (13.647.000) $ 578.921.304

The complete consolidated financial statements for the third quarter ended September 30, 2013, including the notes thereto, are posted on sedar.com and labradorironore.com.
For further information, please contact:
Bruce C. Bone
President & Chief Executive Officer
(416) 863-7133