Labrador Iron Ore Royalty Corporation - Results for the second quarter ended June 30, 2014

TORONTO, Aug. 7, 2014 /CNW/ - Labrador Iron Ore Royalty Corporation ("LIORC", TSX: LIF) announced today its operation and cash flow results for the second quarter ended June 30, 2014.

Royalty income for the second quarter of 2014 amounted to $33.3 million as compared to $41.7 million for the second quarter of 2013. The shareholders' adjusted cash flow (see below for definition) for the second quarter was $33.7 million or $0.53 per share as compared to $23.4 million or $0.37 per share for the same period in 2013. The higher cash flow for the quarter reflected an IOC dividend of which LIORC's share was $14.8 million or $0.23 per share. Net income was $35.9 million or $0.56 per share compared to $39.2 million or $0.61 per share for the same period in 2013. Equity earnings from Iron Ore Company of Canada ("IOC") amounted to $18.2 million or $0.28 per share as compared to $19.3 million or $0.30 per share in 2013.  

Production and thus sales during the quarter continued to be affected by the unusually harsh winter conditions that lasted well into the quarter. The phase two expansion is now basically complete and should be reflected in the production results for the balance of the year. June saw operating conditions return closer to normal and adjusted for the three day scheduled maintenance shutdown concentrate production exceeded an annual rate of 18 million tonnes for the month. The lower royalty revenue for the quarter resulted from lower sales and lower prices. The iron ore index price for the quarter was 17.4% lower than the first quarter of 2014 and 22.2% lower than the second quarter of 2013. This was partially offset by the slightly lower value of the Canadian dollar against its U.S. counterpart.

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

(in millions except per share information)

3 Months
Ended
June 30,
2014

3 Months
Ended
June 30,
2013

6 Months
Ended
June 30,
2014

6 Months
Ended
June 30,
2013



(Unaudited)








Revenue

$33.8

$42.2

$61.0

$68.6


Adjusted cash flow

$33.7

$23.4

$61.4

$37.8


Adjusted cash flow per share

$0.53

$0.37

$0.96

$0.59


Net income

$35.9

$39.2

$63.0

$60.9


Net income per share

$0.56

$0.61

$0.98

$0.95


"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 dividends to shareholders.

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





3 Months
Ended
June 30,
2014

3 Months
Ended
June 30,
2013

6 Months
Ended
Jun. 30,
2014


6 Months
Ended
Jun. 30,
2013


Year
Ended
Dec. 31,
2013












Pellets




1.93

2.58

3.81


4.30


8.60

Concentrates(1)




1.91

2.28

2.54


3.18


6.20












Total




3.84

4.86

6.35


7.48


14.80

      (1)       Excludes third party ore sales.




Outlook

With the expansion program now complete, we expect to see IOC concentrate production approach closer to its rated expanded capacity. Pricing is still a major question mark, as there does not seem to be any consensus as to the future direction of prices. With the current price substantially below 2013 and close to the lows for the past several years, we are hopeful that we will see some improvement in the later part of the year. IOC is continuing to make progress on its cost reduction program and with the increased production expected, we should see a substantially lower per tonne cost of production. With increased sales expected by IOC, despite lower iron ore prices, we should see satisfactory results going forward.

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

Bruce C. Bone
President and Chief Executive Officer 
August 7, 2014

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 Labrador Iron Ore Royalty Corporation's ("LIORC" or the "Corporation") 2013 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 2013 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 second quarter of 2014 amounted to $33.3 million as compared to $41.7 million for the second quarter of 2013. The shareholders' adjusted cash flow (see next page for definition and calculation) for the second quarter was $33.7 million or $0.53 per share as compared to $23.4 million or $0.37 per share for the same period in 2013. The higher cash flow for the quarter reflected an IOC dividend of which LIORC's share was $14.8 million or $0.23 per share. Net income was $35.9 million or $0.56 per share compared to $39.2 million or $0.61 per share for the same period in 2013. Equity earnings from IOC amounted to $18.2 million or $0.28 per share as compared to $19.3 million or $0.30 per share in 2013.  

Production and thus sales during the quarter continued to be affected by the unusually harsh winter conditions that lasted well into the quarter. The phase two expansion is now basically complete and should be reflected in the production results for the balance of the year. June saw operating conditions return closer to normal and adjusted for the three day scheduled maintenance shutdown concentrate production exceeded an annual rate of 18 million tonnes for the month. The lower royalty revenue for the quarter resulted from lower sales and lower prices. The iron ore index price for the quarter was 17.4% lower than the first quarter of 2014 and 22.2% lower than the second quarter of 2013. This was partially offset by the slightly lower value of the Canadian dollar against its U.S. counterpart.

Results for the six months were affected by the same factors as the 3 months period, mainly the "polar vortex" and the declining iron ore prices. Administrative expenses were substantially lower in 2014 due to the legal and consultant fees incurred in 2013 in connection with the board of directors' examination of the effect on LIORC of the possibility of a sale by Rio Tinto of its equity in IOC. IOC did not pay a dividend in the first half of 2013 but did pay in 2014, of which LIORC's share was $27.4 million or $0.42 per share. Without the dividend cash flow in the first half of 2014 would have been slightly below last year.

The following table sets out quarterly revenue, net income and cash flow data for 2014, 2013 and 2012.




Revenue


Net

Income

Net
Income
per Share/Unit


Adjusted Cash

Flow(1)


Adjusted Cash Flow
per Share/Unit (1)

Distributions Declared
per Share/Unit 


(in millions except per Share/Unit information)


2014







First Quarter

$27.2

$27.1

$0.42

$27.7(2)

$0.43

$0.400

Second Quarter

$33.8

$35.9

$0.56

$33.7(3)

$0.53

$0.400








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

Fourth Quarter

$34.6

$46.7

$0.73

   $57.6(4)

$0.90

$0.750








2012







First Quarter(5)

$22.4

$23.0

$0.36

$14.4

$0.23

$0.375

Second Quarter(5)

$36.4

$36.8

$0.57

$22.3

$0.35

$0.375

Third Quarter (5)

$32.6

$29.7

$0.47

$18.5

$0.28

$0.375

Fourth Quarter

$32.8

$33.0

$0.51

$19.9

$0.31

$0.375


Notes:

(1)

"Adjusted cash flow" (see below). 




(2)

Includes a $12.6 million IOC dividend.




(3)

Includes a $14.8 million IOC dividend.




(4)

Includes a $40.0 million IOC dividend.




(5)

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.







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 $0.46 for the quarter (2013 - $0.24). Cumulative standardized cash flow from inception of the Corporation is $19.70 per share and total cash distributions since inception are $19.09 per share, 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 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 dividends to shareholders.

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


3 Months Ended

June 30, 2014

3 Months Ended

June 30, 2013

6 Months Ended

June, 2014

6 Months Ended

June 30, 2013

Standardized cash flow from operating activities

$29,229,157

$15,133,753

$55,077,722

$29,240,622

Excluding: changes in amounts receivable, accounts payable and

income taxes payable

4,439,911

8,291,771

6,274,780

8,534,915

Adjusted cash flow

$33,669,068

$23,425,524

$61,352,502

$37,775,537

Adjusted cash flow per share

$0.53

$0.37

$0.96

$0.59

Liquidity and Capital Resources

The Corporation has $34.1 million in cash as at June 30, 2014 with total current assets of $66.7 million and working capital of $34.8 million. During the quarter, the Corporation earned operating cash flows of $29.2 million and increased the cash balance by $3.6 million after dividends paid.

Cash balances consist of deposits in Canadian dollars with Canadian chartered banks. Accounts receivable primarily consist of royalty payments from IOC. Royalty payments are received in U.S. dollars and converted to Canadian dollars on receipt, usually 25 days after the quarter end. The Corporation does not normally attempt to hedge this short term foreign currency exposure.

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 pay cash dividends 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 on September 18, 2016 with provision for annual one-year extensions.  No amount is currently drawn under this facility (2013 – nil) leaving $50.0 million available to provide for any capital required by IOC or requirements of the Corporation.

Outlook

With the expansion program now complete, we expect to see IOC concentrate production approach closer to its rated expanded capacity. Pricing is still a major question mark, as there does not seem to be any consensus as to the future direction of prices. With the current prices substantially below 2013 and close to the lows for the past several years, we are hopeful that we will see some improvement in the later part of the year. IOC is continuing to make progress on its cost reduction program and with the increased production expected, we should see a substantially lower per tonne cost of production. With increased sales expected by IOC, despite lower iron ore prices, we should see satisfactory results going forward.

Bruce C. Bone
President and Chief Executive Officer
Toronto, Ontario
August 7, 2014

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 interim condensed consolidated financial statements.

LABRADOR IRON ORE ROYALTY CORPORATION



INTERIM CONDENSED CONSOLIDATED BALANCE SHEETS


















As at



June 30, 


December 31,

Canadian $ 

2014


2013



(Unaudited)

Assets




Current Assets





Cash

$        34,091,646


$      52,613,924


Amounts receivable

30,559,783


35,818,924


Income taxes recoverable

2,026,130


-

Total Current Assets

66,677,559


88,432,848






Non-Current Assets




Iron Ore Company of Canada ("IOC"),





royalty and commission interests 

277,816,947


279,576,792

Investment in IOC 

409,936,611


407,622,445

Total Non-Current Assets

687,753,558


687,199,237






Total Assets

$      754,431,117


$    775,632,085











Liabilities and Shareholders' Equity




Current Liabilities





Accounts payable

$          6,318,166


$        7,508,145


Dividend payable 

25,600,000


48,000,000


Income taxes payable

-


8,317,812

Total Current Liabilities

31,918,166


63,825,957






Non-Current Liabilities





Deferred income taxes

128,330,000


128,478,000

Total Liabilities

160,248,166


192,303,957






Shareholders' Equity





Share capital 

317,708,147


317,708,147


Retained earnings 

285,037,804


273,225,981


Accumulated other comprehensive loss 

(8,563,000)


(7,606,000)



594,182,951


583,328,128






Total Liabilities and Shareholders' Equity

$      754,431,117


$    775,632,085

 

LABRADOR IRON ORE ROYALTY CORPORATION




INTERIM CONDENSED CONSOLIDATED STATEMENTS 



OF COMPREHENSIVE INCOME
















For the Three Months Ended



June 30,

Canadian $

2014


2013



(Unaudited)

Revenue





IOC royalties

$        33,305,033


$              41,696,680


IOC commissions

395,190


478,318


Interest and other income 

81,796


36,565



33,782,019


42,211,563

Expenses





Newfoundland royalty taxes

6,661,006


8,339,336


Amortization of royalty and commission interests

977,496


1,040,787


Administrative expenses 

646,478


934,734



8,284,980


10,314,857






Income before equity earnings and income taxes

25,497,039


31,896,706

Equity earnings in IOC

18,242,559


19,339,009






Income before income taxes 

43,739,598


51,235,715






Provision for income taxes 





Current 

7,615,927


9,511,969


Deferred

231,000


2,527,000



7,846,927


12,038,969






Net income for the period

35,892,671


39,196,746






Other comprehensive (loss)/gain





Share of other comprehensive (loss)/gain of IOC that will not be 





reclassified subsequently to profit or loss (net of taxes)

(479,000)


7,032,000






Comprehensive income for the period

$        35,413,671


$               46,228,746






Net income per share 

$                   0.56


$                          0.61

 

LABRADOR IRON ORE ROYALTY CORPORATION




INTERIM CONDENSED CONSOLIDATED STATEMENTS 



OF COMPREHENSIVE INCOME
















For the Six Months Ended



June 30, 

Canadian $ 

2014


2013



(Unaudited)

Revenue





IOC royalties

$        60,157,477


$               67,797,885


IOC commissions

637,280


735,969


Interest and other income 

180,438


94,934



60,975,195


68,628,788

Expenses





Newfoundland royalty taxes

12,031,495


13,555,741


Amortization of royalty and commission interests

1,759,845


1,990,154


Administrative expenses 

1,180,067


1,892,253



14,971,407


17,438,148






Income before equity earnings and income taxes

46,003,788


51,190,640

Equity earnings in IOC

30,809,961


28,703,284






Income before income taxes 

76,813,749


79,893,924






Provision for income taxes 





Current 

13,787,926


15,405,257


Deferred

14,000


3,618,000



13,801,926


19,023,257






Net income for the period

63,011,823


60,870,667






Other comprehensive (loss)/gain





Share of other comprehensive (loss)/gain of IOC that will not be 





reclassified subsequently to profit or loss (net of taxes) 

(957,000)


6,495,000






Comprehensive income for the period

$        62,054,823


$               67,365,667






Net income per share

$                   0.98


$                          0.95

 

LABRADOR IRON ORE ROYALTY CORPORATION

INTERIM CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS






For the Six Months Ended


June 30,

Canadian $

2014


2013


(Unaudited)

Net inflow (outflow) of cash related

   to the following activities





Operating




   Net income for the period

$       63,011,823


$          60,870,667

   Items not affecting cash:




       Equity earnings in IOC

(30,809,961)


(28,703,284)

       Current income taxes

13,787,926


15,405,257

       Deferred income taxes

14,000


3,618,000

       Amortization of royalty and commission interests

1,759,845


1,990,154

   Common share dividend from IOC

27,376,795


-

   Change in amounts receivable and accounts payable

4,069,162


(11,845,040)

   Income taxes paid 

(24,131,868)


(12,095,132)

   Cash flow from operating activities

55,077,722


29,240,622


Financing

   Dividends paid to shareholders

(73,600,000)


(48,000,000)

   Cash flow used in financing activities

(73,600,000)


(48,000,000)


Decrease in cash, during the period

(18,522,278)


(18,759,378)


Cash, beginning of period

52,613,924


26,923,421


Cash, end of period

$       34,091,646


$            8,164,043

 

LABRADOR IRON ORE ROYALTY CORPORATION





INTERIM CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY











Accumulated





other 



Share

Retained

comprehensive 


Canadian $ 

capital

earnings

loss

Total


(Unaudited)






Balance as at December 31, 2012

$     317,708,147

$     244,395,841

$     (17,598,000)

$           544,505,988

Net income for the period 

-

60,870,667


60,870,667

Dividends declared to shareholders 

-

(48,000,000)


(48,000,000)

Share of other comprehensive income from investment in IOC (net of taxes) 

-

-

6,495,000

6,495,000

Balance as at June 30, 2013

$     317,708,147

$     257,266,508

$     (11,103,000)

$           563,871,655






Balance as at December 31, 2013

317,708,147

273,225,981

(7,606,000)

583,328,128

Net income for the period

-

63,011,823

-

63,011,823

Dividends declared to shareholders 

-

(51,200,000)

-

(51,200,000)

Share of other comprehensive loss from investment in IOC (net of taxes)

-

-

(957,000)

(957,000)

Balance as at June 30, 2014

$     317,708,147

$     285,037,804

$       (8,563,000)

$           594,182,951

The complete interim consolidated financial statements for the second quarter ended June 30, 2014, including the notes thereto, are posted on sedar.com and labradorironore.com.

SOURCE Labrador Iron Ore Royalty Corporation

For further information: Bruce C. Bone, President & Chief Executive Officer, (416) 863-7133