Labrador Iron Ore Royalty Corporation - Results for the third quarter ended September 30, 2013

TORONTO, Oct. 31, 2013 /CNW/ - 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

SOURCE: Labrador Iron Ore Royalty Corporation

For further information:

Bruce C. Bone
President & Chief Executive Officer
(416) 863-7133


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