Labrador Iron Ore Royalty Income Fund - 2008 Results of Operations



    TORONTO, Feb. 27 /CNW/ - Labrador Iron Ore Royalty Income Fund announced
the results of its operations for the year ended December 31, 2008. Following
are some of the financial highlights of the Fund's 2008 results with
comparison to the 2007 results:


    
    -------------------------------------------------------------------------
    Years Ended December 31                             2008            2007
    ($ in millions except per unit information)

    Revenue                                            163.4            67.6

    Expenses (including royalty taxes)                  38.8            22.6

    Net Income                                         176.5            80.9

    Adjusted Cash Flow(1)(2)                           174.9            60.5

    Net Income per Unit                               $ 5.52          $ 2.53

    Adjusted Cash Flow per Unit(1)(2)                 $ 5.46          $ 1.89

    Cash Distributions per Unit                       $ 4.85          $ 1.95
    -------------------------------------------------------------------------

    (1) See Management's Discussion & Analysis for definition
    (2) Includes IOC dividends totaling $77.9 million or $2.44 per Unit
        (2007 - $18.8 million or $0.59 per Unit)
    

    Financial Performance

    The Fund's adjusted cash flow (see Management's Discussion & Analysis for
definition and calculation) for the year ended December 31, 2008 was $174.9
million or $5.46 per unit as compared to $60.5 million or $1.89 per unit for
2007.
    Iron ore sales of the Iron Ore Company of Canada ("IOC") amounted to 15.1
million tonnes compared to 13.4 million tonnes in 2007. 2008 sales, although
higher than 2007, were disappointing as we had expected sales to exceed 16
million tonnes, but the iron ore markets deteriorated very suddenly in the
last two months of the year resulting in reduced sales. Sales in 2007 had been
restricted due to the lost production caused by the strike of IOC's unionized
work force which shut down all production facilities from March 9 to April 27,
2007. Iron ore markets remained very strong during the first three quarters of
the year and benchmark prices increased 86.67% for pellets and 68.75% for
concentrate. The decline during the year of the Canadian dollar against its US
counterpart from $0.9913 to $1.2180 positively affected results for the year.
The Fund's adjusted cash flow includes a dividend from IOC of $77.9 million
(2007 - $18.8 million).
    The Fund's consolidated net income for the year ended December 31, 2008
was $176.5 million or $5.52 per unit compared to $80.9 million or $2.53 per
unit in 2007. The Fund's share of IOC's earnings amounted to $84.5 million
compared to $30.7 million in 2007. The 2008 earnings were reduced by an after
tax charge of $26 million ($0.81 per unit) in the fourth quarter relating to
IOC's decision to write down the value of the partly refurbished pellet plant
at Sept-Iles.

    IOC Developments

    During the year IOC completed its program to increase annual concentrate
production capacity to 18.4 million tonnes. On March 11, 2008, IOC announced
an additional $500 million expansion program to increase annual concentrate
production capacity to 22 million tonnes and on September 4, 2008, it
announced a $300 million expansion program to further increase production
capacity to 22.8 million tonnes, including $75 million towards a feasibility
study to increase production capacity to 26 million tonnes. In December 2008,
in addition to cutting back production, IOC suspended the $800 million
expansion programs in response to adverse market conditions.
    The continued re-evaluation of reserves during the year (after mining
almost 40 million tonnes) resulted in an increase of 100 million tonnes to
1,393 million tonnes at year-end. Resources totalled 3,121 million tonnes
after transfers to reserves and some reduction in inferred resources.

    Outlook

    During the fourth quarter of 2008 steel producers were faced with a sharp
decline in demand for steel products and as a result many cut back production
and sharply reduced their demand for iron ore. This caused a sudden
deterioration of the iron ore markets and most producers, including IOC, cut
back production to avoid building excessive inventories. The market currently
remains unsettled and IOC expects to continue to operate below production
capacity until demand recovers. Pricing for 2008 remains unsettled with some
sales taking place at prices considerably below 2008 benchmark prices,
although some firming of prices appears to be occurring. A positive factor is
the US - Canadian dollar exchange rate, with the Canadian dollar currently
trading about 27% lower than at the beginning of 2008.

    I would like to take this opportunity to thank our unitholders for their
interest and loyalty and my fellow Trustees for their wisdom and support.

    
    Respectfully submitted on behalf of the
    Trustees of Labrador Iron Ore Royalty Income Fund,

    Bruce C. Bone
    Chairman and Chief Executive Officer
    February 27, 2009
    

    Fund Structure

    The Fund is an unincorporated limited purpose trust whose sole investment
is all of the issued and outstanding common shares and $247.8 million notes of
Labrador Mining Company Limited ("Labmin"). Labmin directly holds a 7% gross
overriding royalty on IOC's sales revenue, a 9.56% equity interest in IOC and
100% of Hollinger-Hanna Limited. Hollinger-Hanna holds a 5.54% equity interest
in IOC. It also receives a commission of 10 cents per tonne on all iron ore
products sold by IOC. Net income earned from these investments is used by
Labmin to service interest payments on the $247.8 million of notes held by the
Fund, with any excess after expenses and working capital requirements being
distributed in the form of dividends.
    Six Trustees are responsible for the governance of the Fund and also
serve as directors of Labmin and Hollinger-Hanna. The Trustees, in addition to
managing the affairs of the Fund, Labmin and Hollinger-Hanna, oversee Labmin's
interests in IOC. Two of the six Trustees sit on the board of IOC and the
three independent Trustees serve as members of the Audit and Compensation
Committees. Scotia Capital Inc. pursuant to an administration agreement acts
as the administrator of the Fund, Labmin and Hollinger-Hanna.

    Taxation

    The Fund is a taxable trust under the Income Tax Act. By electing to have
income earned from its investments taxed in the unitholders' hands, it reduces
its taxable income to nil. Labmin is a taxable corporation. Dividend income
received from IOC and Hollinger-Hanna is received tax free while royalty
income, less the expenses of Labmin, is subject to income tax. Expenses of
Labmin include $30.0 million a year in interest payments relating to the
$247.8 million notes held by the Fund plus interest on any bank loans.
Hollinger-Hanna is a taxable corporation.
    On June 22, 2007, the federal government enacted tax legislation that
taxes certain publicly traded trusts on the "non-portfolio earnings"
distributed to its unitholders at a rate similar to the combined federal and
provincial corporate tax rates. Generally, there is a four year transition
period for a publicly traded fund, such as the Fund, such that the Fund will
not be subject to this tax until 2011, provided the Fund does not exceed its
"normal growth", as determined by reference to the normal growth guidelines
issued by the Department of Finance on December 15, 2006, as amended from time
to time. The Trustees continue to review the implications of these changes on
the Fund.

    Income Taxes

    Distributions to a unitholder that are paid or payable within a
particular year are to be included in the calculation of the unitholder's
taxable income for that year. Quarterly distributions are normally comprised
of both an interest and a dividend component. The dividend component will be
eligible for the dividend tax credit and, accordingly, will be subject to a
lower effective tax rate than that applicable to the interest component. The
dividends paid in 2008 were "eligible dividends" under the Income Tax Act.

    Quarterly Distributions

    Distributions of $4.85 per unit to unitholders were declared by the
Trustees of the Fund in 2008 (2007 - $1.95) including special distributions of
$3.00 per unit (2007 - $0.55 per unit). Due to economic uncertainties the
Trustees did not declare a special distribution in the fourth quarter in order
to reduce net liabilities to zero and to retain funds to support 2009
distributions. These distributions were allocated as follows:

    
    -------------------------------------------------------------------------
                                     Dividend  Interest              Total
    -------------------------------------------------------------------------
                                                          Distri-   Distri-
    Period              Payment       Income    Income    bution    bution
    Ended                 Date       per Unit  Per Unit  Per Unit (S Million)
    -------------------------------------------------------------------------

    Mar. 31, 2008    Apr. 25, 2008    $ 0.100   $ 0.250   $ 0.350     $ 11.2
    Jun. 30, 2008    Jul. 25, 2008      0.250     0.250     0.500       16.0
      Special
       distribution  Jul. 25, 2008      0.500         -     0.500       16.0
    Sep. 30, 2008    Oct. 24, 2008      0.250     0.250     0.500       16.0
      Special
       distribution  Oct. 24, 2008      2.500         -     2.500       80.0
    Dec. 31, 2008    Jan. 26, 2009      0.357     0.143     0.500       16.0
    -------------------------------------------------------------------------

    Distribution to
     Unitholders -2008                $ 3.957   $ 0.893   $ 4.850     $155.2
    -------------------------------------------------------------------------

    Mar. 31, 2007     Apr. 25, 2007   $ 0.100   $ 0.250   $ 0.350     $ 11.2
    Jun. 30, 2007     Jul. 25, 2007     0.100     0.250     0.350       11.2
    Sep. 30, 2007     Oct. 25, 2007     0.100     0.250     0.350       11.2
      Special
       distribution   Oct. 25, 2007     0.350         -     0.350       11.2
    Dec. 31,2007      Jan. 25, 2008     0.207     0.143     0.350       11.2
      Special
       distribution   Jan. 25, 2008     0.200         -     0.200        6.4
    -------------------------------------------------------------------------

    Distribution to
     Unitholders -2007                $ 1.057   $ 0.893   $ 1.950     $ 62.4
    -------------------------------------------------------------------------
    

    The quarterly distributions are payable to all unitholders of record on
the last day of each calendar quarter and are paid on the 25th day of the
following month. Unitholders of record on December 31, 2008 will be required
to include the fourth quarter distribution of $0.50 as income in the 2008
taxation year.

    Review of Operations

    Iron Ore Company of Canada

    The income of the Fund is entirely dependent on IOC as the only assets of
the Fund and its subsidiaries are related to IOC and its operations. IOC is
Canada's largest iron ore producer, operating a mine, concentrator and pellet
plant at Labrador City, Newfoundland, and is among the top five producers of
iron ore pellets in the world. It has been producing and processing iron ore
concentrate and pellets since 1954. IOC is strategically situated to serve the
markets of the Great Lakes and the balance of the world from its year-round
port facilities at Sept-Iles, Quebec.
    IOC has ore reserves sufficient for at least 30 years at current
production rates with additional resources of a greater magnitude. It
currently has the nominal capacity to extract around 43 million tonnes of
crude ore annually. The crude ore is processed into iron ore concentrate and
then either sold or converted into many different qualities of iron ore
pellets to meet its customers' needs. The iron ore concentrate and pellets are
transported to IOC's port facilities at Sept-Iles, Quebec via its wholly-owned
Quebec North Shore and Labrador Railway, a 418 kilometer rail line which links
the mine and the port. From there, the products are shipped to markets
throughout North America, Europe, the Middle East and the Asia-Pacific region.
    IOC's 2008 sales totaled 15.1 million tonnes comprised of 2.8 million
tonnes of iron ore concentrate and 12.3 million tonnes of iron ore pellets.
IOC generated revenues of $2,200.0 million in 2008 (2007 - $1,014.8 million).
IOC sales traditionally are approximately 35% in North America, 40% in Europe
and 25% in the Asia-Pacific region.

    
    Selected IOC Financial Information

                              2008              2007              2006
    -------------------------------------------------------------------------
                                          ($ in thousands)
    Revenue              2,199,908         1,014,843         1,197,378
    Cash from
     operations          1,195,472           218,315           274,690
    Net income (loss)(1)   567,122(1)        206,267(1),(2)    261,115(1)
    Capital
     expenditures          262,861           175,874           169,252


                              2005              2004
    -------------------------------------------------------------------------
                                          ($ in thousands)
    Revenue              1,157,250           555,687
    Cash from
     operations            439,212            37,202
    Net income (loss)(1)   285,899(1)        (34,966)(1),(2)
    Capital
     expenditures          118,774            70,301

    (1) Net income includes unrealized foreign exchange gains(losses) before
        tax on U.S. debt translation of $8,643 in 2008, $31,639 in 2007, $473
        in 2006, ($227) in 2005 and $16,725 in 2004.
    (2) Revenue in 2007 was negatively affected by the strike by IOC's
        unionized work force which closed down all production facilities
        from March 9, 2007 until April 27, 2007.
    (3) Revenue in 2004 was negatively affected by the strike by IOC's
        unionized work force which closed down all production facilities
        from July 19, 2004 until September 29, 2004. IOC's loss of pellet and
        concentrate production as a result of the strike was the principal
        reason that a net loss for the year occurred.
    

    IOC Royalty

    The Fund, through its subsidiary Labmin, holds certain leases and
licenses covering approximately 18,200 hectares of land near Labrador City.
IOC has leased certain portions of these lands from which it currently mines
iron ore. In return, IOC pays Labmin a 7% gross overriding royalty on all
sales of iron ore products produced from these lands. A 20% tax on the royalty
is payable to the Government of Newfoundland and Labrador. For the five years
prior to 2008, the average royalty (net of the 20% tax) had been approximately
$48.2 million per year and in 2008 it was $129.1 million (2007 - $52.9
million).
    Because the royalty is "off-the-top", it is not dependent on the
profitability of IOC. However, it is affected by changes in sales volumes,
iron ore prices and, because iron ore prices are denominated in US dollars,
the United States - Canadian dollar exchange rate.

    IOC Equity

    In addition to the royalty interest, the Fund through its wholly owned
subsidiaries, Labmin and Hollinger-Hanna, owns a 15.10% equity interest in
IOC. The other shareholders of IOC are Rio Tinto Limited with 58.72% and
Mitsubishi Corporation with 26.18%.

    IOC Commissions

    Hollinger-Hanna has the right to receive a payment of 10 cents per tonne
on the products sold by IOC. Pursuant to an agreement, IOC is obligated to
make the payment to Hollinger-Hanna so long as Hollinger-Hanna is in existence
and solvent. In 2008, Hollinger-Hanna received a total of $1.5 million in
commissions from IOC (2007 - $1.3 million).

    Management's Discussion and Analysis

    The following is a discussion of the consolidated financial condition and
results of operations of the Fund for the years ended December 31, 2008 and
2007. This discussion should be read in conjunction with the Consolidated
Financial Statements of the Fund and notes thereto for the years ended
December 31, 2008 and 2007. This information is prepared in accordance with
Canadian Generally Accepted Accounting Principles ("GAAP") and all amounts are
shown in Canadian dollars unless otherwise indicated.
    The consolidated balance sheets as at December 31, 2008 and 2007, the
consolidated statements of income, comprehensive income and undistributed
income and the consolidated statements of cash flows reflect the results of
the Fund's operations for the years ended December 31, 2008 and 2007 and its
financial position at the respective year ends.

    General

    The Fund is dependent on the operations of IOC. IOC's earnings and cash
flows are affected by the volume of iron ore products sold and the prices
received. Iron ore demand and prices fluctuate and are affected by numerous
factors which include demand for steel and steel products, the relative
exchange rate of the US dollar, global and regional demand and production,
political and economic conditions and production costs in major producing
areas. Starting in November 2008, iron ore markets weakened substantially with
most producers, including IOC, cutting back production to avoid building up
excessive inventories.

    Liquidity and Capital Resources

    Operating cash flow of the Fund is sourced entirely from IOC through the
Fund's 7% royalty, 10 cents commission per tonne and its 15.10% equity
interest in IOC. The Fund intends to make cash distributions 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 Fund extended the term of its $50 million revolving credit facility
to September 18, 2011 with provision for annual one-year extensions. No
amounts are currently drawn under this facility leaving $50.0 million
available to provide for any capital required by IOC or other Fund
requirements.

    Operating Results

    The following table summarizes the Fund's 2008 operating results as
compared to 2007 results.

    
    Revenue                                             2008            2007
                                              -------------------------------
    IOC royalties (net of 20% Newfoundland
     royalty tax)                              $ 129,122,510   $  52,894,432
    IOC commissions                                1,481,981       1,318,723
    Other                                            496,103         182,745
                                              -------------------------------
                                                 131,100,594      54,395,900
                                              -------------------------------
    Expenses
    Administrative expenses                          686,583       3,986,122
    Interest expense (net of amortization of
     $239,391; 2007 S125,004)                        498,379         967,220
    Income taxes expenses - current               32,983,609       7,800,230
                                              -------------------------------
                                                  34,168,571      12,753,572
                                              -------------------------------
                                                  96,932,023      41,642,328
                                              -------------------------------
    Non cash revenue (expense)
    Equity earnings in IOC                        84,488,582      30,680,688
    Reduction in future income taxes                 390,000      13,050,000
    Amortization                                  (5,293,892)     (4,449,898)
                                              -------------------------------
                                                  79,584,690      39,280,790

                                              -------------------------------
    Net income and comprehensive income        $ 176,516,713   $  80,923,118
                                              -------------------------------
    

    The Fund's 2008 results were very satisfactory with net royalty income
$76.2 million higher than 2007 and the dividend received from IOC being $77.9
million (2007 - $18.8). Although these results were much improved from 2007
they were somewhat disappointing as we had expected sales to exceed 16 million
tonnes, but the iron ore market deteriorated very suddenly in the last two
months of the year resulting in reduced sales. Sales in 2007 had been
restricted due to the lost production caused by the strike of IOC's unionized
work force which shut down all production facilities from March 9 to April 27,
2007. Iron ore markets remained very strong during the first three quarters of
the year, resulting in benchmark price increases of 86.67% for pellets and
68.75% for concentrate. The decline during the year of the Canadian dollar
against its US counterpart from $0.9913 to $1.2180 positively affected results
for the year. The Fund's adjusted cash flow includes a dividend from IOC of
$77.9 million (2007 - $18.8 million).
    The decrease in administrative expenses of $3.3 million was primarily a
result of the change in the expense relating to unit appreciation rights,
which was a credit of $0.8 million in 2008 (2007 an expense of $2.6 million).
Current income taxes represent federal and provincial income taxes payable by
Labmin on IOC royalties, net of interest, royalty taxes and administrative
expenses. The Fund's share of IOC's earnings amounted to $84.5 million as
compared to $30.7 million in 2007.
    The operating cash flow of the Fund is dependent on the royalty,
commission and dividend payments from IOC. Royalty payments to the Fund vary
considerably from quarter to quarter. This is because sales revenue of IOC is
not constant throughout the year, being lower during the winter months when
the St. Lawrence Seaway is closed, and can vary because of the timing of ship
loadings.
    It had been IOC's policy to declare an annual dividend, the amount of
which varied according to the estimated profits and cash flows for the year.
As a result of its decision to expand production, IOC suspended its common
share dividend beginning in 1998. With substantially improved cash flow, IOC
reinstated its dividend in 2005. The Fund's share of IOC's dividend amounted
to $77.9 million ($2.43 per unit) in 2008 as compared to $18.8 million ($0.59
per unit) in 2007.
    Although the fourth quarter was negatively affected by the slowdown in
sales that commenced in November, revenue was substantially greater than 2007
due to the higher price levels and the lower value of the Canadian dollar
against its U.S. counterpart. Royalty income for the quarter was $44.2 million
(2007 - $18.3 million) and adjusted cash flow from operations was $27.5
million ($0.86 per unit) compared to 2007 of $11.6 million ($0.36 per unit).
Net income for the 2008 quarter was reduced by $26 million ($0.81 per unit),
being the Fund's share of an after tax charge incurred by IOC relating to
IOC's decision to write down the value of its partly refurbished pellet plant
at Sept-Iles.
    Due to the sharp drop in world demand for raw materials, including iron
ore, IOC found the refurbishment of its Sept-Iles pellet plant (which has been
idle since 1981 and was partially refurbished in 2001) to no longer be viable
and decided not to proceed with the project. The trustees of the Fund support
this decision as it will allow IOC to concentrate its efforts on its current
operations.

    Selected Consolidated Financial Information

    The following table sets out financial data for the three years ended
December 31, 2008, 2007 and 2006.

    
                                                   Years Ended December 31

    Description                                 2008        2007        2006
    -----------                                 ----        ----        ----
                                               (in millions  except per Unit
                                                       information)

    Revenue                                  $ 163.4     $  67.6     $  83.2

    Net Income                               $ 176.5     $  80.9     $  94.4

    Net Income per Unit                      $  5.52     $  2.53     $  2.95

    Adjusted Cash Flow(1)                    $ 174.9     $  60.5     $  72.9

    Adjusted Cash Flow per Unit(1)           $  5.46     $  1.89     $  2.28

    Total Assets                             $ 554.3     $ 508.7     $ 510.1

    Total Long-Term Debt                           -     $   1.3     $   6.1

    Cash Distribution per Unit               $  4.85     $  1.95     $  2.15

    Number of Units outstanding (millions)      32.0        32.0        32.0

    Notes: (1) "Adjusted cash flow" (see below)



    The following table sets out quarterly revenue, net income and cash flow
data for 2008 and 2007.

                                                           Adjusted  Distri-
                                            Net   Adjusted   Cash    butions
                                   Net    Income    Cash   Flow per Declared
                       Revenue   Income  per Unit  Flow(1)  Unit(1) per Unit
                       -------- -------- -------- -------- -------- --------
                             (in millions except per Unit information)

    2008
    ----
    First Quarter        $16.6    $10.8    $0.34   $ 10.4    $0.32    $0.35

    Second Quarter       $58.1    $73.9    $2.31   $ 32.9    $1.03    $1.00

    Third Quarter        $43.7    $65.6    $2.05   $104.1(2) $3.25    $3.00

    Fourth Quarter       $45.0    $26.2    $0.82   $ 27.5    $0.86    $0.50

    2007
    ----
    First Quarter        $13.1    $10.7    $0.34   $  8.7    $0.27    $0.35

    Second Quarter       $15.7    $15.2    $0.47   $  9.5    $0.30    $0.35

    Third Quarter        $20.1    $23.0    $0.72   $ 30.8(3) $0.96    $0.70

    Fourth Quarter       $18.7    $32.0    $1.00   $ 11.5    $0.36    $0.55

    Notes: (1) "Adjusted cash flow" (see below)

           (2) Includes a $77.9 million IOC dividend

           (3)   Includes a $18.8 million IOC dividend
    

    Standardized Cash Flow and Adjusted Cash Flow

    For the Fund, standardized cash flow is the same as cash flow from
operating activities as recorded in the Fund's cash flow statements as the
Fund does not incur capital expenditures or have any restrictions on
distributions. Standardized cash flow per unit was $5.82 for 2008 (2007 -
$2.10). Cumulative standardized cash flow from inception of the trust is
$22.24 per unit and total cash distributions since inception are $20.93 per
unit, for a payout ratio of 94%.
    "Adjusted cash flow" is defined as cash flow from operating activities
after adjustments for changes in amounts receivable, accounts payable and
income taxes payable/recoverable. It is not a recognized measure under
Canadian GAAP. The Trustees believe that adjusted cash flow is a useful
analytical measure as it better reflects cash available for distributions to
Unitholders.
    The following reconciles standardized cash flow from operating activities
to adjusted cash flow.

    
                                                     2008            2007
                                              -------------------------------
    Standardized cash flow from operating
     activities                                $ 186,191,796   $  67,198,257
    Excluding: changes in amounts receivable,
     accounts payable and income taxes
     payable/recoverable                         (11,336,209)     (6,712,319)
                                              -------------------------------
    Adjusted cash flow                         $ 174,855,587   $  60,485,938
                                              -------------------------------
    Adjusted cash flow per unit                $        5.46   $        1.89
                                              -------------------------------
    

    Disclosure Controls and Internal Control Over Financial Reporting

    The Chairman and CEO and the CFO are responsible for establishing and
maintaining disclosure controls and procedures and internal control over
financial reporting for the Fund. Two officers serve as directors of IOC and
IOC provides monthly reports on its operations to them. The Fund also relies
on financial information provided by IOC, including its audited financial
statements, and other material information provided to the Chairman and CEO,
the Vice Chairman and Secretary and the CFO by officers of IOC. IOC is a
private corporation, and its financial statements are not publicly available.
    The Trustees are informed of all material information relating to the
Fund and its subsidiaries by the officers of the Fund on a timely basis and
approve all core disclosure documents including the Management Information
Circular, the annual and interim financial statements and related Management's
Discussion and Analysis, the Annual Information Form, any prospectuses and all
press releases. An evaluation of the design and operating effectiveness of the
Fund's disclosure controls and procedures was conducted under the supervision
of the CEO and CFO. Based on their evaluation, they concluded that the Fund's
disclosure controls and procedures were effective in ensuring that material
information relating to the Fund was accumulated and communicated for the year
ended December 31, 2008.
    The Chairman and CEO and the CFO have designed internal control over
financial reporting to provide reasonable assurance regarding the reliability
of financial reporting and the preparation of financial statements for
external purposes in accordance with Canadian GAAP. An evaluation of the
design and operating effectiveness of the Fund's internal control over
financial reporting was conducted under the supervision of the CEO and CFO.
Based on their evaluation, they concluded that the Fund's internal control
over financial reporting was effective and that there were no material
weaknesses therein for the year ended December 31, 2008.
    No material change in the Fund's internal control over financial
reporting occurred during the year ended December 31, 2008.

    Transition to International financial reporting standards ("IFRS")

    The CICA Accounting Standards Board requires all Canadian publically
accountable enterprises to adopt International Financial Reporting Standards
for the years beginning on or after January 1, 2011. The objective of the
change is to move towards the use of single set of world-wide accounting
standards, thereby facilitating and improving global cash flows, as well as
improving financial reporting and transparency. The Fund will adopt IFRS
starting January 1, 2011.
    In order to prepare for the transition to IFRS, the Fund has performed a
preliminary assessment of the impact of significant accounting differences
between IFRS and Canadian GAAP including the impact to business processes,
systems and internal control over financial reporting. Based on management's
review, while there are accounting differences between IFRS and Canadian GAAP,
it does not appear that these differences will have a material impact on the
Fund's net income and comprehensive income. Rules for determining possible
impairment of long lived assets under IFRS are different from current Canadian
GAAP, and could result in greater volatility in booking possible losses and
gains on the Fund's investment in IOC and royalty and commission interests, if
future circumstances indicated a possible impairment in those carrying values.
Management has reviewed the impact of IFRS on its business processes,
information technology and internal controls over financial reporting and does
not believe that the adoption of IFRS will materially impact any of these
areas.
    Further updates on implementation progress and any changes to reporting
impacts from the adoption of IFRS will be provided during the implementation
period leading up to January 1, 2011.

    Outlook

    During the fourth quarter of 2008 steel producers were faced with a sharp
decline in demand for steel products and as a result many cut back production
and sharply reduced their demand for iron ore. This caused a sudden
deterioration of the iron ore markets and most producers, including IOC, cut
back production to avoid building excessive inventories. The market currently
remains unsettled and IOC expects to continue to operate below production
capacity until demand recovers. Pricing for 2008 remains unsettled with some
sales taking place at prices considerably below 2008 benchmark prices,
although some firming of prices appears to be occurring. A positive factor is
the US - Canadian dollar exchange rate, with the Canadian dollar currently
trading about 27% lower than at the beginning of 2008.

    Additional information

    Additional information relating to the Fund, including the Annual
Information Form, is on SEDAR at www.sedar.com.

    
    Bruce C. Bone
    Chairman and Chief Executive Officer
    Toronto, Ontario
    February 27, 2009



    CONSOLIDATED BALANCE SHEETS

    As at December 31                               2008            2007
                                               --------------  --------------

    Assets
    Current
      Cash and cash equivalents                $  27,795,570   $     151,256
      Amounts receivable (note 2)                 36,476,337      18,838,481
      Income taxes recoverable                             -       1,389,717
                                               --------------  --------------
                                                  64,271,907      20,379,454

    Deferred charges, net of accumulated
     amortization of $20,666 (2007 - $781,275)       392,666         218,725

    Iron Ore Company of Canada ("IOC"),
     royalty and commission interests (note 3)   302,198,099     307,252,600

    Investment in IOC (note 4)                   187,452,133     180,887,115
                                               --------------  --------------
                                               $ 554,314,805   $ 508,737,894
                                               --------------  --------------
                                               --------------  --------------

    Liabilities and Unitholders' Equity
    Current
      Accounts payable                         $   7,484,614   $   5,542,158
      Income taxes payable                        25,641,892               -
      Distributions payable to
       unitholders (note 5)                       16,000,000      17,600,000
                                               --------------  --------------
                                                  49,126,506      23,142,158

    Long-term debt (note 6)                                -       1,334,150

    Future income tax liability (note 7)         103,110,000     103,500,000
                                               --------------  --------------
                                                 152,236,506     127,976,308

    Unitholders' equity
     Trust units (note 8)                        317,708,147     317,708,147
     Undistributed income                         84,370,152      63,053,439
                                               --------------  --------------
                                               $ 554,314,805   $ 508,737,894
                                               --------------  --------------
                                               --------------  --------------



    CONSOLIDATED STATEMENTS OF INCOME,
    COMPREHENSIVE INCOME AND UNDISTRIBUTED INCOME

    For the years ended December 31                 2008            2007
                                               --------------  --------------

    Revenue
      IOC royalties                            $ 161,403,138   $  66,118,040
      IOC commissions                              1,481,981       1,318,723
      Interest and other income                      496,103         182,745
                                               --------------  --------------
                                                 163,381,222      67,619,508
                                               --------------  --------------

    Expenses
      Newfoundland royalty taxes                  32,280,628      13,223,608
      Amortization of royalty and
       commission interests                        5,054,501       4,324,894
      Administrative expenses (note 9)               686,583       3,986,122
      Interest expense                               737,770       1,092,224
                                               --------------  --------------
                                                  38,759,482      22,626,848
                                               --------------  --------------

    Income before equity earnings
     and income taxes                            124,621,740      44,992,660
    Equity earnings in IOC (note 4)               84,488,582      30,680,688
                                               --------------  --------------
    Income before income taxes                   209,110,322      75,673,348
                                               --------------  --------------
    Provision for (recovery of)
     income taxes (note 7)
      Current                                     32,983,609       7,800,230
      Future                                        (390,000)    (13,050,000)
                                               --------------  --------------
                                                  32,593,609      (5,249,770)
                                               --------------  --------------
    Net income and comprehensive
     income for the year                         176,516,713      80,923,118

    Undistributed income, beginning of year       63,053,439      44,530,321

    Distributions to unitholders (note 5)       (155,200,000)    (62,400,000)
                                               --------------  --------------
    Undistributed income, end of year          $  84,370,152   $  63,053,439
                                               --------------  --------------
                                               --------------  --------------
    Net income per unit (note 8)               $        5.52   $        2.53
                                               --------------  --------------
                                               --------------  --------------



    CONSOLIDATED STATEMENTS OF CASH FLOWS

    For the years ended December 31                 2008            2007
                                               --------------  --------------

    Net inflow (outflow) of cash related
     to the following activities

    Operating
      Net income for the year                  $ 176,516,713   $  80,923,118
      Items not affecting cash:
        Equity earnings in IOC                   (84,488,582)    (30,680,688)
        Future income taxes                         (390,000)    (13,050,000)
        Amortization of royalty and
         commission interests                      5,054,501       4,324,894
        Amortization of deferred charges             239,391         125,004
      Common share dividend received from IOC     77,923,564      18,843,610
      Change in amounts receivable,
       accounts payable and income
       taxes payable/recoverable                  11,336,209       6,712,319
                                               --------------  --------------
      Cash flow from operating activities        186,191,796      67,198,257
                                               --------------  --------------

    Financing
      Distributions paid to unitholders         (156,800,000)    (62,400,000)
      Repayment of long-term debt                 (1,334,150)     (4,788,938)
      Financing cost                                (413,332)              -
                                               --------------  --------------
                                                (158,547,482)    (67,188,938)
                                               --------------  --------------

    Increase in cash and cash equivalents
     during the year                              27,644,314           9,319
    Cash, beginning of year                          151,256   $     141,937
                                               --------------  --------------
    Cash and cash equivalents, end of year     $  27,795,570   $     151,256
                                               --------------  --------------
                                               --------------  --------------

    Cash and cash equivalents are comprised of:
      Cash in bank                             $     114,949   $     151,256
      Term deposits                               27,680,621               -
                                               --------------  --------------
                                               $  27,795,570   $     151,256
                                               --------------  --------------
                                               --------------  --------------

    Cash income taxes paid                     $   5,952,000   $  10,517,379
                                               --------------  --------------
                                               --------------  --------------
    Cash interest paid                         $     494,248   $   1,106,106
                                               --------------  --------------
                                               --------------  --------------
    

    %SEDAR: 00002722E




For further information:

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

Organization Profile

LABRADOR IRON ORE ROYALTY INCOME FUND

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