Labrador Iron Ore Royalty Income Fund - Results for the second quarter ended June 30, 2008



    TORONTO, Aug. 12 /CNW/ - Labrador Iron Ore Royalty Income Fund
(TSX: LIF.UN) announced its results for the second quarter ended June 30,
2008.
    Royalty income for the second quarter of 2008 amounted to $57.61 million
as compared to $15.30 million for the second quarter of 2007, an increase of
277% over the same period last year. The Fund's cash flow from operating
activities after adjustments for changes in amounts receivable, accounts
payable and income taxes payable/recoverable (adjusted cash flow) for the
second quarter was $32.95 million or $1.03 per unit as compared to
$9.46 million or $0.30 per unit for the same period in 2007. Net income was
$73.92 million or $2.31 per unit compared to $15.16 million or $0.47 per unit
for the same period in 2007.
    Royalty income for the second quarter was positively affected by the
price increases of 86.67% for pellets and 68.75% for concentrates which
occurred in late April. Since these increases were retroactive to January 1
for most contracts, the quarter included retroactive royalty revenues for Iron
Ore Company of Canada (IOC) first quarter sales of about $6.6 million or $0.20
per unit. The corresponding 2007 quarter was negatively affected by the strike
which closed down IOC's production facilities from March 9 to April 27,
reducing product available for sale. The net result was that sales volume in
the 2008 quarter was 50% higher than 2007.
    The increased volume and prices resulted in the Fund's share of the
equity earnings from IOC increasing to $49.2 million from $5.7 million in the
2007 quarter. Approximately $16.0 million or $0.50 per unit of this increase
relates to the retroactive first quarter billings.
    Results for the three months and six months ended June 30 are summarized
below:


    
                                   3 Months   3 Months   6 Months   6 Months
                                      Ended      Ended      Ended      Ended
                                    June 30    June 30    June 30    June 30
                                       2008       2007       2008       2007
                                    -----------------------------------------
                                                   (Unaudited)
                                                   -----------
    Revenue (in millions)            $58.06     $15.68     $74.70     $28.83
                                    --------   --------   --------   --------
    Adjusted cash flow (in millions) $32.95     $ 9.46     $43.30     $18.17
                                    --------   --------   --------   --------
    Adjusted cash flow per unit      $ 1.03     $ 0.30     $ 1.35     $ 0.57
                                    --------   --------   --------   --------
    Net income (in millions)         $73.92     $15.16     $84.70     $25.90
                                    --------   --------   --------   --------
    Net income per unit              $ 2.31     $ 0.47     $ 2.65     $ 0.81
                                    --------   --------   --------   --------
    


    "Adjusted cash flow" (defined as cash flow from operating activities as
shown on the attached financial statements less changes in amounts receivable,
accounts payable and income taxes payable/recoverable) 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.
    A summary of IOC's sales in millions of tonnes is as follows:


    
                                              6 Months   6 Months       Year
                                                 Ended      Ended      Ended
                                               June 30,   June 30,   Dec. 31,
                                                  2008       2007       2007
                                               --------   --------   --------
    Pellets                                       6.57       4.52      10.99
    Concentrates                                  0.82       0.73       2.41
                                               --------   --------   --------
    Total                                         7.39       5.25      13.40
                                               --------   --------   --------
    


    IOC has substantially completed its $60 million expansion to increase its
concentrate capacity to 18.4 million tonnes during the quarter and has
approved a further $500 million expenditure to increase concentrate capacity
to 22 million tonnes by 2010. IOC also announced a feasibility study to
further increase concentrate capacity to 25 million tonnes and pellet capacity
from 13.5 to 14.5 million tonnes by 2011.

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

    Bruce C. Bone
    Chairman and Chief Executive Officer
    August 12, 2008

    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 Fund's 2007 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 Fund's 2007 Annual
Report.
    The Fund'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 Fund's royalty revenue is affected by the price of iron ore, which is
usually set in US dollar terms, and thus the Canadian - U.S. dollar exchange
rate.
    The sales of IOC are usually 15% - 20% of the annual volume in the first
quarter, with the balance spread fairly evenly throughout the other three
quarters. 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 was positively affected by the
price increases of 86.67% for pellets and 68.75% for concentrates which
occurred in late April. Since these increases were retroactive to January 1
for most contracts the quarter included retroactive royalty revenues for IOC
first quarter sales of about $6.6 million or $0.20 per unit. The corresponding
2007 quarter was negatively affected by the strike which closed down IOC's
production facilities from March 9 to April 27, reducing product available for
sale. The net result was that sales volume in the 2008 quarter was 50% higher
than 2007.
    The increased volume and prices resulted in the Fund's share of the
equity earnings from IOC increasing to $49.2 million from $5.7 million in the
2007 quarter. Approximately $16.0 million or $0.50 per unit of this increase
relates to the retroactive first quarter billings.
    Cash flow from operating activities after adjustments for changes in
amounts receivable, accounts payable and income taxes payable/recoverable
(adjusted cash flow) for the quarter was $32.95 million or $1.03 per unit as
compared to $9.46 million or $0.30 per unit for the same period in 2007. The
increase was mainly the result of the increased royalties of $22.5 million
($0.70 per unit) after provincial and federal income taxes and Newfoundland
royalty taxes.
    The six months results were affected by the same factors as the quarter
and showed comparable improvements from the 2007 period.
    The following table sets out quarterly revenue, net income and cash flow
data for 2008, 2007 and 2006.


    
                                                            Adjusted Distrib-
                                             Net   Adjusted   Cash    utions
                                    Net    Income    Cash   Flow per Declared
                         Revenue  Income  per Unit  Flow(1)  Unit(1) per Unit
                        -------- -------- -------- -------- -------- --------
                                (million 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

    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(2)$  0.96  $  0.70
    Fourth Quarter      $  18.7  $  32.0  $  1.00  $  11.5  $  0.36  $  0.55

    2006
    ----
    First Quarter       $  14.4  $  11.9  $  0.37  $   9.4  $  0.29  $  0.35
    Second Quarter      $  19.2  $  33.5  $  1.05  $ 25.3(3)$  0.79  $  0.65
    Third Quarter       $  20.2  $  20.3  $  0.63  $ 20.6(4)$  0.64  $  0.60
    Fourth Quarter      $  29.4  $  28.7  $  0.90  $  17.6  $  0.56  $  0.55

    Notes: (1)  "Adjusted cash flow" (see below)
           (2)  Includes a $18.8 million IOC dividend
           (3)  Includes a $12.5 million IOC dividend
           (4)  Includes a $8.5 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 $0.31 for the quarter (2007
- $0.19). Cumulative standardized cash flow from inception of the trust is
$17.19 per unit and total cash distributions since inception are $17.18 per
unit, for a payout ratio of 100%.
    "Adjusted cash flow" is defined as cash flow from operating activities as
shown on the attached financial statements less 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 cash flow from operating activities to adjusted
cash flow.


    
                             3 Months     3 Months     6 Months     6 Months
                                Ended        Ended        Ended        Ended
                              June 30,     June 30,     June 30,     June 30,
                                 2008         2007         2008         2007
                          ---------------------------------------------------
    Cash flow from
     operating activities  $9,898,335   $5,951,679  $24,686,256  $24,725,022
    Excluding: changes in
     amounts receivable,
     accounts payable and
     income taxes payable/
     recoverable           23,050,965    3,506,218   18,618,516   (6,559,657)
                          ---------------------------------------------------
    Adjusted cash flow    $32,949,300   $9,457,897  $43,304,472  $18,165,365
                          ---------------------------------------------------
    Adjusted cash flow
     per unit             $      1.03   $     0.30  $      1.35  $      0.57
                          ---------------------------------------------------
    


    Liquidity
    ---------
    The Fund has a $50 million revolving credit facility reducing by
$25 million in September 2008 with the balance due in 2009. Currently, no
amounts are drawn under this facility ($5.4 million at June 30, 2008) leaving
$50.0 million available to provide for any capital required by IOC or other
Fund requirements.

    Outlook
    -------
    Iron ore markets remain strong and, with price increases of 86.67% for
pellets and 68.75% for concentrates, the Fund will receive substantially
higher royalty revenue and its equity earnings from IOC should be very
significantly higher than previous years. In addition, IOC is planning on
increased production and, barring any unforeseen circumstances, production
should exceed 17 million tonnes compared to 13.2 million tonnes in 2007 and
16.1 million tonnes in 2006. With IOC expecting to be able to sell all its
production and with increased prices, 2008 results should be very
satisfactory. Going forward, with the expansion of concentrate production to
18.4 million tonnes substantially completed during the quarter and the
expansion to 22 million tonnes underway, the resulting increased sales by IOC
should be positive for the Fund.

    Bruce C. Bone
    Chairman and Chief Executive Officer
    Toronto, Ontario
    August 12, 2008


    
    LABRADOR IRON ORE ROYALTY INCOME FUND
    CONSOLIDATED BALANCE SHEETS

    -------------------------------------------------------------------------

                                                           As at
                                               ------------------------------
                                                  June 30       December 31
                                                    2008            2007
                                               ------------------------------
                                                (Unaudited)
    Assets
    Current
      Cash and cash equivalents                $     108,881   $     151,256
      Amounts receivable                          58,330,884      18,838,481
      Income taxes recoverable                             -       1,389,717
                                               --------------  --------------
                                                  58,439,765      20,379,454

    Deferred charges                                 156,223         218,725

    Iron Ore Company of Canada ("IOC"),
     royalty and commission interests            304,861,601     307,252,600

    Investment in IOC                            231,423,004     180,887,115
                                               --------------  --------------

                                               $ 594,880,593   $ 508,737,894
                                               --------------  --------------
                                               --------------  --------------

    Liabilities and Unitholders' Equity
    Current
      Accounts payable                         $  13,797,412       5,542,158
      Income taxes payable                        11,228,916               -
      Distributions payable to unitholders        32,000,000   $  17,600,000
                                               --------------  --------------
                                                  57,026,328      23,142,158

    Long-term debt                                 5,405,519       1,334,150

    Future income tax liability                  110,190,000     103,500,000
                                               --------------  --------------
                                                 172,621,847     127,976,308

    Unitholders' equity
      Trust units                                317,708,147     317,708,147
      Undistributed income                       104,550,599      63,053,439
                                               --------------  --------------
                                               $ 594,880,593     508,737,894
                                               --------------  --------------
                                               --------------  --------------



    LABRADOR IRON ORE ROYALTY INCOME FUND
    CONSOLIDATED STATEMENTS OF INCOME AND
    COMPREHENSIVE INCOME AND UNDISTRIBUTED INCOME
    -------------------------------------------------------------------------

                                                    For the Three Months
                                                        Ended June 30,
                                                     2008           2007
                                               ------------------------------
                                                         (Unaudited)

    Revenue
      IOC royalties                            $  57,609,343   $  15,297,488
      IOC commissions                                450,793         297,689
      Interest and other income                        2,572          81,588
                                               --------------  --------------
                                                  58,062,708      15,676,765
                                               --------------  --------------
    Expenses
      Newfoundland royalty taxes                  11,521,869       3,059,497
      Amortization of royalty and
       commission interests                        1,485,584         975,738
      Administrative expenses(note 2)                529,303       1,224,742
      Interest expense                               180,128         254,151
                                               --------------  --------------
                                                  13,716,884       5,514,128
                                               --------------  --------------

    Income before equity earnings and
     income taxes                                 44,345,824      10,162,637
    Equity earnings in IOC                        49,208,618       5,688,732
                                               --------------  --------------

    Income before income taxes                    93,554,442      15,851,369
                                               --------------  --------------

    Provision for (recovery of) income taxes
      Current                                     12,913,359       1,711,729
      Future                                       6,720,000      (1,020,000)
                                               --------------  --------------
                                                  19,633,359         691,729
                                               --------------  --------------

    Net income and comprehensive
     income for the period                        73,921,083      15,159,640

    Undistributed income, beginning of period     62,629,516      44,065,803

    Distributions to unitholders                 (32,000,000)    (11,200,000)
                                               --------------  --------------

    Undistributed income, end of period        $ 104,550,599   $  48,025,443
                                               --------------  --------------
                                               --------------  --------------

    Net income per unit                        $        2.31   $        0.47
                                               --------------  --------------
                                               --------------  --------------



    LABRADOR IRON ORE ROYALTY INCOME FUND
    CONSOLIDATED STATEMENTS OF INCOME AND
    COMPREHENSIVE INCOME AND UNDISTRIBUTED INCOME
    -------------------------------------------------------------------------

                                                      For the Six Months
                                                        Ended June 30,
                                                     2008            2007
                                               ------------------------------
                                                         (Unaudited)

    Revenue
      IOC royalties                            $  73,970,606   $  28,225,802
      IOC commissions                                727,129         516,740
      Interest and other income                        4,338          85,501
                                               --------------  --------------
                                                  74,702,073      28,828,043
                                               --------------  --------------
    Expenses
      Newfoundland royalty taxes                  14,794,121       5,645,160
      Amortization of royalty and
       commission interests                        2,390,999       1,696,554
      Administrative expenses(note 2)              1,534,488       1,825,124
      Interest expense                               352,561         512,574
                                               --------------  --------------
                                                  19,072,169       9,679,412
                                               --------------  --------------

    Income before equity earnings and
     income taxes                                 55,629,904      19,148,631
    Equity earnings in IOC                        50,535,889       8,818,813
                                               --------------  --------------

    Income before income taxes                   106,165,793      27,967,444
                                               --------------  --------------

    Provision for (recovery of) income taxes
      Current                                     14,778,633       2,742,322
      Future                                       6,690,000        (670,000)
                                               --------------  --------------
                                                  21,468,633       2,072,322
                                               --------------  --------------

    Net income and comprehensive
     income for the period                        84,697,160      25,895,122

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

    Distributions to unitholders                 (43,200,000)    (22,400,000)
                                               --------------  --------------

    Undistributed income, end of period        $ 104,550,599   $  48,025,443
                                               --------------  --------------
                                               --------------  --------------

    Net income per unit                        $        2.65   $        0.81
                                               --------------  --------------
                                               --------------  --------------



    LABRADOR IRON ORE ROYALTY INCOME FUND
    CONSOLIDATED STATEMENTS OF CASH FLOWS
    -------------------------------------------------------------------------

                                                    For the Three Months
                                                        Ended June 30,
                                                     2008           2007
                                               ------------------------------
                                                         (Unaudited)
    Net inflow (outflow) of cash related
     to the following activities

    Operating
      Net income for the period                $  73,921,083   $  15,159,640
      Items not affecting cash:
        Equity earnings in IOC                   (49,208,618)     (5,688,732)
        Future income taxes                        6,720,000      (1,020,000)
        Amortization of royalty and
         commission interests                      1,485,584         975,738
        Amortization of deferred charges              31,251          31,251
      Change in amounts receivable, accounts
       and income taxes payable/recoverable      (23,050,965)     (3,506,218)
                                               --------------  --------------
      Cash flow from operating activities          9,898,335       5,951,679
                                               --------------  --------------

    Financing
      Distributions paid to unitholders          (11,200,000)    (11,200,000)
      Proceeds from long-term debt                 1,222,889       5,404,215
                                               --------------  --------------
                                                  (9,977,111)     (5,795,785)
                                               --------------  --------------

    Increase (decrease) in cash and cash
     equivalents during the period                   (78,776)        155,894

    Cash and cash equivalents, beginning
     of period                                       187,657          82,756
                                               --------------  --------------

    Cash and cash equivalents, end of period   $     108,881   $     238,650
                                               --------------  --------------
                                               --------------  --------------

    Cash income taxes paid                     $   1,900,000   $   3,150,432
                                               --------------  --------------
                                               --------------  --------------

    Cash interest paid                         $     154,667   $     190,949
                                               --------------  --------------
                                               --------------  --------------



    LABRADOR IRON ORE ROYALTY INCOME FUND
    CONSOLIDATED STATEMENTS OF CASH FLOWS
    -------------------------------------------------------------------------

                                                      For the Six Months
                                                        Ended June 30,
                                                     2008            2007
                                               ------------------------------
                                                         (Unaudited)
    Net inflow (outflow) of cash related
      to the following activities

    Operating
      Net income for the period                $  84,697,160   $  25,895,122
      Items not affecting cash:
        Equity earnings in IOC                   (50,535,889)     (8,818,813)
        Future income taxes                        6,690,000        (670,000)
        Amortization of royalty and
         commission interests                      2,390,999       1,696,554
        Amortization of deferred charges              62,502          62,502
      Change in amounts receivable, accounts
       payable and income taxes
       payable/recoverable                       (18,618,516)      6,559,657
                                               --------------  --------------
      Cash flow from operating activities         24,686,256      24,725,022
                                               --------------  --------------

    Financing
      Distributions paid to unitholders          (28,800,000)    (28,800,000)
      Proceeds from long-term debt                 4,071,369       4,171,691
                                               --------------  --------------
                                                 (24,728,631)    (24,628,309)
                                               --------------  --------------

    Increase (decrease) in cash and cash
     equivalents during the period                   (42,375)         96,713
    Cash and cash equivalents, beginning
     of period                                       151,256         141,937
                                               --------------  --------------

    Cash and cash equivalents, end of period   $     108,881   $     238,650
                                               --------------  --------------
                                               --------------  --------------

    Cash income taxes paid                     $   2,160,000   $   7,134,419
                                               --------------  --------------
                                               --------------  --------------

    Cash interest paid                         $     252,582   $     400,358
                                               --------------  --------------
                                               --------------  --------------



    Notes to Consolidated Financial Statements

    1.  Basis of Presentation

        The financial statements have not been reviewed in accordance with
        section 7050 of the CICA Handbook, Auditor Review of the Interim
        Financial Statements, by the Fund's Auditor.

        Not all disclosures required by Canadian generally accepted
        accounting principles for annual financial statements have been
        presented and, accordingly, these interim financial statements should
        be read in conjunction with the most recently prepared annual
        financial statements for the year ended December 31, 2007.

        These interim financial statements follow the same accounting
        policies and method of application as the most recent annual
        financial statements for the year ended December 31, 2007.

        Seasonality

        The results of operations and operating cash flows of the Fund vary
        considerably from quarter to quarter. The operations of the Fund are
        dependent on the royalty and commission revenues from IOC, whose
        production and revenues are not constant throughout the year, being
        lower during the winter months when the St. Lawrence Seaway is
        closed.

    2.  Unit Appreciation Rights

        In 2005, the Fund adopted a unit appreciation rights plan which
        granted 50,000 units to each if its six trustees, all as more fully
        described in the annual financial statements. Since the grant date,
        237,500 unit appreciation rights have been exercised.

        Compensation expense is not recognized when rights are issued, but is
        accrued as an expense over the period that the rights vest. The unit
        appreciation rights are marked to market each quarter to the extent
        the units exceed $23.00. Compensation expense of $184,625
        (2007 - $885,773) for the three months ended June 30, 2008 and
        $876,625 (2007 - $1,176,773) for the six months ended June 30, 2008
        have been recorded in administrative expenses in connection with the
        unit appreciation rights.

        In June 2008, one Trustee exercised unit appreciation rights in
        respect of 12,500 units at a market value of $57.77 resulting in a
        total payment of $434,625.

    3.  Capital Management

        The Fund's capital consists of the unitholders' equity and the short
        and long term debt facilities. The Trustees are responsible for
        managing the investments and affairs of the Fund, including the
        receipt of revenues and the payment of distributions to the
        unitholders. The Fund makes cash distributions of the net income to
        the maximum extent possible, subject to the maintenance of
        appropriate levels of working capital.

    4.  Financial Instruments

        The Fund derives dividends and royalty income from IOC denominated in
        US dollars. From time to time the Fund may enter into financial
        agreements with banks and other financial institutions to reduce the
        underlying risks associated with this foreign currency denominated
        income. As at June 30, 2008, there were no foreign exchange contracts
        outstanding.
    

    %SEDAR: 00002722E




For further information:

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

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LABRADOR IRON ORE ROYALTY INCOME FUND

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