Labrador Iron Ore Royalty Income Fund - Results for the second quarter ended June 30, 2009



    
    Labrador Iron Ore Royalty Income Fund (TSX: LIF.UN) announced its results
    for the second quarter ended June 30, 2009.
    

    TORONTO, Aug. 6 /CNW/ - Royalty income for the second quarter of 2009
amounted to $19.24 million as compared to $57.61 million for the second
quarter of 2008. The Fund's cash flow from operating activities after
adjustments for changes in amounts receivable, accounts payable and income
taxes payable (adjusted cash flow) for the second quarter was $12.58 million
or $0.39 per unit as compared to $32.95 million or $1.03 per unit for the same
period in 2008. Net income was $17.78 million or $0.55 per unit compared to
$73.92 million or $2.31 per unit for the same period in 2008.
    The second quarter of 2008 included a retroactive pricing adjustment
relating to the 2008 first quarter resulting from the price increase of 87.67%
for pellets and 68.75% for concentrates that occurred in the second quarter of
2008 but were retroactive to January. These retroactive adjustments increased
2008 second quarter royalty income by $6.6 million or $0.20 per unit and
equity earnings from Iron Ore Company of Canada (IOC) by $16 million or $0.50
per unit. Without these adjustments adjusted cash flow per unit in 2008 would
have been $0.83 per unit and net income per unit would have been $1.61 per
unit.
    The world recession which started last year and sharply reduced demand
for iron ore starting in the fourth quarter of 2008 continued into the second
quarter of 2009, resulting in pellet sales for the quarter being sharply lower
than 2008. However this was substantially offset by increased spot sales of
concentrates. In order to manage inventories, IOC shut down all production
facilities from July 7 to August 10, 2009. This will not affect its shipping
operations at Sept-Iles.
    IOC has yet to settle 2009 contract pricing, but when settled the prices
are expected to approximate other settlements that have taken place and have
resulted in reductions of 48.3% for pellets and 28.2% for concentrates. Spot
prices, which had fallen below the 2009 Asian settlement prices, recovered
during the quarter. The expected price settlements have been recorded in
earnings for the quarter so that a retroactive adjustment such as occurred in
2008 should not occur in 2009.
    Equity earnings from IOC amounted to $7.25 million ($0.23 per unit) as
compared to $49.21 million ($1.54 per unit) in 2008. If the 2008 retroactive
price increase had been included in the first quarter, 2008 second quarter
equity earnings would have been reduced by $16 million or $0.50 per unit to
$1.04 per unit.
    Results for the three months and six months ended June 30, 2009 are
summarized below:

    
                                   3 Months   3 Months   6 Months   6 Months
                                      Ended      Ended      Ended      Ended
                                    June 30,   June 30,   June 30,   June 30,
                                       2009       2008       2009       2008
                                   ------------------------------------------
                                                   (Unaudited)

    Revenue (in millions)           $ 19.66    $ 58.06    $ 36.26    $ 74.70
                                   ---------  ---------  ---------  ---------
    Adjusted cash flow (in
     millions)                      $ 12.58    $ 32.95    $ 23.69    $ 43.30
                                   ---------  ---------  ---------  ---------
    Adjusted cash flow per unit     $  0.39    $  1.03    $  0.74    $  1.35
                                   ---------  ---------  ---------  ---------
    Net income (in millions)        $ 17.78    $ 73.92    $ 34.31    $ 84.70
                                   ---------  ---------  ---------  ---------
    Net income per unit             $  0.55    $  2.31    $  1.07    $  2.65
                                   ---------  ---------  ---------  ---------
    

    "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) 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:

    
                        3 Months   3 Months   6 Months   6 Months       Year
                           Ended      Ended      Ended      Ended      Ended
                         June 30,   June 30,   June 30,   June 30,   June 30,
                            2009       2008       2009       2008       2008
                        -----------------------------------------------------
    Pellets                 2.41       4.02       3.62       6.57      12.30
    Concentrates            1.83       0.56       2.75       0.82       2.76
                        -----------------------------------------------------

    Total                   4.24       4.58       6.37       7.39      15.06
                        -----------------------------------------------------


    Outlook
    -------
    
    At the present time, iron ore markets for concentrates and pellets are
firming and we anticipate sales volumes to approach more normal levels. With
the substantial price reductions that have occurred, both royalty revenue and
equity earnings from IOC in 2009 are expected to be substantially below 2008
levels. Steel markets remain relatively strong in Asia and the very weak
markets in Europe and North America have recently been firming, so more normal
sales levels should occur in the last half of 2009. Nevertheless, 2009 will be
disappointing when compared to last year's results. With the firming of prices
in the spot market and the appearance of increased demand, the outlook for
2010 appears more promising.

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

    
    Bruce C. Bone
    Chairman and Chief Executive Officer
    August 6, 2009
    

    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 2008 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 2008 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 and 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. The current state of the market may cause 2009 sales to
deviate from this pattern.
    Royalty income for the second quarter of 2009 amounted to $19.24 million
as compared to $57.61 million for the second quarter of 2008. The Fund's cash
flow from operating activities after adjustments for changes in amounts
receivable, accounts payable and income taxes payable (adjusted cash flow) for
the second quarter was $12.58 million or $0.39 per unit as compared to $32.95
million or $1.03 per unit for the same period in 2008. Net income was $17.78
million or $0.55 per unit compared to $73.92 million or $2.31 per unit for the
same period in 2008.
    The second quarter of 2008 included a retroactive pricing adjustment
relating to the 2008 first quarter resulting from the price increase of 87.67%
for pellets and 68.75% for concentrates that occurred in the second quarter of
2008 but were retroactive to January. These retroactive adjustments increased
2008 second quarter royalty income by $6.6 million or $0.20 per unit and
equity earnings from Iron Ore Company of Canada (IOC) by $16 million or $0.50
per unit. Without these adjustments adjusted cash flow per unit in 2008 would
have been $0.83 per unit and net income per unit would have been $1.61 per
unit.
    The world recession which started last year and sharply reduced demand
for iron ore starting in the fourth quarter of 2008 continued into the second
quarter of 2009, resulting in pellet sales for the quarter being sharply lower
than 2008. However this was substantially offset by increased spot sales of
concentrates. In order to manage inventories, IOC shut down all production
facilities from July 7 to August 10, 2009. This will not affect its shipping
operations at Sept-Iles.
    IOC has yet to settle 2009 contract pricing, but when settled the prices
are expected to approximate other settlements that have taken place and have
resulted in reductions of 48.3% for pellets and 28.2% for concentrates. Spot
prices, which had fallen below the 2009 Asian settlement prices, recovered
during the quarter. The expected price settlements have been recorded in
earnings for the quarter so that a retroactive adjustment such as occurred in
2008 should not occur in 2009.
    Equity earnings from IOC amounted to $7.25 million ($0.23 per unit) as
compared to $49.21 million ($1.54 per unit) in 2008. If the 2008 retroactive
price increase had been included in the first quarter, 2008 second quarter
equity earnings would have been reduced by $16 million or $0.50 per unit to
$1.04 per unit.
    Net income for the second quarter was $17.78 million or $0.55 per unit as
compared to $73.92 million or $2.31 per unit in 2008. Had the 2008 price
increase been recorded in the first quarter of 2008, net income would have
been reduced by $22.6 million or $0.70 per unit to $1.61.
    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 $12.58 million or $0.39 per unit as compared to
$32.95 million or $1.03 per unit for the same period in 2008.
    The six month results were affected by the same factors as the quarter
and reflect the lower volume and substantially lower pricing which have
occurred as a result of the global recession.
    The following table sets out quarterly revenue, net income and cash flow
data for 2009, 2008 and 2007.

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

    2009
    ----
    First Quarter       $  16.6  $  16.5  $  0.52 $   11.1  $  0.35  $  0.50
    Second Quarter      $  19.7  $  17.8  $  0.55 $   12.6  $  0.39  $  0.50

    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 this 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 $0.39 for the quarter (2008
- $1.03). Cumulative standardized cash flow from inception of the trust is
$22.65 per unit and total cash distributions since inception are $21.93 per
unit, for a payout ratio of 97%.
    "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. 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,
                                 2009         2008         2009         2008
                        -----------------------------------------------------
    Standardized cash
     flow from
     operating
     activities           $10,681,572  $ 9,898,335  $13,203,469  $24,686,256
    Excluding: changes in
     amounts receivable,
     accounts payable and
     income taxes
     payable/recoverable    1,894,773   23,050,965   10,487,330   18,618,516
                        -----------------------------------------------------
    Adjusted cash flow    $12,576,345  $32,949,300  $23,690,799  $43,304,472
                        -----------------------------------------------------
    Adjusted cash flow
     per unit             $      0.39  $      1.03  $      0.74  $      1.35
                        -----------------------------------------------------


    Liquidity
    ---------
    

    The Fund has a $50 million revolving credit facility with a term ending
September 18, 2011 with provision for annual one-year extensions. No amounts
are currently drawn under this facility leaving $50 million available to
provide for any capital required by IOC or other Fund requirements. IOC has
suspended its previously announced expansion plans and intends to fund capital
expenditures from internally generated funds.

    
    Outlook
    -------
    

    At the present time, iron ore markets for concentrates and pellets are
firming and we anticipate sales volumes to approach more normal levels. With
the substantial price reductions that have occurred, both royalty revenue and
equity earnings from IOC in 2009 are expected to be substantially below 2008
levels. Steel markets remain relatively strong in Asia and the very weak
markets in Europe and North America have recently been firming, so more normal
sales levels should occur in the last half of 2009. Nevertheless, 2009 will be
disappointing when compared to last year's results. With the firming of prices
in the spot market and the appearance of increased demand, the outlook for
2010 appears more promising.

    
    Bruce C. Bone
    Chairman and Chief Executive Officer
    Toronto, Ontario
    August 6, 2009


    LABRADOR IRON ORE ROYALTY INCOME FUND
    CONSOLIDATED BALANCE SHEETS

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

                                                           As at
                                               ------------------------------
                                                   June 30       December 31
                                                    2009             2008
                                               ------------------------------
                                                 (Unaudited)
    Assets
    Current
      Cash and cash equivalents                $   8,999,039   $  27,795,570
      Amounts receivable                          20,034,962      36,476,337
                                               --------------  --------------
                                                  29,034,001      64,271,907

    Deferred charges                                 351,332         392,666

    Iron Ore Company of Canada ("IOC"),
     royalty and commission interests            300,156,960     302,198,099

    Investment in IOC                            201,495,819     187,452,133
                                               --------------  --------------
                                               $ 531,038,112   $ 554,314,805
                                               --------------  --------------
                                               --------------  --------------

    Liabilities and Unitholders' Equity
    Current
      Accounts payable                         $   4,266,831   $   7,484,614
      Income taxes payable                         1,930,970      25,641,892
      Distributions payable to unitholders        16,000,000      16,000,000
                                               --------------  --------------
                                                  22,197,801      49,126,506

    Future income tax liability                  104,450,000     103,110,000
                                               --------------  --------------
                                                 126,647,801     152,236,506

    Unitholders' equity
      Trust units                                317,708,147     317,708,147
      Undistributed income                        86,682,164      84,370,152
                                               --------------  --------------
                                               $ 531,038,112   $ 554,314,805
                                               --------------  --------------
                                               --------------  --------------



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

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

                                                    For the Three Months
                                                        Ended June 30,
                                                     2009           2008
                                               ------------------------------
                                                         (Unaudited)
    Revenue
      IOC royalties  (Unaudited)               $  19,237,019   $  57,609,343
      IOC commissions                                417,231         450,793
      Interest and other income                       11,498           2,572
                                               --------------  --------------
                                                  19,665,748      58,062,708
                                               --------------  --------------
    Expenses
      Newfoundland royalty taxes                   3,847,404      11,521,869
      Amortization of royalty and commission
       interests                                   1,359,002       1,485,584
      Administrative expenses (note 2)               580,514         529,303
      Interest expense                               114,160         180,128
                                               --------------  --------------
                                                   5,901,080      13,716,884
                                               --------------  --------------

    Income before equity earnings and income
     taxes                                        13,764,668      44,345,824
    Equity earnings in IOC                         7,248,111      49,208,618
                                               --------------  --------------
    Income before income taxes                    21,012,779      93,554,442
                                               --------------  --------------

    Provision for income taxes
      Current                                      2,567,992      12,913,359
      Future                                         660,000       6,720,000
                                               --------------  --------------
                                                   3,227,992      19,633,359
                                               --------------  --------------

    Net income and comprehensive income for
     the period                                   17,784,787      73,921,083

    Undistributed income, beginning of period     84,897,377      62,629,516

    Distributions to unitholders                 (16,000,000)    (32,000,000)
                                               --------------  --------------
    Undistributed income, end of period        $  86,682,164   $ 104,550,599
                                               --------------  --------------
                                               --------------  --------------
    Net income per unit                        $        0.55   $        2.31
                                               --------------  --------------
                                               --------------  --------------



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

                                                      For the Six Months
                                                        Ended June 30
                                                     2009           2008
                                               ------------------------------
                                                         (Unaudited)
    Revenue
      IOC royalties                            $  35,502,120   $  73,970,606
      IOC commissions                                626,760         727,129
      Interest and other income                      130,468           4,338
                                               --------------  --------------
                                                  36,259,348      74,702,073
                                               --------------  --------------
    Expenses
      Newfoundland royalty taxes                   7,100,424      14,794,121
      Amortization of royalty and commission
       interests                                   2,041,139       2,390,999
      Administrative expenses (note 2)               898,792       1,534,488
      Interest expense                               227,292         352,561
                                               --------------  --------------
                                                  10,267,647      19,072,169
                                               --------------  --------------

    Income before equity earnings and income
     taxes                                        25,991,701      55,629,904
    Equity earnings in IOC                        14,043,686      50,535,889
                                               --------------  --------------
    Income before income taxes                    40,035,387     106,165,793
                                               --------------  --------------
    Provision for income taxes
      Current                                      4,383,375      14,778,633
      Future                                       1,340,000       6,690,000
                                               --------------  --------------
                                                   5,723,375      21,468,633
                                               --------------  --------------

    Net income and comprehensive
    income for the period                         34,312,012      84,697,160

    Undistributed income, beginning of period     84,370,152      63,053,439

    Distributions to unitholders                 (32,000,000)    (43,200,000)
                                               --------------  --------------
    Undistributed income, end of period        $  86,682,164   $ 104,550,599
                                               --------------  --------------
                                               --------------  --------------
    Net income per unit                        $        1.07   $        2.65
                                               --------------  --------------
                                               --------------  --------------



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

                                                    For the Three Months
                                                        Ended June 30,
                                                     2009           2008
                                               ------------------------------
                                                         (Unaudited)
    Net inflow (outflow) of cash related to
     the following activities
    Operating
      Net income for the period                $  17,784,787   $  73,921,083
      Items not affecting cash:
        Equity earnings in IOC                    (7,248,111)    (49,208,618)
        Future income taxes                          660,000       6,720,000
        Amortization of royalty and commission
         interests                                 1,359,002       1,485,584
        Amortization of deferred charges              20,667          31,251
      Change in amounts receivable, accounts
       and income taxes payable                   (1,894,773)    (23,050,965)
                                               --------------  --------------
      Cash flow from operating activities         10,681,572       9,898,335
                                               --------------  --------------

    Financing
      Distributions paid to unitholders          (16,000,000)    (11,200,000)
      Proceeds from long-term debt                         -       1,222,889
                                               --------------  --------------
                                                 (16,000,000)     (9,977,111)
                                               --------------  --------------
    Decrease in cash and cash equivalents
     during the period                            (5,318,428)        (78,776)
    Cash and cash equivalents, beginning of
     period                                       14,317,467         187,657
                                               --------------  --------------
    Cash and cash equivalents, end of period   $   8,999,039   $     108,881
                                               --------------  --------------
                                               --------------  --------------
    Cash income taxes paid                     $     799,150   $   1,900,000
                                               --------------  --------------
                                               --------------  --------------
    Cash interest paid                         $      92,466   $     154,667
                                               --------------  --------------
                                               --------------  --------------



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

                                                      For the Six Months
                                                        Ended June 30,
                                                     2009           2008
                                               ------------------------------
                                                         (Unaudited)
    Net inflow (outflow) of cash related to
     the following activities
    Operating
      Net income for the period                $  34,312,012   $  84,697,160
      Items not affecting cash:
        Equity earnings in IOC                   (14,043,686)    (50,535,889)
        Future income taxes                        1,340,000       6,690,000
        Amortization of royalty and commission
         interests                                 2,041,139       2,390,999
        Amortization of deferred charges              41,334          62,502
      Change in amounts receivable, accounts
       payable and income taxes payable          (10,487,330)    (18,618,516)
                                               --------------  --------------
      Cash flow from operating activities         13,203,469      24,686,256
                                               --------------  --------------
    Financing
        Distributions paid to unitholders        (32,000,000)    (28,800,000)
        Proceeds from long-term debt                       -       4,071,369
                                               --------------  --------------
                                                 (32,000,000)    (24,728,631)
                                               --------------  --------------

    Decrease in cash and cash equivalents
     during the period                           (18,796,531)        (42,375)
    Cash and cash equivalents, beginning of
     period                                       27,795,570         151,256
                                               --------------  --------------
    Cash and cash equivalents, end of period   $   8,999,039   $     108,881
                                               --------------  --------------
                                               --------------  --------------
    Cash income taxes paid                     $  28,094,297   $   2,160,000
                                               --------------  --------------
                                               --------------  --------------
    Cash interest paid                         $     186,987   $     252,582
                                               --------------  --------------
                                               --------------  --------------


    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, 2008.

        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, 2008.

        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 of its six trustees, all as more fully
        described in the annual financial statements. Since the grant date,
        287,000 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 unit price exceeds $23.00. Compensation expense of $231,000
        (2008- $184,625) for the three months ended June 30, 2009 and
        $384,000 (2008 - $876,625) for the six months ended June 30, 2009
        have been recorded in administrative expenses in connection with the
        unit appreciation rights.

        During the quarter, Trustees exercised unit appreciation rights in
        respect of 22,500 units at a market value of $35.00 resulting in a
        total payment of $270,000.

    3.  Capital Management

        The Fund's capital consists of the unitholders' equity and a long-
        term debt facility. 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, 2009, 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

Organization Profile

LABRADOR IRON ORE ROYALTY INCOME FUND

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