Labrador Iron Ore Royalty Corporation - Results for the Third Quarter Ended September 30, 2012

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Labrador Iron Ore Royalty Corporation

Nov 01, 2012, 17:55 ET

TORONTO, Nov. 1, 2012 /CNW/ - Labrador Iron Ore Royalty Corporation (TSX: LIF) announced today its operation and cash flow results for the third quarter ended September 30, 2012.

Royalty income for the third quarter of 2012 amounted to $32.1 million as compared to $54.4 million for the third quarter of 2011. The unitholder's cash flow from operating activities after adjustments for changes in amounts receivable, accounts payable and income taxes payable (adjusted cash flow) for the third quarter was $18.5 million or $0.28 per unit as compared to $63.7 million or $0.99 per unit for the same period in 2011. Net income was $29.7 million or $0.47 per unit compared to $76.3 million or $1.19 per unit for the same period in 2011. Equity earnings from IOC amounted to $14.2 million or $0.22 per unit as compared to $47.0 million or $0.73 per unit in 2011.

In the third quarter IOC started to see the positive results of the first phase of its expansion program. The commissioning of the new ore delivery system and in-pit crusher is basically complete and the additional grinding mill is being commissioned, resulting in increased production and thus sales as compared to the first two quarters of this year and the corresponding 2011 quarter. The full benefits of this phase of the expansion will progressively be incorporated into production output, with the most significant benefits likely in the second quarter of 2013. Unfortunately, the positive increase in sales volume was more than offset by the sharp decrease in the price of iron ore which occurred in the quarter, resulting in our royalty revenue for the quarter being substantially less than last year's third quarter. Although the price drop took iron ore to levels not seen since 2009, prices have since made a substantial recovery and are currently more than 30% higher than the low reached in the quarter, which further demonstrates the current market volatility. Phase 2 of the expansion program is expected to be commissioned in the first half of next year. As a result of its ongoing capital program and the sharp price drop which affected IOC's cash flow and earnings, in order to preserve cash to cover its capital program and in view of the market volatility, IOC did not pay a dividend during the quarter (2011 - $31.2 million) which along with the lower royalty substantially reduced our cash flow as compared to last year's third quarter.

All net income, adjusted cash flow and per unit figures referred to in this report use the totals according to the financial statements plus (where applicable) the $7,488,000 ($0.117 per stapled unit) and $22,464,000 ($0.351 per stapled unit) interest on the subordinated notes for the three months and nine months periods, respectively.

Results for the three months and nine months ended September 30 are summarized below:

	3 Months Ended Sept. 30, 2012	3 Months Ended Sept. 30, 2011	9 Months Ended Sept. 30, 2012	9 Months Ended Sept. 30, 2011
	(Unaudited)

Revenue (in millions)	$32.6	$ 54.9	$91.4	$ 123.7
Adjusted cash flow (in millions)	$18.5	$ 63.7	$55.2	$ 134.7
Adjusted cash flow per unit	$0.28	$ 0.99	$0.86	$ 2.10
Net income (in millions)	$29.7	$ 76.3	$89.5	$ 163.4
Net income per unit	$0.47	$ 1.19	$1.40	$ 2.55

"Adjusted cash flow" (defined as cash flow from operating activities as shown on the attached financial statements adjusted for changes in amounts receivable, accounts payable and income taxes payable) is not a recognized measure under IFRS. The Directors believe that adjusted cash flow is a useful analytical measure as it better reflects cash available for distributions to unitholders.

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

	3 Months Ended Sept. 30, 2012	3 Months Ended Sept. 30, 2011	9 Months Ended Sept. 30, 2012	9 Months Ended Sept. 30, 2011	Year Ended Dec. 31, 2011

Pellets	2.77	2.24	7.37	6.41	8.71
Concentrates	1.72	1.94	2.92	3.27	4.85

Total	4.49	4.18	10.29	9.68	13.56

Capital Restructuring

At the special meeting of holders of stapled units held on September 28, 2012, the holders approved the exchange of subordinated notes for common shares of LIORC and the consolidation of common shares. Approximately 99.9% of the votes cast at the meeting were in favour of the exchange. The transactions were completed with effect on October 3, 2012 and each holder ended up holding the same number of common shares as before the transactions and LIORC had 64 million common shares outstanding. The common shares trade on The Toronto Stock Exchange under the symbol LIF.

Subordinated Notes

This will be the last quarter which will have interest on the subordinated notes as an expense, as under the restructuring interest ceased to accrue after September 30, 2012. Also the payment made on October 25 to unitholders of record September 30 will be the last distribution that will be comprised of dividends and interest. Future distributions will be entirely dividends.

Outlook

We should see improved results in the fourth quarter, as we expect to see further increased sales volume as a result of the expected increased production and, if the price recovery of iron ore from its summer lows can be sustained, we should see increased royalty income and IOC should have increased earnings. Going forward, we expect to see increased sales from IOC as they get the full benefit of the increased production from the completed phases 1 and 2 of the expansion program.

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

Bruce C. Bone
President and Chief Executive Officer
November 1, 2012

Management's Discussion and Analysis

The following discussion and analysis should be read in conjunction with the Management's Discussion and Analysis section of the Corporation's 2011 Annual Report and the interim financial statements and notes contained in this report. Although management believes that expectations reflected in forward-looking statements are reasonable, such statements involve risk and uncertainties including the factors discussed in the Corporation's 2011 Annual Report.

The Corporation's revenues are entirely dependent on the operations of Iron Ore Company of Canada (IOC) as its principal assets relate to the operations of IOC and its principal source of revenue is the 7% royalty it receives on all sales of iron ore products by IOC. In addition to the volume of iron ore sold, the Corporation's royalty revenue is affected by the price of iron ore and the Canadian - U.S. dollar exchange rate.

The 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. For 2012, because of the coming on stream of the phase 1 expansion, we expect the percentage of sales to be higher than normal in the latter part of the year. 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 same factors affecting the quarter affected the nine months with the additional factors of the start-up and integration of the phase 1 expansion into the operations along with the usual winter operating conditions during the first two quarters. Cash flow was substantially reduced because IOC did not pay any dividends during the period (2011- $60.2 million).

The following table sets out quarterly revenue, net income and cash flow data for 2012, 2011 and 2010.

			Revenue	Net Income	Net Income per Unit	Adjusted Cash Flow⁽¹⁾	Adjusted Cash Flow per Unit⁽¹⁾	Distributions Declared per Unit
			(in millions except per Unit information)
2012
First Quarter⁽²⁾			$22.4	$23.0	$0.36	$14.4	$0.23	$0.375
Second Quarter⁽²⁾ Third Quarter⁽²⁾			$36.4 $32.6	$36.8 $29.7	$0.57 $0.47	$22.3 $18.5	$0.35 $0.28	$0.375 $0.375
2011
First Quarter⁽²⁾			$30.7	$38.9	$0.61	$48.0 ⁽³⁾	$0.75	$0.75
Second Quarter⁽²⁾			$38.1	$48.2	$0.75	$23.0	$0.36	$0.375
Third Quarter ⁽²⁾			$54.9	$76.3	$1.19	$63.7 ⁽⁴⁾	$0.99	$0.75
Fourth Quarter⁽²⁾			$38.8	$45.9	$0.72	$23.4	$0.37	$0.375
2010
First Quarter			$16.7	$15.7	$0.25	$22.3 ⁽⁵⁾	$0.35	$0.375
Second Quarter			$52.5	$69.1	$1.08	$30.5	$0.48	$0.375
Third Quarter⁽²⁾			$40.9	$64.4	$1.02	$85.9 ⁽⁶⁾	$1.34	$0.50
Fourth Quarter⁽²⁾			$54.3	$62.8	$0.99	$31.9	$0.50	$1.00
Notes:	⁽¹⁾	"Adjusted cash flow" (see below)
	⁽²⁾	Commencing with third quarter 2010, net income, adjusted cash flow, distributions and per unit figures referred to in this table use the totals according to the financial statements plus (where applicable) the $7,488,000 ($0.117 per unit) interest on the subordinated notes
	⁽³⁾	Includes a $29.0 million IOC dividend
	⁽⁴⁾	Includes a $31.2 million IOC dividend
	⁽⁵⁾	Includes a $11.5 million IOC dividend
	⁽⁶⁾	Includes a $62.2 million IOC dividend

Standardized Cash Flow and Adjusted Cash Flow

For the Corporation, standardized cash flow is the same as cash flow from operating activities as recorded in the Corporation's cash flow statements as the Corporation does not incur capital expenditures or have any restrictions on distributions. Standardized cash flow per unit was $0.22⁽¹⁾ for the quarter (2011 - $0.80⁽¹⁾). Cumulative standardized cash flow from inception of the Corporation is $16.65 per unit and total cash distributions since inception are $16.27 per unit, for a payout ratio of 98%.

"Adjusted cash flow" is defined as cash flow from operating activities as shown on the attached financial statements adjusted for changes in amounts receivable, accounts and interest payable and income taxes payable. It is not a recognized measure under IFRS. The Directors believe that adjusted cash flow is a useful analytical measure as it better reflects cash available for distributions to unitholders.

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

	3 Months Ended Sept. 30, 2012	3 Months Ended Sept. 30, 2011	9 Months Ended Sept. 30, 2012	9 Months Ended Sept. 30, 2011
Standardized cash flow from operating activities	$13,860,481	$51,667,679	$33,031,588	$109,120,236
Excluding: changes in amounts receivable, accounts payable and income taxes payable	(2,892,094)	4,520,122	(334,889)	3,102,446
Adjusted cash flow⁽¹⁾	$10,968,387	$56,187,801	$32,696,699	$112,222,682
Adjusted cash flow per unit⁽¹⁾	$0.17	$0.88	$0.51	$1.75

^{(1) Excludes note interest on subordinated notes paid directly to
unitholders of $7,488,000 ($0.117 per stapled unit) and $22,464,000
($0.351 per stapled unit) for the three months and nine months periods,
respectively.}

Liquidity

The Corporation has a $50 million revolving credit facility to September 18, 2014 with provision for annual one-year extensions. No amounts are currently drawn under this facility (2011 - nil) leaving $50 million available to provide for any capital required by IOC or other Corporation requirements.

Capital Restructuring

At the special meeting of holders of stapled units held on September 28, 2012, the holders approved the exchange of subordinated notes for common shares of LIORC and the consolidation of common shares. Approximately 99.9% of the votes cast at the meeting were in favour of the exchange. The transactions were completed with effect on October 1, 2012 and each holder ended up holding the same number of common shares as before the transactions and LIORC had 64 million common shares outstanding. The common shares trade on The Toronto Stock Exchange under the symbol LIF.

Subordinated Notes

Outlook

We should see improved results in the fourth quarter, as we expect to see further increased sales volume as a result of the expected increased production and if the price recovery of iron ore from its summer lows can be sustained, we should see increased royalty income and IOC should have increased earnings. Going forward, we expect to see increased sales from IOC as they get the full benefit of the increased production from the completed phases 1and 2 of the expansion program.

Bruce C. Bone
President and Chief Executive Officer
Toronto, Ontario
November 1, 2012

LABRADOR IRON ORE ROYALTY CORPORATION
INTERIM CONDENSED CONSOLIDATED BALANCE SHEETS



			As at
			September 30,		December 31,
Canadian $			2012		2011
			(Unaudited)
Assets
Current Assets
	Cash	$	24,993,772	$	41,498,184
	Amounts receivable (note 4)		32,259,832		40,669,780
	Income taxes recoverable		6,840,871		392,173
Total Current Assets			64,094,475		82,560,137

Non-Current Assets
Iron Ore Company of Canada ("IOC"),
	royalty and commission interests		283,008,577		287,131,292
Investment in IOC			341,336,012		299,280,483
Total Non-Current Assets			624,344,589		586,411,775

Total Assets		$	688,439,064	$	668,971,912


Liabilities and Shareholders' Equity
Current Liabilities
	Accounts payable	$	6,793,028	$	8,419,389
	Interest payable on subordinated notes		7,488,000		7,488,000
	Dividend payable		16,512,000		16,512,000
Total Current Liabilities			30,793,028		32,419,389

Non-Current Liabilities
Deferred income taxes (note 6)			119,690,000		114,830,000
Subordinated notes			248,000,000		248,000,000
Total Non-Current Liabilities			367,690,000		362,830,000

Total Liabilities			398,483,028		395,249,389

Equity
	Share capital		69,708,147		69,708,147
	Retained earnings		236,499,889		219,001,376
	Accumulated other comprehensive loss		(16,252,000)		(14,987,000)
			289,956,036		273,722,523

Total Equity and Liabilities		$	688,439,064	$	668,971,912



Approved by the Directors,


(signed) Bruce C. Bone			(signed) Alan R. Thomas
Director			Director

LABRADOR IRON ORE ROYALTY CORPORATION
INTERIM CONDENSED CONSOLIDATED STATEMENTS
OF COMPREHENSIVE INCOME


		For the Three Months
		Ended September 30,
Canadian $			2012		2011
		(Unaudited)
Revenue
	IOC royalties	$	32,117,891	$	54,421,894
	IOC commissions		442,043		411,443
	Interest and other income		78,363		107,890
			32,638,297		54,941,227
Expenses
	Newfoundland royalty taxes		6,423,578		10,884,379
	Amortization of royalty and commission interests		1,355,487		1,313,290
	Administrative expenses		720,569		525,507
	Interest expense:
	Credit facility		93,493		94,521
	Subordinated notes		7,488,000		7,488,000
			16,081,127		20,305,697

Income before equity earnings and income taxes			16,557,170		34,635,530
Equity earnings in IOC			14,155,835		46,984,091

Income before income taxes			30,713,005		81,619,621

Provision for income taxes
	Current		6,944,270		10,933,465
	Deferred		1,563,000		1,923,000
			8,507,270		12,856,465

Net income for the period			22,205,735		68,763,156

Other comprehensive loss
	Share of other comprehensive loss of IOC, net of tax		(430,000)		(372,000)

Comprehensive income for the period		$	21,775,735	$	68,391,156

Net income per common share		$	0.35	$	1.07

LABRADOR IRON ORE ROYALTY CORPORATION
INTERIM CONDENSED CONSOLIDATED STATEMENTS
OF COMPREHENSIVE INCOME


		For the Nine Months Ended
		September 30,
Canadian $			2012		2011
			(Unaudited)
Revenue
	IOC royalties	$	90,124,124	$	122,456,324
	IOC commissions		1,010,820		952,746
	Interest and other income		294,522		344,851
			91,429,466		123,753,921
Expenses
	Newfoundland royalty taxes		18,024,825		24,491,265
	Amortization of royalty and commission interests		4,122,715		3,484,528
	Administrative expenses		1,799,950		1,631,063
	Interest expense:
	Credit facility		281,507		280,480
	Subordinated notes		22,464,000		22,464,000
			46,692,997		52,351,336

Income before equity earnings and income taxes			44,736,469		71,402,585
Equity earnings in IOC (note 5)			43,535,529		96,667,045

Income before income taxes			88,271,998		168,069,630

Provision for income taxes (note 6)
	Current		16,162,485		22,831,692
	Deferred		5,075,000		4,329,000
			21,237,485		27,160,692

Net income for the period			67,034,513		140,908,938

Other comprehensive loss
	Share of other comprehensive loss of IOC, net of tax		(1,265,000)		(1,115,000)

Comprehensive income for the period		$	65,769,513	$	139,793,938

Net income per common share		$	1.05	$	2.20

LABRADOR IRON ORE ROYALTY CORPORATION
INTERIM CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS




			For the Nine Months Ended
			September 30,
Canadian $				2012		2011
			(Unaudited)
Net inflow (outflow) of cash related
	to the following activities

Operating
	Net income for the period		$	67,034,513	$	140,908,938
	Items not affecting cash:
		Equity earnings in IOC		(43,535,529)		(96,667,045)
		Current income taxes		16,162,485		22,831,692
		Deferred income taxes		5,075,000		4,329,000
		Amortization of royalty and commission interests		4,122,715		3,484,528
		Interest expense		22,745,507		22,744,480
	Common share dividend from IOC			-		60,167,261
	Change in amounts receivable and accounts payable			6,783,587		(3,266,591)
	Interest paid			(22,745,507)		(22,744,480)
	Income taxes paid			(22,611,183)		(22,667,547)
	Cash flow from operating activities			33,031,588		109,120,236

Financing
	Dividends paid to shareholders			(49,536,000)		(113,536,000)
	Cash flow used in financing activities			(49,536,000)		(113,536,000)

Decrease in cash, during the period				(16,504,412)		(4,415,764)

Cash, beginning of period				41,498,184		73,611,888

Cash, end of period			$	24,993,772	$	69,196,124

LABRADOR IRON ORE ROYALTY CORPORATION
INTERIM CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

						Accumulated
						other
		Capital		Retained		comprehensive
Canadian $		stock		earnings		income (loss)		Total
			(Unaudited)

Balance as at December 31, 2010	$	69,708,147	$	147,934,994	$	(4,271,000)	$	213,372,141
Net income for the period		-		140,908,938		-		140,908,938
Dividends declared to shareholders		-		(97,536,000)		-		(97,536,000)
Share of other comprehensive loss from investment in IOC		-		-		(1,115,000)		(1,115,000)
Balance as at September 30, 2011		69,708,147		191,307,932		(5,386,000)		255,630,079

Balance as at December 31, 2011		69,708,147		219,001,376		(14,987,000)		273,722,523
Net income for the period		-		67,034,513		-		67,034,513
Dividends declared to shareholders		-		(49,536,000)		-		(49,536,000)
Share of other comprehensive loss from investment in IOC		-		-		(1,265,000)		(1,265,000)
Balance as at September 30, 2012	$	69,708,147	$	236,499,889	$	(16,252,000)	$	289,956,036

The complete consolidated financial statements for the third quarter ended September 30, 2012, including notes thereto, are posted on sedar.com and labradorironore.com.

SOURCE: Labrador Iron Ore Royalty Corporation

Bruce C. Bone
President & Chief Executive Officer
(416) 863-7133
E-mail: [email protected]

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