Labrador Iron Ore Royalty Corporation - 2011 Results of Operations

March 8, 2012

TORONTO, March 7, 2012 /CNW/ - Labrador Iron Ore Royalty Corporation (TSX: LIF.UN) announced the results of its operations for the year ended December 31, 2011.

To the Holders of Stapled Units of Labrador Iron Ore Royalty Corporation 

On July 1, 2011 the 2-for-1 subdivision of the stapled units approved by the holders of stapled units (the "Unitholders") on May 30, 2011, became effective. The stapled units started trading on a split basis on the Toronto Stock Exchange on June 28, 2011. Accordingly, all per unit figures in this report are based on 64 million units outstanding, with all prior per unit figures being restated.

Prior to the July 1, 2010 conversion of Labrador Iron Ore Royalty Corporation ("LIORC" or the "Corporation") from an income trust, the net income of the Unitholders was the same as the trust's net income. Since the Unitholders now own the $248 million LIORC subordinated notes directly, the net income of the Unitholders consists of the net income of LIORC plus the interest paid on the LIORC subordinated notes. Thus 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 $29,952,000 ($0.468 per stapled unit) interest on the subordinated notes for each quarter and the year ended December 31, 2011, respectively.

Transition to International financial reporting standards

The 2011 consolidated financial statements of the Corporation are prepared in accordance with International Financial Reporting Standards ("IFRS") as issued by the International Accounting Standards Board ("IASB") and are the Corporation's first annual financial statements prepared in accordance with IFRS. Prior to the adoption of IFRS, the financial statements were prepared in accordance with Canadian Generally Accepted Accounting Principles ("Canadian GAAP").

IFRS are premised on a conceptual framework similar to Canadian GAAP. However, significant differences exist in certain matters of recognition, measurement and disclosure. The adoption had a small impact on the consolidated balance sheets and statements of comprehensive income. The overall impact was to reduce its retained earnings by $22.0 million at January 1, 2010 and to increase 2010 comprehensive income by $2.5 million. For the year ended December 31, 2011, the Corporation's share of comprehensive income from IOC is $4.0 million lower than would have been reported under Canadian GAAP. The change to IFRS has no impact on the Corporation's royalty and commission income and no impact on cash flows for the year.

Financial Performance

The Unitholders' adjusted cash flow (see Management's Discussion & Analysis for definition and calculation) for the year ended December 31, 2011 was $158.1 million or $2.47 per stapled unit as compared to $170.6 million or $2.67 per unit for 2010.

Iron ore sales of IOC amounted to 13.2 million tonnes compared to 15.1 million tonnes in 2010. Sales were constrained by lower than expected concentrate production due to mine equipment problems and weather related operating problems in the winter months. In 2011, approximately 32% of IOC's concentrate production was sold as concentrate while the remaining production was converted into pellets at IOC's pelletizing plant before sale. IOC's pellet sales were lower year over year in 2011 as pellet production was curtailed in order to perform extensive maintenance work at the pellet plant, meet contractual commitments for concentrate and take advantage of higher margins on spot sales of concentrate.  Sales to IOC's traditional markets (North America and Europe) represented 61% of IOC's shipments in 2011. Iron ore prices were very strong in the first six months of 2011 due to the market recovery in the advanced economies and solid growth in the emerging and developing economies particularly in the Asian-Pacific region. In the last half of the year, Europe's sovereign debt problems and tightening credit policies of the Chinese government moderated iron ore demand and iron ore spot prices, especially in the fourth quarter.  Despite struggling in the second half of 2011, the spot price index of seaborne iron ore rose 15% year over year to average $169.20 per dry metric ton CFR China in 2011 (according to Platts). As a result in spite of the lower sales volume in 2011 and a higher Canadian dollar, royalty revenue was only slightly below 2010. Until 2009, iron ore prices had been negotiated annually with IOC's customers with prices being denominated in U.S. dollars.  In early 2010, the world's major iron ore producers transitioned to index-based shorter term pricing, breaking a 40-year tradition of benchmark annual pricing. The index-based pricing is premised on daily spot iron ore indices adjusted by factors such as freight, and quality. Effective in the fourth quarter of the year, the pricing, which had been based on the previous quarter's spot prices, has been changed to the current quarter's spot prices. The Canadian dollar remained strong against the U.S. dollar averaging $1.01 against $0.97 in 2010.

The Unitholders' consolidated net income for the year ended December 31, 2011 was $209.3 million or $3.27 per unit compared to $214.1 million or $3.34 per unit in 2010.  Equity earnings from IOC amounted to $124.0 million compared to $129.4 million in 2010.

IOC Developments

On May 6, 2010, IOC announced the resumption of its expansion program, with a proposed $435 million investment to increase its annual concentrate production capacity by 4 million tonnes by 2012.  The investment was the first stage of a three-stage expansion program that could increase concentrate annual capacity by at least 8 million tonnes resulting in a capacity to produce 26 to 30 million tonnes of concentrate pending final scoping of the third stage.  The first stage comprised an overland conveyor to remove bottlenecks in the current ore delivery system, a fourth autogenous grinding mill to increase primary grinding capacity and associated mine and rail equipment.

The commissioning of the new primary crusher and conveyor system commenced on November 30, 2011. On February 8, 2011, IOC announced the restart of the second stage of its expansion program which can increase IOC's annual concentrate capacity by 1.3 million tonnes. IOC will invest $289 million during the second stage to expand its magnetite processing facility and add new spiral lines to the gravity separation circuit. The second stage will also include the purchase of additional mining equipment, railway cars and a locomotive, as well as upgrades at the Wabush terminal sub-substation.  The third stage scope is still under study. On August 16, 2011, IOC announced it would undertake a study to evaluate options to increase concentrate production to 50 million tonnes from 2016, as well as consider the pathway for further expansions beyond this capacity.

The re-evaluation of reserves during the year (after mining 33 million tonnes) resulted in a decrease of 115 million tonnes to 1,374 million tonnes at year-end. Resources totaled 2,463 million tonnes. Revisions to pit designs transferred 61 million tonnes of reserves to resources, with mineral resources increasing by 91 million tonnes due primarily to the transfer from reserves.  It is anticipated that further pit design work will reverse this reserve to resource transfer in 2012. Details of IOC's reserves and resources are provided in the LIORC Annual Information Form.

Proposed Tax Changes

On July 20, 2011, the Ministry of Finance announced proposed amendments to the Income Tax Act concerning stapled securities. Under the proposal, when debt and equity are stapled together and trade as a unit, the interest on the debt portion of the stapled security would not be deductible in computing income for tax purposes. The announcement has an effective date of July 20, 2012. The directors are studying the effect of this announcement on LIORC, while they await the details of the proposed legislation.

Outlook

Consensus forecasts for iron ore markets in 2012 expect that prices will remain near current levels for the first half of the year with higher levels expected in the second half. With the commissioning of phase two of the expansion, IOC should have substantially increased production in 2012 and expects to be able to sell all the iron ore it can produce. The Canadian dollar remains firm and, if it continues to trade around par or above against its U.S. counterpart, it will negatively affect our results but should only marginally offset the gains from pricing and increased volume expected.

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

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

Bruce C. Bone
President and Chief Executive Officer
March 7, 2012

Corporate Structure

On July 1, 2010 Labrador Iron Ore Royalty Income Fund (the "Fund") completed its conversion to a corporation named Labrador Iron Ore Royalty Corporation ("LIORC" or the "Corporation") pursuant to a plan of arrangement (the "Arrangement"). Effective on the closing of the Arrangement and related transactions, the Corporation now directly owns and operates, along with its subsidiary, the businesses which were held and operated by the Fund prior to the closing of the Arrangement.  The Corporation is also the successor by amalgamation under the Arrangement of Labrador Mining Company Limited, formerly a wholly-owned subsidiary of the Fund.

Prior to the conversion to the Corporation, there were 32 million trust units issued and outstanding. Under the Arrangement, the Fund distributed $248,000,000 of 12.08% subordinated notes to its unitholders and unitholders exchanged their units of the Fund for common shares of the Corporation. Each unitholder received one common share and one $7.75 12.08% subordinated note for each unit held. The Corporation 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 the Corporation to service interest payments on the $248 million of notes held by the Unitholders, with any excess after expenses and working capital requirements being distributed in the form of dividends.

Effective on July 1, 2011, the Corporation completed the subdivision of the stapled units on a two-for-one basis.  All common share and per common share amounts including comparative information have been restated to reflect the two-for-one subdivision. Following completion of the subdivision, the number of outstanding common shares and subordinated note receipts represented by stapled units are increased from 32 million to 64 million and each stapled unit consists of (a) one subordinated note receipt representing a $3.875 principal amount of subordinated notes of the Corporation and entitled to interest payments of $0.468 per annum, and (b) one common share of the Corporation.

Seven Directors are responsible for the governance of the Corporation and also serve as directors of Hollinger-Hanna. The Directors, in addition to managing the affairs of the Corporation and Hollinger-Hanna, oversee the Corporation's interests in IOC. Two of the seven Directors sit on the board of IOC and the four independent Directors serve as members of the Audit, Nominating and Compensation Committees. Scotia Managed Companies Administration Inc. pursuant to an administration agreement acts as the administrator of the Corporation and Hollinger-Hanna.

Taxation

The Corporation is a taxable corporation. Dividend income received from IOC and Hollinger-Hanna is received tax free while royalty income is subject to income tax and Newfoundland royalty tax.  Expenses of the Corporation include $30 million a year in interest payments relating to the $248 million of notes held by the Corporation plus interest on any bank loans. Hollinger-Hanna is a taxable corporation.

Income Taxes

Distributions to a Unitholder that are paid 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 2011 were "eligible dividends" under the Income Tax Act.

Review of Operations

Iron Ore Company of Canada

The income of the Corporation is entirely dependent on IOC as the only assets of the Corporation 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-Îles, 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-Îles, 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 2011 sales totaled 13.2 million tonnes comprised of 4.5 million tonnes of iron ore concentrate and 8.7 million tonnes of iron ore pellets. Production in 2011 was 8.7 million tonnes of pellets and 4.8 million tonnes of concentrate. This was lower than budget due to some mine equipment problems and severe weather conditions during the winter months, IOC generated ore sales revenues of $2,335 million in 2011 (2010 - $2,420 million). IOC sales traditionally have been approximately 35% in Europe, 35% in North America and 25% in Asia with minor amounts to other areas. The strong market in Asia with some weakness in North America and Europe resulted in more sales to Asia in 2011.


Selected IOC Financial Information

      2011  2010  2009  2008  2007
               ($ in thousands)   
Operating Revenues     2,443,195  2,521,935  1,144,2041  2,199,908  1,014,843
Cash flow from operating activities     946,240    911,637    42,450  1,195,472  218,315
Net income2     826,677  863,226  215,254  567,122  206,2673
Capital expenditures     647,209  237,977  190,467  262,861  175,874
                   

1 Revenue in 2009 was reduced by idling of pellet machines and a shut down of Carol Lake operations from July 7 to August 10.
2 Net income includes unrealized foreign exchange gains before tax on U.S. debt translation of ($4,122) in 2011, $10,033 in 2010, $11,494 in 2009, $8,643 in 2008, and $31,639 in 2007. 2011 and 2010 presented in accordance with IFRS.
Revenue in 2007 was negatively affected by the strike by IOC's unionized work force which closed down all production facilities from March 9 until April 27.


IOC Royalty

The Corporation 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 the Corporation 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 2011, the average royalty (net of the 20% tax) had been approximately $87.6 million per year and in 2011 the net royalty was $128.6 million (2010 - $130.1 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 Corporation directly and through its wholly owned subsidiary, 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 produced and 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 2011, Hollinger-Hanna received a total of $1.3 million in commissions from IOC (2010 - $1.5 million).

Quarterly Distributions

Distributions of $2.25 per unit, including special distributions of $1.25 per unit, were declared in 2011 (2010 - $1.25 per unit). These distributions were allocated as follows:

      
PeriodPaymentDividend
Income
Interest
Income
DistributionTotal
Distribution
EndedDateper UnitPer UnitPer Unit($ Million)
      
Mar. 31, 2011Apr. 25, 2011$  0.133$ 0.117$ 0.250$ 16.0
Special DistributionApr. 25, 20110.500-0.50032.0
Jun.  30, 2011Jul. 25, 20110.133   0.1170.25016.0
Special Distribution    Jul. 25, 20110.125  -0.1258.0
Sep. 30, 2011Oct. 25, 20110.133   0.1170.25016.0
Special Distribution    Oct. 25, 20110.500-0.50032.0
Dec. 31, 2011Jan. 25, 20120.133   0.1170.25016.0
Special Distribution     Jan. 25, 20120.125-0.1258.0
      
Distribution to Unitholders -2011                $ 1.782  $ 0.468        $  2.25        $144.0
Mar. 31, 2010Apr. 25, 2010  $  0.125  $ 0.125      $ 0.250         $ 16.0
Special DistributionApr. 25, 2010      0.125  -      0.125    8.0
Jun.  30, 2010Jul. 25, 2010      0.150     0.100      0.250  16.0
Special Distribution    Jul. 25, 2010  0.125    -      0.125     8.0
Sep. 30, 2010Oct. 25, 2010  0.133     0.117      0.250  16.0
Special Distribution    Oct. 25, 2010  0.250  -      0.250  16.0
Dec. 31, 2010Jan. 25, 2011    0.133     0.117      0.250  16.0
Special Distribution     Jan. 25, 2011    0.750  -      0.750  48.0
      
Distribution to Unitholders -2010  $ 1.791$ 0.459$  2.25$ 144.0

      

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.

Management's Discussion and Analysis

The following is a discussion of the consolidated financial condition and results of operations of the Corporation for the years ended December 31, 2011 and 2010.  This discussion should be read in conjunction with the Consolidated Financial Statements of the Corporation and notes thereto for the years ended December 31, 2011 and 2010.  This information is prepared in accordance with International Financial Reporting Standards ("IFRS") as issued by the International Accounting Standards Board ("IASB") and all amounts are shown in Canadian dollars unless otherwise indicated.

On July 1, 2011 the 2-for-1 subdivision of the stapled units, approved by the holders of stapled units (the "Unitholders") on May 30, 2011, became effective. The stapled units started trading on a split basis on the Toronto Stock Exchange on June 28, 2011. Accordingly, all per unit figures in this report are based on 64 million units outstanding, with all prior per unit figures being restated.

Transition to International financial reporting standards

The 2011 consolidated financial statements of the Corporation are prepared in accordance with IFRS as issued by the IASB and are the Corporation's first annual financial statements prepared in accordance with IFRS. Prior to the adoption of IFRS, the financial statements were prepared in accordance with Canadian Generally Accepted Accounting Principles ("Canadian GAAP").

IFRS are premised on a conceptual framework similar to Canadian GAAP. However, significant differences exist in certain matters of recognition, measurement and disclosure. The adoption had a small impact on the consolidated balance sheets and statements of comprehensive income. The overall impact was to reduce its retained earnings by $22.0 million at January 1, 2010 and to increase 2010 comprehensive income by $2.5 million. For the year ended December 31, 2011, the Corporation's share of comprehensive income from IOC is $4.0 million lower than would have been reported under Canadian GAAP. The change to IFRS has no impact on the Corporation's royalty and commission income and no impact on cash flows for the year.

General

The Corporation is dependent on the operations of IOC. IOC's earnings and cash flows are affected by the volume and mix 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.

Liquidity and Capital Resources

Operating cash flow of the Corporation is sourced entirely from IOC through the Corporation's 7% royalty, 10 cents commission per tonne and dividends from its 15.10% equity interest in IOC. The Corporation 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 Corporation has a $50 million revolving credit facility with a term ending September 18, 2014 with provision for annual one-year extensions.  No amount is currently drawn under this facility leaving $50.0 million available to provide for any capital required by IOC or requirements of the Corporation.

Prior to the July 1, 2010 conversion of LIORC from an income trust, the net income of the Unitholders was the same as the trust's net income. Since the Unitholders now own the $248 million LIORC subordinated notes directly, the net income of the Unitholders consists of the net income of LIORC plus the interest paid on the LIORC subordinated notes. Thus 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 $29,952,000 ($0.468 per stapled unit) interest on the subordinated notes for each quarter and the year ended December 31, 2011, respectively.


Operating Results

The following table summarizes the Corporation's 2011 operating results as compared to 2010 results.

Revenue          2011     2010
IOC royalties (net of 20% Newfoundland royalty tax)                 $128,584,113            $130,140,944
IOC commissions          1,334,301     1,481,702
Other          482,845     239,625
           130,401,259      131,862,271
Expenses                 
Administrative expenses          2,121,968     3,045,583
Interest expense:                 
   Credit facility          495,365     374,996
   Subordinated notes                        29,952,000                 14,976,000
Income taxes expense - current          29,844,763     31,819,348
           62,414,096     50,215,927
Net Income before undernoted items          67,987,163     81,646,344
Non cash revenue (expense)                 
Equity earnings in IOC          124,015,087     129,388,281
Deferred income taxes          (7,934,000)     (6,315,000)
Amortization          (4,753,868)     (5,604,783)
           111,327,219     117,468,498
                  
Net income for the year                  $179,314,382             $199,114,842
Other comprehensive (loss) income                       (4,916,000)                    129,000
Comprehensive income for the year                 $174,398,382           $199,243,842


Sales were constrained by lower than expected concentrate production due to mine equipment problems and weather related operating problems in the winter months. In 2011, approximately 32% of IOC's concentrate production was sold as concentrate while the remaining production was converted into pellets at IOC's pelletizing plant before sale. IOC's pellet sales were lower year over year in 2011 as pellet production was curtailed in order to perform extensive maintenance work at the pellet plant, meet contractual commitments for concentrate and take advantage of higher margins on spot sales of concentrate.  Sales to IOC's traditional markets (North America and Europe) represented 61% of IOC's shipments in 2011. Iron ore prices were very strong in the first six months of 2011 due to the market recovery in the advanced economies and solid growth in the emerging and developing economies particularly in the Asian-Pacific region. In the last half of the year, Europe's sovereign debt problems and tightening credit policies of the Chinese government moderated iron ore demand and iron ore spot prices, especially in the fourth quarter.  Despite struggling in the second half of 2011, the spot price index of seaborne iron ore rose 15% year over year to average $169.20 per dry metric ton CFR China in 2011 (according to Platts). As a result in spite of the lower sales volume in 2011 and a higher Canadian dollar, royalty revenue was only slightly below 2010. Until 2009, iron ore prices had been negotiated annually with IOC's customers with prices being denominated in U.S. dollars.  In early 2010, the world's major iron ore producers transitioned to index-based shorter term pricing, breaking a 40-year tradition of benchmark annual pricing. The index-based pricing is premised on daily spot iron ore indices adjusted by factors such as freight, and quality. Effective in the fourth quarter of the year, the pricing, which had been based on the previous quarter's spot prices, has been changed to the current quarter's spot prices. The Canadian dollar remained strong against the U.S. dollar averaging $1.01 against $0.97 in 2010.

The decrease in administrative expenses of $0.9 million was mainly due to reorganization costs included in 2010 expenses. Current income taxes represent federal and provincial income taxes payable by the Corporation on IOC royalties, net of interest, royalty taxes and administrative expenses.  The Corporation's share of IOC's earnings amounted to $124.0 million as compared to $129.4 million in 2010. The decrease in earnings resulted mainly from lower sales volume in 2011 offset by spot price increases from last year's level. The other comprehensive loss for 2011 represents the Corporation's share of the actuarial losses for employee pension and benefit plans at IOC for the year offset by a reduction in the plans' future minimum funding requirement as a result of additional contributions made by IOC.

The operating cash flow of the Corporation is dependent on the royalty, commission and dividend payments from IOC. Royalty payments to the Corporation 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 and market conditions.

It is IOC's policy to declare annual dividends, the amounts of which vary according to the estimated profits and cash flows for the year. The Corporation's share of IOC's dividends amounted to $60.2 million ($0.94 per unit) in 2011 as compared to $74.0 million ($1.16 per unit) in 2010.

Fourth quarter sales at 3.9 million tonnes were below 2010 levels. As a result, the lower sales volume in 2011 and a higher Canadian dollar, produced royalty income of $38.3 million (2010 - $53.7 million). Adjusted cash flow from operations was $23.4 million ($0.37 per unit) compared to 2010 of $31.9 million ($0.50 per unit). Production in the fourth quarter was adversely affected by mine equipment problems and weather related operating problems.


Selected Consolidated Financial Information

The following table sets out financial data from a Unitholder's perspective for the three years ended December 31, 2011, 2010 and 2009. (See note 1 to the financial statements.)

     Years Ended December 31(3)
Description    2011 2010 2009
     (in millions except per Unit information)
Revenue    $162.5 $164.4 $77.0
Net Income(1)    $209.3         $214.1     $75.1
Net Income per Unit(1)    $3.27             $3.34       $1.18
Adjusted Cash Flow(1) (2)    $158.1         $170.6      $58.3
Adjusted Cash Flow per Unit(1) (2)    $2.47             $2.67       $0.91
Total Assets    $669.0         $658.1   $514.3
Cash Distribution per Unit    $2.25             $2.25     $1.00
Number of  Units outstanding (millions)       64.0              64.0        64.0
Notes:(1)Includes interest income for the year ended December 31, 2011 of $29,952,000 or $0.468 per stapled
unit (2010 includes $14,976,000 or $0.234 per stapled unit) on the subordinated notes of the
Corporation.
 (2)"Adjusted cash flow" ( see below)
 (3)2011 and 2010 presented in accordance with IFRS


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

 RevenueNet
Income
Net
Income
per Unit(1)
Adjusted Cash
Flow(2)
 Adjusted Cash
Flow
per Unit(1) (2)
Distributions
Declared
per Unit(1)
 (in millions except per Unit information
2011       
First Quarter(3)$30.7$38.9$0.61$48.0(5)$0.75$0.75
Second Quarter(3)$38.1$48.2$0.75$23.0 $0.36$0.375
Third Quarter(3)$54.9$76.3$1.19    $63.7(6)$0.99$0.75
Fourth Quarter(3)$38.8$45.9$0.72$23.4 $0.37$0.375
2010(4)       
First Quarter$16.7$15.7$0.25$22.3(7)$0.35$0.375
Second Quarter$52.5$69.3$1.08$30.5 $0.48$0.375
Third Quarter(3) $40.9$65.4$1.02    $85.9(8)$1.34$0.50
Fourth Quarter(3) $54.3$63.7$0.99$31.9 $0.50$1.00
Notes:(1)Per unit amounts have been retroactively adjusted to reflect the two-for-one share subdivision completed on July 1, 2011        
 (2)"Adjusted cash flow" (see below)        
 (3)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 consolidated financial statements plus (where applicable) the $7,488,000 ($0.117 per unit) interest on the subordinated notes        
 (4)
Restated to conform with IFRS
 (5)Includes a $29.0 million IOC dividend
 (6)Includes a $31.2 million IOC dividend
 (7)Includes a $11.5 million IOC dividend
 (8)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 share/unit was $1.91(1) for 2011 (2010 - $2.43(1)).  Cumulative standardized cash flow from inception of the Corporation is $16.13 per unit and total cash distributions since inception are $15.26 per unit, for a payout ratio of 95%.

(1) Excludes interest on subordinated notes paid directly to unitholders of $0.468 per unit and $0.234 per unit respectively.

"Adjusted cash flow" is defined as cash flow from operating activities after adjustments 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 standardized cash flow from operating activities to adjusted cash flow.

           2011     2010
Standardized cash flow from operating activities                  $121,934,296             $155,920,875
Changes in amounts receivable, accounts and interest payable and
income taxes payable
          6,220,128     (309,816)
Adjusted cash flow (1)          $128,154,424     $155,611,059
Adjusted cash flow per share/unit (1)                            $2.00                       $2.43
   (1)    The year ended December 31, 2011 excludes interest on subordinated notes paid directly to
unitholders of $29,952,000 or $0.468 per unit (2010 - $14,976,000 or $0.234 per unit).


Disclosure Controls and Internal Control over Financial Reporting

The President and CEO and the CFO are responsible for establishing and maintaining disclosure controls and procedures and internal control over financial reporting for the Corporation.  Two officers serve as directors of IOC and IOC provides monthly reports on its operations to them.  The Corporation also relies on financial information provided by IOC, including its audited financial statements, and other material information provided to the President and CEO, the Executive Vice President and Secretary and the CFO by officers of IOC.  IOC is a private corporation, and its financial statements are not publicly available.

The Directors are informed of all material information relating to the Corporation and its subsidiary by the officers of the Corporation 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 Analyses, the Annual Information Form, any prospectuses and all press releases. An evaluation of the design and operating effectiveness of the Corporation's disclosure controls and procedures was conducted under the supervision of the CEO and CFO.  Based on their evaluation, they concluded that the Corporation's disclosure controls and procedures were effective in ensuring that all material information relating to the Corporation was accumulated and communicated for the year ended December 31, 2011.

The President 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 IFRS.  An evaluation of the design and operating effectiveness of the Corporation's internal control over financial reporting was conducted under the supervision of the CEO and CFO.  Based on their evaluation, they concluded that the Corporation's internal control over financial reporting was effective and that there were no material weaknesses therein for the year ended December 31, 2011.

No material change in the Corporation's internal control over financial reporting occurred during the year ended December 31, 2011.

Outlook

Consensus forecasts for iron ore markets in 2012 expect that prices will remain near current levels for the first half of the year with higher levels expected in the second half. With the commissioning of phase two of the expansion, IOC should have substantially increased production in 2012 and expects to be able to sell all the iron ore it can produce. The Canadian dollar remains firm and, if it continues to trade around par or above against its U.S. counterpart, it will negatively affect our results but should only marginally offset the gains from pricing and increased volume expected. 

Additional information

Additional information relating to the Corporation, including the Annual Information Form, is on SEDAR at www.sedar.com. Additional information is also available on the Corporation's website at www.labradorironore.com.

Bruce C. Bone
President and Chief Executive Officer
Toronto, Ontario
March 7, 2012

LABRADOR IRON ORE ROYALTY CORPORATION               
CONSOLIDATED BALANCE SHEETS                   
                     
                    
          As at
            December 31,   December 31,   January 1,
Canadian $           2011   2010   2010
                     
Assets                   
Current Assets                   
 Cash and cash equivalents         $  41,498,184    73,611,888   $  6,203,013
 Amounts receivable          40,669,780   51,420,285   24,987,043
 Income taxes recoverable          392,173   -    
Total Current Assets          82,560,137   125,032,173   31,190,056
                     
Non-Current Assets                   
Iron Ore Company of Canada ("IOC"),                   
 royalty and commission interests          287,131,292   291,885,160   297,489,943
Investment in IOC          299,280,483   241,161,657   185,588,091
Total Non-Current Assets          586,411,775   533,046,817   483,078,034
                     
Total Assets          $668,971,912  $   658,078,990  $  514,268,090
                     
                     
Liabilities and Shareholders'/Unitholders' Equity                   
Current Liabilities                   
 Accounts payable         $  8,419,389  $  10,482,603   $  5,233,229
 Income taxes payable          -   14,515,246   509,562
 Interest payable on subordinated notes           7,488,000   7,488,000   -
 Distributions payable to shareholders/unitholders          16,512,000   56,512,000   16,000,000
Total Current Liabilities          32,419,389   88,997,849   21,742,791
                     
Non-Current Liabilities                   
Deferred income taxes          114,830,000   107,709,000   101,373,000
Subordinated notes          248,000,000     248,000,000   -
Total Non-Current Liabilities          362,830,000     355,709,000   101,373,000
                     
Total Liabilities          395,249,389   444,706,849   123,115,791
                     
Equity                    
 Share capital/Trust units          69,708,147   69,708,147   317,708,147
 Retained earnings           219,001,376   147,934,994   73,444,152
 Accumulated other comprehensive income (loss)          (14,987,000)   (4,271,000)   -
            273,722,523   213,372,141   391,152,299
                     
Total Equity and Liabilities         $668,971,912  $     658,078,990  $  514,268,090
                     
                     
Approved by the Directors,                   
                     
                     
Bruce C. Bone          Alan R. Thomas        
Director          Director        

 

LABRADOR IRON ORE ROYALTY CORPORATION      
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME    
                    
                    
                    
         For the years ended
         December 31,
Canadian $         2011   2010
                    
Revenue                 
 IOC royalties         $  160,730,141    $  162,723,775
 IOC commissions          1,334,301     1,481,702
 Interest and other income           482,845     239,625
             162,547,287     164,445,102
Expenses                 
 Newfoundland royalty taxes          32,146,028     32,582,831
 Amortization of royalty and commission interests          4,753,868     5,604,783
 Administrative expenses           2,121,968     3,045,583
 Interest expense:                   
    Credit facility          495,365     374,996
    Subordinated notes          29,952,000     14,976,000
             69,469,229     56,584,193
                    
Income before equity earnings and income taxes          93,078,058     107,860,909
Equity earnings in IOC          124,015,087     129,388,281
                    
Income before income taxes           217,093,145     237,249,190
                  
Provision for income taxes                 
 Current           29,844,763     31,819,348
 Deferred          7,934,000     6,315,000
           37,778,763     38,134,348
                  
Net income for the year          179,314,382     199,114,842
                  
Other comprehensive income (loss)                   
 Share of other comprehensive income (loss) of IOC,                  
 net of taxes          (4,916,000)     129,000
                  
Comprehensive income for the year         $  174,398,382    $  199,243,842
                  
Net income per common share/unit (1)         $  2.80    $  3.11

 

(1)  Per share/unit amounts have been retroactively adjusted to reflect the two-for-one share subdivision completed on July 1, 2011.




LABRADOR IRON ORE ROYALTY CORPORATION      
CONSOLIDATED STATEMENTS OF CASH FLOWS      
                  
                    
                  
                    
             For the years ended
         December 31,
Canadian $            2011    2010
                  
Net inflow (outflow) of cash related                 
to the following activities                 
                        
Operating                   
 Net income for the year         $  179,314,382    $   199,114,842
 Items not affecting cash:                 
    Equity earnings in IOC            (124,015,087)     (129,388,281)
    Current income taxes          29,844,763     31,819,348
    Deferred income taxes          7,934,000     6,315,000
    Amortization of royalty and commission interests          4,753,868     5,604,783
    Interest expense          30,447,365     15,350,996
 Common share dividend from IOC          60,167,261     73,964,715
 Change in amounts receivable and accounts payable          8,687,291     (21,183,868)
 Interest paid           (30,447,365)     (7,863,000)
 Income taxes paid           (44,752,182)     (17,813,660)
 Cash flow from operating activities          121,934,296     155,920,875
                      
Financing                   
 Distributions paid to unitholders/shareholders            (154,048,000)     (88,512,000)
 Cash flow used in financing activities            (154,048,000)     (88,512,000)
                  
(Decrease)/increase in cash during the year          (32,113,704)     67,408,875
                  
Cash and cash equivalents, beginning of year          73,611,888     6,203,013
                    
Cash, end of year         $  41,498,184    $  73,611,888

 




LABRADOR IRON ORE ROYALTY CORPORATION        
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY      
                   
              Accumulated   
              other    
     Capital Trust Retained comprehensive   
Canadian $     stock units earnings income (loss) Total
                   
                   
Balance as at January 1, 2010     $  - $  317,708,147 $  73,444,152 $  - $  391,152,299
                   
Subordinated notes distributed to trust unitholders pursuant                  
to the Arrangement on July 1, 2010     -  (248,000,000)  -  -  (248,000,000)
Exchange of trust units for common shares on July 1, 2010     69,708,147  (69,708,147)  -  -  -
Net income for the year     -  -  199,114,842  -  199,114,842
Distributions/dividends declared to unitholders/shareholders     -  -  (129,024,000)  -  (129,024,000)
Share of other comprehensive income from investment in IOC     -  -  -  129,000  129,000
Transfer of actuarial gains(losses) on defined benefit plans           4,400,000  (4,400,000)  -
Balance as at December 31, 2010     69,708,147  -  147,934,994  (4,271,000)  213,372,141
                   
Net income for the year     -  -  179,314,382  -  179,314,382
Dividends declared to shareholders      -  -  (114,048,000)  -  (114,048,000)
Share of other comprehensive loss from investment in IOC     -  -     (4,916,000)  (4,916,000)
Transfer of actuarial gains(losses) on defined benefit plans           5,800,000  (5,800,000)  -
Balance as at December 31, 2011    $69,708,147 $  - $  219,001,376 $  (14,987,000) $  273,722,523

 


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Bruce C. Bone
President & Chief Executive Officer
(416) 863-7133
E-mail- investor.relations@labradorironore.com


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