Labrador Iron Ore Royalty Corporation - Results for the first quarter ended March 31, 2014

May 6, 2014

TORONTO, May 6, 2014 /CNW/ - Royalty income for the first quarter of 2014 amounted to $26.9 million as compared to $26.1 million for the first quarter of 2013. The shareholders' adjusted cash flow (see below for definition) for the first quarter was $27.7 million or $0.43 per share as compared to $14.4 million or $0.22 per share for the same period in 2013. The higher cash flow for the quarter reflected an IOC dividend of which our share was $12.6 million or $0.20 per share. Net income was $27.1 million or $0.42 per share compared to $21.7 million or $0.34 per share for the same period in 2013. Equity earnings from Iron Ore Company of Canada ("IOC") amounted to $12.6 million or $0.20 per share as compared to $9.4 million or $0.15 per share in 2013.

IOC production in the first quarter is normally reduced due to the problems associated with winter weather conditions and production is usually 15-20% of annual production. The 2014 first quarter was subjected to disruptively cold weather associated with a "polar vortex" weather pattern, which caused an external power outage and unplanned equipment downtime. As a result, saleable production was 12% below last year's first quarter. Sales for the quarter, which were slightly below last year's quarter, were restricted by the availability of product and IOC had to declare a temporary force majeure. Despite the weather challenges, IOC established new records for February ex-pit mine production and Ore Delivery System crushed ore. Average U.S. dollar index prices for concentrate in the quarter were about 11% below 2013 fourth quarter and the average for the year. The lower price was largely offset by higher pellet premiums and the weakness of the Canadian dollar against its U.S counterpart.

Results for the three months ended March 31 are summarized below:

(in millions except per share information) 2014 2013
  (Unaudited)
     
Revenue $27.2 $26.4
Adjusted cash flow $27.7 $14.4
Adjusted cash flow per share $0.43 $0.22
Net income $27.1 $21.7
Net income per share $0.42 $0.34

"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 dividends to shareholders.

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

     3 Months
Ended
Mar. 31,
2014
 3 Months
Ended
Mar. 31,
2013
 Year
Ended
Dec. 31,
2013
          
Pellets    1.88 1.72 8.60
Concentrates(1)    0.63 0.90 6.20
          
Total    2.51 2.62     14.80
  (1)     Excludes third party ore sales

Outlook

The IOC expansion program should be completed during the second quarter of the year. On the assumption that production for the balance of the year gradually approaches the nominal annual capacity of 23.3 million tonnes, 2014 concentrate production could exceed 18 million tonnes, if weather and other factors do not intervene. Prices are currently lower than the 2013 average prices, but this is partially offset by the weaker Canadian dollar. IOC expects to be able to sell all the concentrate and pellets it can produce during the year. Increased production and sales should result in increased royalty revenue for Labrador Iron Ore Royalty Corporation and increased cash flow for IOC.

Respectfully submitted on behalf of the Directors of Labrador Iron Ore Royalty Corporation,
Bruce C. Bone
President and Chief Executive Officer
May 6, 2014

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 Labrador Iron Ore Royalty Corporation's ("LIORC" or the "Corporation") 2013 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 2013 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 first quarter sales of IOC are traditionally adversely affected by the closing of the St. Lawrence Seaway and general winter operating conditions and are usually 15% - 20% of the annual volume, with the balance spread fairly evenly throughout the other three quarters.  Because of the size of individual shipments some quarters may be affected by the timing of the loading of ships that can be delayed from one quarter to the next.

Royalty income for the first quarter of 2014 amounted to $26.9 million as compared to $26.1 million for the first quarter of 2013. The shareholders' adjusted cash flow (see below for definition and calculation) for the first quarter was $27.7 million or $0.43 per share as compared to $14.4 million or $0.22 per share for the same period in 2013. The higher cash flow for the quarter reflected an IOC dividend of which our share was $12.6 million or $0.20 per share. Net income was $27.1 million or $0.42 per share compared to $21.7 million or $0.34 per share for the same period in 2013. Equity earnings from IOC amounted to $12.6 million or $0.20 per share as compared to $9.4 million or $0.15 per share in 2013.

IOC production in the first quarter is normally reduced due to the problems associated with winter weather conditions and production is usually 15-20% of annual production. The 2014 first quarter was subjected to disruptively cold weather associated with a "polar vortex" weather pattern, which caused an external power outage and unplanned equipment downtime. As a result, saleable production was 12% below last year's first quarter. Sales for the quarter, which were slightly below last year's quarter, were restricted by the availability of product and IOC had to declare a temporary force majeure. Despite the weather challenges, IOC established new records for February ex-pit mine production and Ore Delivery System crushed ore. Average U.S. dollar index prices for concentrate in the quarter were about 11% below 2013 fourth quarter and the average for the year. The lower price was largely offset by higher pellet premiums and the weakness of the Canadian dollar against its U.S counterpart.

The following table sets out quarterly revenue, net income and cash flow data for 2014, 2013 and 2012.

 RevenueNet
Income
Net
Income
per Share/Unit
Adjusted Cash
Flow(1)
Adjusted Cash Flow
per Share/Unit (1)
Distributions
Declared
per Share/Unit
 (in millions except per Share/Unit information) 
2014      
First Quarter$27.2$27.1$0.42$27.7(2)$0.43$0.400
       
2013
      
First Quarter$26.4$21.7$0.34$14.4$0.22$0.375
Second Quarter$42.2$39.2$0.61$23.4$0.37$0.375
Third Quarter$36.1$41.2$0.65$20.0$0.31$0.375
Fourth Quarter$34.6$46.7$0.73$57.6(3)$0.90$0. 750
       
2012
      
First Quarter(4)$22.4$23.0$0.36$14.4$0.23$0.375
Second Quarter(4)$36.4$36.8$0.57$22.3$0.35$0.375
Third Quarter (4)$32.6$29.7$0.47$18.5$0.28$0.375
Fourth Quarter$32.8$33.0$0.51$19.9$0.31$0.375
       
 Notes:(1)"Adjusted cash flow" (see below) 
    
  (2)Includes a $12.6 million IOC dividend
    
  (3)Includes a $40.0 million IOC dividend
    
  (4)Prior to the fourth quarter of 2012, 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

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 was $0.40 for the quarter (2013 - $0.22). Cumulative standardized cash flow from inception of the Corporation is $19.24 per share and total cash distributions since inception are $18.69 per share, for a payout ratio of 97%.

"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 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 dividends to shareholders.

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

  3 Months Ended
Mar. 31, 2014
  3 Months Ended
Mar. 31, 2013
Standardized cash flow from operating activities $25,848,565  $14,106,869
Excluding: changes in amounts receivable, accounts payable and
income taxes payable
 1,834,869  243,144
Adjusted cash flow $27,683,434   $14,350,013 
Adjusted cash flow per share $0.43  $0.22

Liquidity and Capital Resources

The Corporation has $30.5 million in cash as at March 31, 2014 with total current assets of $57.7 million and working capital of $26.7 million. During the quarter, the Corporation earned operating cash flows of $25.8 million with the cash balance declining $22.1 million as a result of dividends paid.

Cash balances consist of deposits in Canadian dollars with Canadian chartered banks. Accounts receivable primarily consist of royalty payments from IOC. Royalty payments are received in U.S. dollars and converted to Canadian dollars on receipt, usually 25 days after the quarter end. The Corporation does not normally attempt to hedge this short term foreign currency exposure.

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 pay cash dividends 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, 2016 with provision for annual one-year extensions.  No amount is currently drawn under this facility (2013 - nil) leaving $50.0 million available to provide for any capital required by IOC or requirements of the Corporation.

Outlook

The IOC expansion program should be completed during the second quarter of the year. On the assumption that production for the balance of the year gradually approaches the nominal annual capacity of 23.3 million tonnes, 2014 concentrate production could exceed 18 million tonnes, if weather and other factors do not intervene. Prices are currently lower than the 2013 average prices, but this is partially offset by the weaker Canadian dollar. IOC expects to be able to sell all the concentrate and pellets it can produce during the year. Increased production and sales should result in increased royalty revenue for LIORC and increased cash flow for IOC.

Bruce C. Bone
President and Chief Executive Officer
Toronto, Ontario
May 6, 2014

Notice:

The following unaudited interim condensed consolidated financial statements of the Corporation have been prepared by and are the responsibility of the Corporation's management. The Corporation's independent auditor has not reviewed these financial statements.

LABRADOR IRON ORE ROYALTY CORPORATION        
INTERIM CONDENSED CONSOLIDATED BALANCE SHEETS        
         
  As at
  March 31,  December 31,
Canadian $ 2014 2013
  (Unaudited)
Assets      
Current Assets      
 Cash $30,462,489 $52,613,924
 Amounts receivable  25,492,111  35,818,924
 Income taxes recoverable  1,714,447  
Total Current Assets  57,669,047  88,432,848
       
Non-Current Assets      
Iron Ore Company of Canada ("IOC"),      
 royalty and commission interests  278,794,443  279,576,792
Investment in IOC  407,064,512  407,622,445
Total Non-Current Assets  685,858,955  687,199,237
       
Total Assets $743,528,002 $775,632,085
       
       
Liabilities and Shareholders' Equity      
Current Liabilities      
 Accounts payable $5,378,722 $7,508,145
 Dividend payable  25,600,000  48,000,000
 Income taxes payable    8,317,812
Total Current Liabilities  30,978,722  63,825,957
       
Non-Current Liabilities      
 Deferred income taxes  128,180,000  128,478,000
Total Liabilities  159,158,722  192,303,957
       
Shareholders' Equity      
 Share capital  317,708,147  317,708,147
 Retained earnings  274,745,133  273,225,981
 Accumulated other comprehensive loss  (8,084,000)  (7,606,000)
   584,369,280  583,328,128
       
Total Liabilities and Shareholders' Equity $743,528,002 $775,632,085
       

LABRADOR IRON ORE ROYALTY CORPORATION
INTERIM CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
           
  For the three months ended
  March 31,
Canadian $ 2014 2013
  (Unaudited)
Revenue      
 IOC royalties $26,852,444 $26,101,205
 IOC commissions  242,090  257,651
 Interest and other income  98,642  58,369
   27,193,176  26,417,225
Expenses      
 Newfoundland royalty taxes  5,370,489  5,216,405
 Amortization of royalty and commission interests  782,349  949,367
 Administrative expenses  431,754  865,053
 Interest expense:      
   Credit facility  101,835  92,466
   6,686,427  7,123,291
       
Income before equity earnings and income taxes  20,506,749  19,293,934
Equity earnings in IOC  12,567,402  9,364,275
       
Income before income taxes   33,074,151  28,658,209
       
Provision for income taxes      
 Current  6,171,999  5,893,288
 Deferred  (217,000)  1,091,000
   5,954,999  6,984,288
       
Net income for the period  27,119,152  21,673,921
       
Other comprehensive loss      
 Share of other comprehensive loss of IOC that will not be      
 reclassified subsequently to profit or loss (net of taxes)  (478,000)  (537,000)
       
Comprehensive income for the period $26,641,152 $21,136,921
       
Net income per share  $0.42 $0.34
       

LABRADOR IRON ORE ROYALTY CORPORATION
INTERIM CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 
  For the three months ended
  March 31,
Canadian $ 2014 2013
  (Unaudited)
Net inflow (outflow) of cash related      
 to the following activities      
       
Operating      
 Net income for the period $27,119,152 $21,673,921
 Items not affecting cash:      
  Equity earnings in IOC  (12,567,402)  (9,364,275)
  Current income taxes  6,171,999  5,893,288
  Deferred income taxes  (217,000)  1,091,000
  Amortization of royalty and commission interests  782,349  949,367
  Interest expense  101,835  92,466
 Common share dividend from IOC  12,566,335  
 Change in amounts receivable and accounts payable  8,197,390  (136,432)
 Interest paid  (101,835)  (92,466)
 Income taxes paid  (16,204,258)  (6,000,000)
 Cash flow from operating activities  25,848,565  14,106,869
       
Financing      
 Dividends paid to shareholders  (48,000,000)  (24,000,000)
 Cash flow used in financing activities  (48,000,000)  (24,000,000)
       
Decrease in cash, during the period  (22,151,435)  (9,893,131)
       
Cash, beginning of period  52,613,924  26,923,421
       
Cash, end of period $30,462,489 $17,030,290
       

LABRADOR IRON ORE ROYALTY CORPORATION
INTERIM CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY        
 
 
Canadian $
 
Share
capital
 
Retained
earnings
 Accumulated
other
comprehensive
loss
 
Total
  (Unaudited)
             
Balance as at December 31, 2012 $317,708,147 $244,395,841 $(17,598,000) $544,505,988
Net income for the period    21,673,921     21,673,921
Dividends declared to shareholders    (24,000,000)     (24,000,000)
Share of other comprehensive loss from investment in IOC (net of taxes)      (537,000)  (537,000)
Balance as at March 31, 2013 $317,708,147 $242,069,762 $(18,135,000) $541,642,909
             
Balance as at December 31, 2013  317,708,147  273,225,981  (7,606,000)  583,328,128
Net income for the period    27,119,152    27,119,152
Dividends declared to shareholders    (25,600,000)    (25,600,000)
Share of other comprehensive loss from investment in IOC (net of taxes)      (478,000)  (478,000) 
Balance as at March 31, 2014 $317,708,147 $274,745,133$ (8,084,000) $584,369,280

The complete consolidated financial statements for the first quarter ended March 31, 2014, including the 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

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