Labrador Iron Ore Royalty Corporation - Results for the second quarter ended June 30, 2013

August 7, 2013

TORONTO, Aug. 7, 2013 /CNW/ - Labrador Iron Ore Royalty Corporation (TSX: LIF) announced today its operation and cash flow results for the second quarter ended June 30, 2013.

Royalty income for the second quarter of 2013 amounted to $41.7 million as compared to $36.0 million for the second quarter of 2012. The shareholders' 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 $23.4 million or $0.37 per share compared to last year's $22.3 million or $0.35 per unit.  Equity earnings from Iron Ore Company of Canada (IOC) amounted to $19.3 million or $0.30 per share as compared to $18.2 million or $0.28 per unit in 2012. Net income was $39.2 million or $0.61 per share compared to $36.8 million or $0.57 per unit for the same period in 2012. Earnings and cash flow for the quarter, although higher than last year were reduced due to higher income taxes, a result of the elimination of interest expense on the subordinated notes that were cancelled last September (see the reorganization referred to below).

Increased IOC production for the quarter as compared to last year reflected the successful completion and integration of the first phase of the expansion program into the operations with April and May production achieving annual rates of 19 and 20 million tonnes respectively. The annual maintenance shutdown was scheduled for early June and went well but upon resumption of operations some ore quality issues were encountered, which were further aggravated by the wildfires in the area.  Although all assets including the expansion facilities operated well, a number of factors caused June production to be below expected levels. The fires in the area did not directly affect IOC Labrador operations, but required the town of Wabush to be evacuated which impacted employee availability. Additionally, the resulting air quality in the area had an effect on productivity requiring stoppages in the mine and an evacuation of the processing plants for periods of time during June and July.  There were also storms that resulted in power outages which impacted operations in the same period. IOC reports that the ore quality issues are being managed and that the fires are now behind them and they expect August production to return to May levels. The June production restrictions did not negatively affect sales in the second quarter but the lower production over recent months will reduce product available for shipment in the third quarter.

At a special meeting held on September 28, 2012, the holders of stapled units approved an exchange of their subordinated notes for common shares of Labrador Iron Ore Royalty Corporation ("LIORC") and a consolidation of common shares. The $248 million subordinated notes were cancelled and each holder of common shares ended up holding the same number of common shares as before the transactions, and LIORC continued to have 64 million common shares outstanding. Interest on the subordinated notes ceased to accrue after September 30, 2012. For the purposes of this report, all references to shareholders and per share figures may refer to holders of stapled units and per stapled units, respectively, as applicable. Prior to the transactions, the net income attributed to the holders of stapled units consisted of the net income of LIORC plus the interest paid on the subordinated notes. Thus 2012 net income, adjusted cash flow and per share figures referred to in this report use the totals according to the financial statements plus the $7,488,000 ($0.117 per stapled unit) and $14,976,000 ($0.234 per stapled unit) interest on the subordinated notes for the three months and six months periods, respectively.

Results for the three months and six months ended June 30 are summarized below:

 3 Months Ended
June 30,
2013
3 Months Ended
June 30,
2012
6 Months Ended
June 30,
2013
 6 Months Ended
June 30,
2012
      
 (Unaudited)  
      
Revenue (in millions)$42.2$36.4$68.6 $58.8
Adjusted cash flow (in millions)$23.4 $22.3 $37.8  $36.7 
Adjusted cash flow per share/unit$0.37$0.35$0.59 $0.57
Net income (in millions)$39.2$36.8$60.9 $59.8
Net income per share/unit$0.61$0.57$0.95 $0.93
    

"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 shareholders.

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

 3 Months Ended
June 30,
2013
3 Months Ended
June 30,
2012
 6 Months Ended
June 30,
2013
6 Months Ended
June 30,
2012
 Year
Ended
Dec. 31, 2012
        
        
Pellets2.582.74 4.304.59 9.90
Concentrates2.280.70 3.181.20 4.22
        
Total4.863.44 7.485.79 14.12
        

IOC Expansion

Phase two of IOC's concentrate expansion program (CEP2), which was temporarily suspended in February 2013, was approved for completion by IOC on August 5. CEP2 will increase concentrate production capacity from 22.0 to 23.3 million tonnes per annum. At the time of suspension, project completion was above 80%, and available capacity was 22.7 mtpa.  It is expected that the project will be completed in the first quarter of 2014 with the full 23.3 million tonne capacity becoming available in the second quarter. To date $393 million has been spent with a further $86 million expenditure required to complete the project.

Potential Sale by Rio Tinto

On April 18, 2013, a letter was sent to shareholders advising about Rio Tinto's potential sale of its interest in IOC and the Board's consideration of strategic alternatives available to the Corporation. At this time we understand from press reports that several expressions of interest have been received by Rio Tinto, which they are in the process of evaluating.

Outlook

With the successful integration of phase 1 of the expansion program and with the price of iron ore seeming to have stabilized from lower levels and IOC expecting to sell all the iron ore it can produce, the balance of the year should see satisfactory results.

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

Bruce C. Bone
President and Chief Executive Officer
August 7, 2013

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 2012 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 2012 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 second quarter of 2013 amounted to $41.7 million as compared to $36.0 million for the second quarter of 2012. The shareholders' 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 $23.4 million or $0.37 per share compared to last year's $22.3 million or $0.35 per unit.  Equity earnings from IOC amounted to $19.3 million or $0.30 per share as compared to $18.2 million or $0.28 per unit in 2012. Net income was $39.2 million or $0.61 per share compared to $36.8 million or $0.57 per unit for the same period in 2012. Earnings and cash flow for the quarter, although higher than last year were reduced due to higher income taxes, a result of the elimination of interest expense on the subordinated notes that were cancelled last September (see the reorganization referred to below). Comprehensive income was positively affected by our share of a $70 million reduction in IOC's unfunded pension liability due to an actuarial revaluation of the liability using current long term interest rates.

Increased IOC production for the quarter as compared to last year reflected the successful completion and integration of the first phase of the expansion program into the operations with April and May production achieving annual rates of 19 and 20 million tonnes respectively. The annual maintenance shutdown was scheduled for early June and went well but upon resumption of operations some ore quality issues were encountered, which were further aggravated by the wildfires in the area.  Although all assets including the expansion facilities operated well, a number of factors caused June production to be below expected levels. The fires in the area did not directly affect IOC Labrador operations, but required the town of Wabush to be evacuated which impacted employee availability. Additionally, the resulting air quality in the area had an effect on productivity requiring stoppages in the mine and an evacuation of the processing plants for periods of time during June and July.  There were also storms that resulted in power outages which impacted operations in the same period. IOC reports that the ore quality issues are being managed and that the fires are now behind them and they expect August production to return to May levels. The June production restrictions did not negatively affect sales in the second quarter but the lower production over recent months will reduce product available for shipment in the third quarter.

The six months results were affected by the operating factors that affected the second quarter and the usual winter operating problems in the first quarter. Administrative expenses were higher mainly due to financial and legal expenses incurred to examine the implications of Rio Tinto's proposed sale of its IOC holdings, and to advise Labrador Iron Ore Royalty Corporation ("LIORC") on possible action going forward, should a sale result. Amortization expense is lower this year, because of the increase in ore reserves resulting from last year's resource assessment program at IOC. The increase in income taxes this year is the result of the interest on the previously outstanding $248 million notes no longer being payable.

At a special meeting held on September 28, 2012, the holders of stapled units approved an exchange of their subordinated notes for common shares of LIORC and a consolidation of common shares. The $248 million subordinated notes were cancelled and each holder of common shares ended up holding the same number of common shares as before the transactions, and LIORC continued to have 64 million common shares outstanding. Interest on the subordinated notes ceased to accrue after September 30, 2012. For the purposes of this report, all references to shareholders and per share figures may refer to holders of stapled units and per stapled units, respectively, as applicable. Prior to the transactions, the net income attributed to the holders of stapled units consisted of the net income of LIORC plus the interest paid on the subordinated notes. Thus 2012 net income, adjusted cash flow and per share figures referred to in this report use the totals according to the financial statements plus the $7,488,000 ($0.117 per stapled unit) and $14,976,000 ($0.234 per stapled unit) interest on the subordinated notes for the three months and six months periods, respectively.

The following table sets out quarterly revenue, net income and cash flow data for 2013, 2012 and 2011.

 RevenueNet
Income
Net Income
per
Share/Unit(1)
Adjusted Cash
Flow(2)
Adjusted Cash Flow
per Share/Unit(1) (2)
Distributions
Declared
per Share/Unit(1)
 (in millions except per Share/Unit information)         
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
2012      
First Quarter(3)$22.4$23.0$0.36$14.4$0.23$0.375
Second Quarter(3)$36.4$36.8$0.57$22.3$0.35$0.375
Third Quarter (3)$32.6$29.7$0.47$18.5$0.28$0.375
Fourth Quarter$32.8$32.3$0.50$19.9$0.31$0.375
2011      
First Quarter(3)$30.7$38.9$0.61   $48.0 (4)$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 (5)$0.99$0.75
Fourth Quarter(3)$38.8$45.9$0.72$23.4$0.37  $0.375
Notes:(1)Per share 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)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        
 (4)Includes a $29.0 million IOC dividend        
 (5)Includes a $31.2 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 was $0.24(1) for the quarter (2012 - $0.04(1)). Cumulative standardized cash flow from inception of the Corporation is $17.86 per share and total cash distributions since inception are $17.91 per share, for a payout ratio of 100%.

"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 shareholders.

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

 3 Months Ended
June 30, 2013
3 Months Ended
June 30, 2012
6 Months Ended
June 30, 2013
6 Months Ended
June 30, 2012
Standardized cash flow from operating activities$15,133,753$2,343,296$29,240,622$19,171,109
Excluding: changes in amounts receivable, accounts payable and income taxes payable8,313,16712,477,8968,534,9152,557,205
Adjusted cash flow$23,446,920    $14,821,192(1)$37,775,537 $21,728,314(1) 
Adjusted cash flow per share$0.37                    $0.23(1)$0.59              $0.34(1)

(1) Excludes note interest on subordinated notes paid directly to shareholders of $7,488,000 ($0.117 per unit) and $14,976,000 ($0.234 per unit) for the three months and six months periods, respectively.


Liquidity

The Corporation has a $50 million revolving credit facility to September 18, 2016 with provision for annual one-year extensions.  No amounts are currently drawn under this facility (2012 - nil) leaving $50 million available to provide for any capital required by IOC or other Corporation requirements.

IOC Expansion

Phase two of IOC's concentrate expansion program (CEP2), which was temporarily suspended in February 2013, was approved for completion by IOC on August 5. CEP2 will increase concentrate production capacity from 22.0 to 23.3 million tonnes per annum. At the time of suspension, project completion was above 80%, and available capacity was 22.7 mtpa.  It is expected that the project will be completed in the first quarter of 2014 with the full 23.3 million tonne capacity becoming available in the second quarter. To date $393 million has been spent with a further $86 million expenditure required to complete the project.

Outlook

With the successful integration of phase 1 of the expansion program and with the price of iron ore seeming to have stabilized from lower levels and IOC expecting to sell all the iron ore it can produce, the balance of the year should see satisfactory results.

Bruce C. Bone
President and Chief Executive Officer
Toronto, Ontario
August 7, 2013

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
  June 30,  December 31, 
Canadian $ 2013 2012 
    (Unaudited)    
Assets      
Current Assets      
 Cash $8,164,043  $26,923,421 
 Amounts receivable 44,032,900  29,308,484 
 Income taxes recoverable -  3,130,130 
Total Current Assets 52,196,943  59,362,035 
        
Non-Current Assets      
Iron Ore Company of Canada ("IOC"),      
 royalty and commission interests  281,273,346  283,263,500 
Investment in IOC 388,070,875  351,770,591 
Total Non-Current Assets 669,344,221  635,034,091 
        
Total Assets $721,541,164  $694,396,126 
        
        
Liabilities and Shareholders' Equity      
Current Liabilities      
 Accounts payable $9,046,514  $6,167,138 
 Dividend payable 24,000,000  24,000,000 
 Taxes Payable 179,995  - 
Total Current Liabilities 33,226,509  30,167,138 
        
Non-Current Liabilities      
 Deferred income taxes  126,080,000  121,360,000 
Total Liabilities 159,306,509  151,527,138 
        
Shareholders' Equity      
 Share capital  317,708,147  317,708,147 
 Retained earnings  257,629,508  244,758,841 
 Accumulated other comprehensive loss  (13,103,000)  (19,598,000) 
   562,234,655  542,868,988 
        
Total Liabilities and Shareholders' Equity $721,541,164  $694,396,126 

 

LABRADOR IRON ORE ROYALTY CORPORATION   
INTERIM CONDENSED CONSOLIDATED STATEMENTS   
OF COMPREHENSIVE INCOME        
     
     
  For the Three Months 
  Ended June 30,
Canadian $ 2013 2012
  (Unaudited)
Revenue   
 IOC royalties $41,696,680  $35,996,161
 IOC commissions 478,318  337,774
 Interest and other income  36,565  93,949
   42,211,563  36,427,884
Expenses     
 Newfoundland royalty taxes 8,339,336  7,199,232
 Amortization of royalty and commission interests 1,040,787  1,425,808
 Administrative expenses  841,241  495,322
 Interest expense:     
   Credit facility 93,493  94,521
   Subordinated notes  -  7,488,000
   10,314,857  16,702,883
       
Income before equity earnings and income taxes 31,896,706  19,725,001
Equity earnings in IOC  19,339,009  18,174,251
       
Income before income taxes  51,235,715  37,899,252
       
Provision for income taxes      
 Current  9,511,969  6,329,617
 Deferred 2,527,000  2,275,772
   12,038,969  8,605,389
       
Net income for the period 39,196,746  29,293,863
       
Other comprehensive gain/(loss)     
 Share of other comprehensive income/(loss) of IOC that will not be      
 reclassified subsequently to profit or loss (net of taxes)  7,032,000  (433,000)
       
Comprehensive income for the period $46,228,746  $28,860,863
       
Net income per share $0.61  $0.46
      
      

LABRADOR IRON ORE ROYALTY CORPORATION   
INTERIM CONDENSED CONSOLIDATED STATEMENTS   
OF COMPREHENSIVE INCOME        
     
     
  For the Six Months Ended
  June 30, 
Canadian $ 2013 2012
    (Unaudited)  
Revenue   
 IOC royalties $67,797,885  $58,006,234
 IOC commissions 735,969  568,777
 Interest and other income  94,934  216,161
   68,628,788  58,791,172
Expenses     
 Newfoundland royalty taxes 13,555,741  11,601,247
 Amortization of royalty and commission interests 1,990,154  2,767,228
 Administrative expenses  1,706,294  1,079,382
 Interest expense:     
   Credit facility 185,959  188,014
   Subordinated notes  -  14,976,000
   17,438,148  30,611,871
       
Income before equity earnings and income taxes 51,190,640  28,179,301
Equity earnings in IOC  28,703,284  29,379,694
       
Income before income taxes  79,893,924  57,558,995
       
Provision for income taxes      
 Current  15,405,257  9,218,215
 Deferred 3,618,000  3,512,000
   19,023,257  12,730,215
       
Net income for the period 60,870,667  44,828,780
       
Other comprehensive gain/(loss)     
 Share of other comprehensive income/(loss) of IOC that will not be      
 reclassified subsequently to profit or loss (net of taxes)  6,495,000  (835,000)
       
Comprehensive income for the period $67,365,667  $43,993,780
       
Net income per share $0.95  $0.70

 

LABRADOR IRON ORE ROYALTY CORPORATION      
INTERIM CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
       
       
   
       
    For the Six Months Ended
    June 30,
Canadian $  2013 2012
      (Unaudited)  
Net inflow (outflow) of cash related   
 to the following activities   
       
Operating    
 Net income for the period $60,870,667  $44,828,780
 Items not affecting cash:     
  Equity earnings in IOC (28,703,284)  (29,379,694)
  Current income taxes 15,405,257  9,218,215
  Deferred income taxes 3,618,000  3,512,000
  Amortization of royalty and commission interests 1,990,154  2,767,228
  Interest expense 185,959  15,164,014
 Change in amounts receivable and accounts payable (11,845,040)  3,224,580
 Interest paid  (185,959)  (15,164,014)
 Income taxes paid  (12,095,132)  (15,000,000)
 Cash flow from operating activities 29,240,622  19,171,109
         
Financing      
 Dividends paid to shareholders (48,000,000)  (33,024,000)
 Cash flow used in financing activities (48,000,000)  (33,024,000)
         
Decrease in cash, during the period (18,759,378)  (13,852,891)
         
Cash, beginning of period 26,923,421  41,498,184
         
Cash, end of period $8,164,043  $27,645,293

 

LABRADOR IRON ORE ROYALTY CORPORATION    
INTERIM CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY 
     
   Accumulated 
   other  
 CapitalRetainedcomprehensive  
Canadian $ stockearningsincome (loss)Total
   (Unaudited)    
     
Balance as at December 31, 2011 $69,708,147 $219,001,376 $(14,987,000) $273,722,523
Net income for the period - 44,828,780 - 44,828,780
Dividends declared to shareholders - (33,024,000) - (33,024,000)
Share of other comprehensive loss from investment in IOC (net of taxes) - - (835,000) (835,000)
Balance as at June 30, 2012 69,708,147 230,806,156 (15,822,000) 284,692,303
         
Balance as at December 31, 2012 317,708,147 244,758,841 (19,598,000) 542,868,988
Net income for the period - 60,870,667 - 60,870,667
Dividends declared to shareholders  - (48,000,000) - (48,000,000)
Share of other comprehensive income from investment in IOC (net of taxes) - - 6,495,000 6,495,000
Balance as at June 30, 2013 $69,708,147 $257,629,508 $(13,103,000) $562,234,655

 

 

The complete consolidated financial statements for the second quarter ended June 30, 2013, 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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