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

November 1, 2012

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
        
Pellets2.772.24 7.376.41 8.71
Concentrates1.721.94 2.923.27 4.85
        
Total4.494.18 10.299.68 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.

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. Cash flow for the quarter was lower than last year as a result of lower royalty revenue and further because IOC did not pay a dividend this quarter (2011 - $31.2 million).

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.

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.

 RevenueNet
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

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 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: investor.relations@labradorironore.com


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