TORONTO, Aug. 8, 2012 /CNW/ - Labrador Iron Ore Royalty Corporation (TSX: LIF.UN) announced today its operation and cash flow results for the second quarter ended June 30, 2012.

Royalty income for the second quarter of 2012 amounted to $36.0 million as compared to $37.8 million for the second quarter of 2011. The unitholders' 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 $22.3 million or $0.35 per unit compared to last year's $23.0 million or $0.36 per unit.  Net income was $36.8 million or $0.57 per unit compared to $48.2 million or $0.75 per unit for the same period in 2011. Equity earnings from Iron Ore Company of Canada (IOC) amounted to $18.2 million or $0.28 per unit as compared to $30.4 million or $0.48 per unit in 2011.

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 $14,976,000 ($0.234 per stapled unit) interest on the subordinated notes for the three months and six months periods, respectively.

IOC production and sales volumes for the quarter were above last year's second quarter but were still somewhat affected by the commissioning of the new ore delivery system and the additional grinding mill. We reported last quarter that the commissioning, which started at the beginning of the year, was expected to be completed by mid-year. This has now occurred and we expect to see the resultant increased production in the third quarter. The lower revenue and cash flow for the quarter in spite of the increased sales volumes resulted from lower prices for iron ore in the quarter. Equity earnings from IOC were substantially lower in the quarter mainly due to the lower iron ore prices.

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

"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:

Proposed Tax Changes

On July 25, 2012 the Department of Finance released the proposed legislative amendments to the Income Tax Act concerning stapled securities originally announced on July 20, 2011. It appears that the effect of the legislative changes on the Corporation is to deny the deduction of interest on the $248 million subordinated notes after July 20, 2012. The Board of Directors has been considering the alternatives available to the Corporation and expects to call a meeting of the unitholders in the near future to consider a response to the legislative changes.

Outlook

With the commissioning of the new ore delivery system and the additional grinding mill completing the first phase of the IOC's expansion and phase two expected to be completed early next year, the increased production capacity bodes well for increased royalty revenue. Currently offsetting the gains expected from increased volumes is weakness in the pricing of iron ore. The general market consensus seems to be that prices will recover later in the year.

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

Bruce C. Bone
President and Chief Executive Officer
August 8, 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 one expansion, we expect the first two quarters' sales to total less than 40% of sales for 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 second quarter of 2012 amounted to $36.0 million as compared to $37.8 million for the second quarter of 2011. The unitholders' 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 $22.3 million or $0.35 per unit compared to last year's $23.0 million or $0.36 per unit.  Net income was $36.8 million or $0.57 per unit compared to $48.2 million or $0.75 per unit for the same period in 2011. Equity earnings from IOC amounted to $18.2 million or $0.28 per unit as compared to $30.4 million or $0.48 per unit in 2011.

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 $14,976,000 ($0.234 per stapled unit) interest on the subordinated notes for the three months and six months periods, respectively.

IOC production and sales volumes for the quarter were above last year's second quarter but were still somewhat affected by the commissioning of the new ore delivery system and the additional grinding mill. We reported last quarter that the commissioning, which started at the beginning of the year, was expected to be completed by mid-year. This has now occurred and we expect to see the resultant increased production in the third quarter. The lower revenue and cash flow for the quarter in spite of the increased sales volumes resulted from lower prices for iron ore in the quarter. Equity earnings from IOC were substantially lower in the quarter mainly due to the lower iron ore prices.

The six months results were affected by the same factors as the second quarter and, in addition, the adjusted cash flow was substantially lower because IOC did not pay a dividend in the first quarter of 2012 (2011 - $29 million).

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

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 $0.04⁽¹⁾ for the quarter (2011 - $0.67⁽¹⁾). Cumulative standardized cash flow from inception of the Corporation is $16.43 per unit and total cash distributions since inception are $15.90 per unit, 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 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.

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

Proposed Tax Changes

On July 25, 2012 the Department of Finance released the proposed legislative amendments to the Income Tax Act concerning stapled securities originally announced on July 20, 2011. It appears that the effect of the legislative changes on the Corporation is to deny the deduction of interest on the $248 million subordinated notes after July 20, 2012. This would increase LIORC's taxes payable for 2012 by approximately $4.0 million and $8.7 million annually thereafter. The Board of Directors has been considering the alternatives available to the Corporation and expects to call a meeting of the unitholders in the near future to consider a response to the legislative changes.

Outlook

With the commissioning of the new ore delivery system and the additional grinding mill completing the first phase of the IOC's expansion and phase two expected to be completed early next year, the increased production capacity bodes well for increased royalty revenue. Currently offsetting the gains expected from increased volumes is weakness in the pricing of iron ore. The general market consensus seems to be that prices will recover later in the year.

Bruce C. Bone
President and Chief Executive Officer
Toronto, Ontario
August 8, 2012

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

SOURCE: Labrador Iron Ore Royalty Corporation