Labrador Iron Ore Royalty Corporation - Results for the Second Quarter Ended June 30, 2012

August 8, 2012

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:

 3 Months Ended
June 30,
2012
3 Months Ended
June 30,
2011
6 Months Ended
June 30,
2012
 6 Months Ended
June 30,
2011
                                                  (Unaudited)  
      
Revenue (in millions)$36.4$38.1$58.8 $68.8
Adjusted cash flow (in millions)$22.3$23.0$36.7 $71.0
Adjusted cash flow per unit$0.35$ 0.36$0.57 $  1.11
Net income (in millions)$ 36.8$ 48.2$ 59.8 $ 87.1
Net income per unit$  0.57$  0.75$  0.93 $  1.36
    

"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
June 30,
2012
3 Months Ended
June 30,
2011
 6 Months Ended
June 30,
2012
6 Months Ended
June 30,
2011
 Year
Ended
Dec. 31, 2011
        
Pellets2.741.90 4.594.17 8.71
Concentrates0.701.05 1.201.33 4.85
        
Total3.442.95 5.795.50 13.56
        

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.

 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)$36.4$36.8$0.57$22.3$0.35$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 $0.04(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.

 3 Months Ended
June 30, 2012
3 Months Ended
June 30, 2011
6 Months Ended
June 30, 2012
6 Months Ended
June 30, 2011
Standardized cash flow from operating activities$2,343,296$42,731,031$19,171,109$57,452,557
Excluding: changes in amounts receivable, accounts payable and income taxes payable12,477,896(27,229,486)2,557,205(1,417,676)
Adjusted cash flow(1)$14,821,192 $15,501,545 $21,728,314 $56,034,881 
Adjusted cash flow per unit(1)$0.23$0.24$0.34$0.88

(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

LABRADOR IRON ORE ROYALTY CORPORATION   
INTERIM CONDENSED CONSOLIDATED BALANCE SHEETS 
      
      
   
  As at
  June 30,  December 31, 
Canadian $ 2012 2011 
    (Unaudited)    
Assets    
Current Assets    
 Cash $27,645,293  $41,498,184 
 Amounts receivable (note 4) 36,541,047  40,669,780 
 Income taxes recoverable 6,173,958  392,173 
Total Current Assets 70,360,298  82,560,137 
        
Non-Current Assets      
Iron Ore Company of Canada ("IOC"),      
 royalty and commission interests  284,364,064  287,131,292 
Investment in IOC (note 5) 327,683,177  299,280,483 
Total Non-Current Assets 612,047,241  586,411,775 
        
Total Assets $682,407,539  $  668,971,912 
        
        
Liabilities and Shareholders' Equity      
Current Liabilities      
 Accounts payable $7,515,236  $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 31,515,236  32,419,389 
        
Non-Current Liabilities      
Deferred income taxes (note 6) 118,200,000  114,830,000 
Subordinated notes 248,000,000  248,000,000 
Total Non-Current Liabilities 366,200,000  362,830,000 
        
Total Liabilities 397,715,236  395,249,389 
        
Equity       
 Share capital  69,708,147  69,708,147 
 Retained earnings  230,806,156  219,001,376 
 Accumulated other comprehensive loss  (15,822,000)  (14,987,000) 
   284,692,303  273,722,523 
        
Total Equity and Liabilities $682,407,539  $  668,971,912 
      
      
      
Approved by the Directors,    
      
      
(signed) Bruce C. Bone(signed) Alan R. Thomas 
DirectorDirector   

 

LABRADOR IRON ORE ROYALTY CORPORATION   
INTERIM CONDENSED CONSOLIDATED STATEMENTS   
OF COMPREHENSIVE INCOME     
     
     
  For the Three Months 
  Ended June 30,
Canadian $ 2012 2011
  (Unaudited)
Revenue   
 IOC royalties $35,996,161  $37,754,213
 IOC commissions 337,774  290,334
 Interest and other income  93,949  104,172
   36,427,884  38,148,719
Expenses     
 Newfoundland royalty taxes 7,199,232  7,550,843
 Amortization of royalty and commission interests 1,425,808  1,112,870
 Administrative expenses  495,322  705,404
 Interest expense:     
   Credit facility 94,521  93,494
   Subordinated notes  7,488,000  7,488,000
   16,702,883  16,950,611
       
Income before equity earnings and income taxes 19,725,001  21,198,108
Equity earnings in IOC  18,174,251  30,431,486
       
Income before income taxes  37,899,252  51,629,594
       
Provision for income taxes      
 Current  6,329,617  6,809,433
 Deferred 2,275,772  4,102,000
   8,605,389  10,911,433
       
Net income for the period 29,293,863  40,718,161
       
Other comprehensive loss     
 Share of other comprehensive loss of IOC, net of tax (433,000)  (371,000)
       
Comprehensive income for the period $28,860,863  $40,347,161
       
Net income per common share $0.46  $0.64
      
 

 

LABRADOR IRON ORE ROYALTY CORPORATION   
INTERIM CONDENSED CONSOLIDATED STATEMENTS   
OF COMPREHENSIVE INCOME       
     
     
  For the Six Months Ended
  June 30, 
Canadian $ 2012 2011
    (Unaudited)  
Revenue   
 IOC royalties $58,006,234  $68,034,430
 IOC commissions 568,777  541,303
 Interest and other income  216,161  236,961
   58,791,172  68,812,694
Expenses     
 Newfoundland royalty taxes 11,601,247  13,606,886
 Amortization of royalty and commission interests 2,767,228  2,171,238
 Administrative expenses  1,079,382  1,105,556
 Interest expense:     
   Credit facility 188,014  185,959
   Subordinated notes  14,976,000  14,976,000
   30,611,871  32,045,639
       
Income before equity earnings and income taxes 28,179,301  36,767,055
Equity earnings in IOC (note 5) 29,379,694  49,682,954
       
Income before income taxes  57,558,995  86,450,009
       
Provision for income taxes (note 6)     
 Current  9,218,215  11,898,227
 Deferred 3,512,000  2,406,000
   12,730,215  14,304,227
       
Net income for the period 44,828,780  72,145,782
       
Other comprehensive loss     
 Share of other comprehensive loss of IOC, net of tax (835,000)  (743,000)
       
Comprehensive income for the period $43,993,780  $71,402,782
     
Net income per common share $0.70  $1.13
     
 

 

LABRADOR IRON ORE ROYALTY CORPORATION   
INTERIM CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
       
       
   
       
    For the Six Months Ended
    June 30,
Canadian $  2012 2011
      (Unaudited)  
Net inflow (outflow) of cash related   
 to the following activities   
       
Operating    
 Net income for the period $ 44,828,780  $ 72,145,782
 Items not affecting cash:   
  Equity earnings in IOC(29,379,694) (49,682,954)
  Current income taxes9,218,215 11,898,227
  Deferred income taxes3,512,000 2,406,000
  Amortization of royalty and commission interests2,767,228 2,171,238
  Interest expense15,164,014 15,161,959
 Common share dividend from IOC- 28,994,815
 Change in amounts receivable and accounts payable3,224,580 10,261,996
 Interest paid (15,164,014) (15,161,959)
 Income taxes paid (15,000,000) (20,742,547)
 Cash flow from operating activities19,171,109 57,452,557
       
Financing    
 Dividends paid to shareholders(33,024,000) (97,024,000)
 Cash flow used in financing activities(33,024,000) (97,024,000)
       
Decrease in cash, during the period(13,852,891) (39,571,443)
       
Cash, beginning of period41,498,184 73,611,888
       
Cash, end of period $ 27,645,293  $ 34,040,445
    

 

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, 2010 $69,708,147 $147,934,994 $(4,271,000) $213,372,141
Net income for the period - 72,145,782 - 72,145,782
Dividends declared to shareholders - (57,024,000) - (57,024,000)
Share of other comprehensive loss from investment in IOC - - (743,000) (743,000)
Balance as at June 30, 2011 69,708,147 163,056,776 (5,014,000) 227,750,923
         
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 - - (835,000) (835,000)
Balance as at June 30, 2012 $69,708,147 $230,806,156 $(15,822,000) $284,692,303

 

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

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


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