Labrador Iron Ore Royalty Corporation - Results for the Third Quarter Ended September 30, 2011

November 3, 2011

TORONTO, Nov. 3, 2011 /CNW/ - Labrador Iron Ore Royalty Corporation ("LIORC") (TSX: LIF.UN) announced the results of its operations for the third quarter ended September 30, 2011.

On July 1, 2011 the 2-for-1 split of the stapled units approved by the unitholders on May 30, 2011, became effective. The stapled units started trading on a split basis on the Toronto Stock Exchange on June 28, 2011. Accordingly, all per unit figures in this report are based on 64 million units outstanding, with all prior per unit figures being restated.

Royalty income for the third quarter of 2011 amounted to $54.4 million as compared to $40.6 million for the third quarter of 2010. 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 $63.7 million or $0.99 per unit as compared to $85.9 million or $1.34 per unit for the same period in 2010. Net income was $76.3 million or $1.19 per unit compared to $65.4 million or $1.02 per unit for the same period in 2010. Equity earnings from IOC amounted to $47.0 million or $0.73 per unit as compared to $39.2 million or $0.61 per unit in 2010. The lower cash flow for the quarter reflected an IOC dividend of which LIORC's share was $31.2 million or $0.49 per unit as compared to $62.2 million or $0.97 per unit in 2010.

Prior to the July 1, 2010 conversion of Labrador Iron Ore Royalty Corporation ("LIORC") from an income trust, the net income of the unitholders was the same as the trust's net income. Since the unitholders now own the $248 million LIORC subordinated notes directly, the net income of the unitholders consists of the net income of LIORC plus the interest paid on the LIORC subordinated notes. Thus 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 period ended September 30, 2011, respectively.

The increased royalty revenue for the third quarter, as compared to the 2010 quarter, is mainly due to the increased production in the quarter that resulted in IOC having more product available for sale. The 2010 quarter was negatively affected by the timing of shipments, which were deferred until the fourth quarter.

Results for the three months and nine months ended September 30 are summarized below:

 3 Months
Ended
Sept. 30,
2011
3 Months
Ended
Sept. 30,
2010
9 Months
Ended
Sept. 30,
2011
9 Months
Ended
Sept. 30,
2010
 
 (Unaudited) 
Revenue (in millions)$ 54.9$ 40.9$ 123.7$ 110.1 
Adjusted cash flow (in millions)$ 63.7$ 85.9$ 134.7$ 138.7 
Adjusted cash flow per unit$ 0.99$ 1.34$ 2.10$ 2.17 
Net income (in millions)$ 76.3$ 65.4$ 163.4$ 150.4 
Net income per unit$ 1.19$ 1.02$ 2.55$ 2.35 

"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 Canadian GAAP or IFRS. The Directors believe that adjusted cash flow is a useful analytical measure as it better reflects cash available for distributions to unitholders.

Iron Ore Company of Canada

Third quarter production was substantially improved from the first two quarters of the year as further progress was made in the stabilization and improvement of production capability. Production was 4% higher than the corresponding 2010 quarter and 61% and 24% higher than the first and second quarters of 2011, respectively. The problems that existed during the first part of the year have largely been remedied and, with Phase 1 of the expansion project nearing completion, production going forward should be substantially increased.  The increased production will enable IOC to take advantage of the current market demand for iron ore.

The Concentrator Expansion Project remains on schedule with Phase 1 expected to be completed by year-end, raising the concentrator capacity by 4Mt/a. Phase 2 completion, which would further raise capacity by 1.3Mt/a, is expected by the end of 2012.

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

 3 Months
Ended
Sept. 30,
2011
3 Months
Ended
Sept. 30,
2010
9 Months
Ended
Sept. 30,
2011
9 Months
Ended
Sept. 30,
2010
Year
Ended
Dec. 31,
2010
 
Pellets2.242.416.418.0812.05 
Concentrates1.940.80(1)3.272.19(1)3.02(1) 
Total4.183.219.6810.2715.07 

(1) Excludes third party ore sales

Proposed Tax Changes

On July 20, 2011, the Ministry of Finance announced proposed amendments to the Income Tax Act concerning stapled securities. Under the proposal, when debt and equity are stapled together and trade as a unit, the interest on the debt portion of the stapled security would not be deductible in computing income for tax purposes. The announcement has an effective date of July 20, 2012 with a deferral to July 20, 2016 under some circumstances. The directors are studying the effect of this announcement on LIORC, while they await the details of the proposed legislation.

Outlook

Although iron ore prices have retreated from their recent highs, the general market consensus seems to be that barring a major meltdown in Europe, the price should recover and remain closer to 2011 average levels going forward. The completion of the first phase of the Concentrator Expansion Project will have a positive effect on LIORC's future royalty revenue. The strength of the Canadian dollar against its U.S. counterpart has at least temporarily abated, which is positive for LIORC's results. We expect the final quarter of 2011 and next year to be positive for LIORC.

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

  
Bruce C. Bone
President and Chief Executive Officer
November 3, 2011
 

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 2010 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 2010 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. 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.

On July 1, 2011 the 2-for-1 split of the stapled units approved by the unitholders on May 30, 2011, became effective. The stapled units started trading on a split basis on the Toronto Stock Exchange on June 28, 2011. Accordingly, all per unit figures in this report (except distributions declared) are based on 64 million units outstanding, with all prior per unit figures being restated.

Royalty income for the third quarter of 2011 amounted to $54.4 million as compared to $40.6 million for the third quarter of 2010. 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 $63.7 million or $0.99 per unit as compared to $85.9 million or $1.34 per unit for the same period in 2010. Net income was $76.3 million or $1.19 per unit compared to $65.4 million or $1.02 per unit for the same period in 2010. Equity earnings from IOC amounted to $47.0 million or $0.73 per unit as compared to $39.2 million or $0.61 per unit in 2010. The lower cash flow for the quarter reflected an IOC dividend of which LIORC's share was $31.2 million or $0.49 per unit as compared to $62.2 million or $0.97 per unit in 2010.

Prior to the July 1, 2010 conversion of Labrador Iron Ore Royalty Corporation ("LIORC") from an income trust, the net income of the unitholders was the same as the trust's net income. Since the unitholders now own the $248 million LIORC subordinated notes directly, the net income of the unitholders consists of the net income of LIORC plus the interest paid on the LIORC subordinated notes. Thus 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 period ended September 30, 2011, respectively.

The increased royalty revenue for the third quarter, as compared to the 2010 quarter, is mainly due to the increased production in the quarter that resulted in IOC having more product available for sale. The 2010 quarter was negatively affected by the timing of shipments, which were deferred until the fourth quarter.

The nine month results while improved from 2010 were negatively affected by the lower production in the first half of the year, which resulted in IOC shipping less product in 2011 year to date. .  This was more than offset by the higher prices in effect in 2011.

The following table sets out quarterly revenue, net income and cash flow data for 2011, 2010 and 2009.

 RevenueNet
Income
Net
Income
per unit(1)
Adjusted
Cash
Flow(2)
Adjusted
Cash Flow
per unit(1)(2)
Distributions
Declared
per unit(1)
 (in millions except per Unit information)
2011      
First Quarter(3)$ 30.7$ 38.9$ 0.61$ 48.0(6)$ 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(7)$ 0.99                  $ 0.75
       
2010(4)      
First Quarter(5)$ 16.7$ 15.7$ 0.25$ 22.3(8)$ 0.35$ 0.375
Second Quarter(5)$ 52.5$ 69.3$ 1.08   $ 30.5$ 0.48$ 0.375
Third Quarter(3) (5)$ 40.9$ 65.4$ 1.02$ 85.9(9)$ 1.34                  $ 0.50
Fourth Quarter(3)$ 54.3$ 62.8$ 0.98$ 31.9$ 0.50$ 1.00
2009      
First Quarter$ 16.6$ 16.5$ 0.26$ 11.1$ 0.17$ 0.25
Second Quarter$ 19.7$ 17.8$ 0.28$ 12.6$ 0.20$ 0.25
Third Quarter$ 15.8$ 13.6$ 0.21$ 18.8(10)$ 0.29$ 0.25
Fourth Quarter$ 24.9$ 27.2$ 0.43$ 15.8$ 0.25$ 0.25

(1) Per unit 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) 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
(4) Except as noted, the figures have not been restated to conform with IFRS
(5) Restated to conform with IFRS
(6) Includes a $29.0 million IOC dividend
(7) Includes a $31.2 million IOC dividend
(8) Includes a $11.5 million IOC dividend
(9) Includes a $62.2 million IOC dividend
(10) Includes a $8.2 million IOC dividend

Iron Ore Company of Canada

Third quarter production was substantially improved from the first two quarters of the year as further progress was made in the stabilization and improvement of production capability. Production was 4% higher than the corresponding 2010 quarter and 61% and 24% higher than the first and second quarters of 2011, respectively. The problems that existed during the first part of the year have largely been remedied and, with Phase 1 of the expansion project nearing completion, production going forward should be substantially increased.  The increased production will enable IOC to take advantage of the current market demand for iron ore.

The Concentrator Expansion Project remains on schedule with Phase 1 expected to be completed by year-end, raising the concentrator capacity by 4Mt/a. Phase 2 completion, which would further raise capacity by 1.3Mt/a, is expected by the end of 2012.

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 $0.81(1) for the quarter (2010 - $0.46). Cumulative standardized cash flow from inception of the Corporation is $15.93 per unit and total cash distributions since inception are $15.01(1) per unit, for a payout ratio of 94%.

(1) Excludes interest on subordinated notes paid directly to unitholders of $0.117 and $0.585 respectively.

"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 Canadian GAAP or 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, 2011
3 Months
Ended
Sept. 30, 2010
9 Months
Ended
Sept. 30, 2011
9 Months
Ended
Sept. 30, 2010
 
Standardized cash flow from operating activities$ 51,667,679$ 29,759,422$ 109,120,236$ 67,661,394 
Excluding: changes in amounts receivable, accounts payable and income taxes payable4,520,12248,612,8883,102,44663,523,464 
Adjusted cash flow(1)$ 56,187,801$ 78,372,310$ 112,222,682$ 131,184,858 
Adjusted cash flow per unit(1)$ 0.88$ 1.22$ 1.75$ 2.05 

(1) Three months and nine months ended September 30, 2011 exclude interest on subordinated notes paid directly to unitholders of $7,488,000 ($0.117 per unit) and $22,464,000 ($0.351 per unit) 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 (2010 - nil) leaving $50 million available to provide for any capital required by IOC or other Corporation requirements.

International Financial Reporting Standards ("IFRS")

The Corporation adopted IFRS effective January 1, 2010 and has prepared the current interim financial statements using IFRS Accounting Policies. Prior to the adoption of IFRS, the financial statements were prepared in accordance with Canadian Generally Accepted Accounting Principles ("Canadian GAAP"). The Corporation's financial statements for the year ending December 31, 2011 will be the first annual financial statements that comply with IFRS.

IFRS are premised on a conceptual framework similar to Canadian GAAP. However, significant differences exist in certain matters of recognition, measurement and disclosure. The adoption had a small impact on the consolidated balance sheets and statements of comprehensive income. The overall impact was to reduce the carrying value of the Corporation's investment in IOC and its retained earnings and accumulated other comprehensive income by $11.8 million at January 1, 2010 and $13.7 million at December 31, 2010. For the three and nine month periods ended September 30, 2011, the Corporation's share of net income and comprehensive income from IOC is $0.1 million lower than would have been reported under Canadian GAAP. The change to IFRS has no impact on the Corporation's royalty and commission income and no impact on cash flows for the quarter.

Proposed Tax Changes

On July 20, 2011, the Ministry of Finance announced proposed amendments to the Income Tax Act concerning stapled securities. Under the proposal, when debt and equity are stapled together and trade as a unit, the interest on the debt portion of the stapled security would not be deductible in computing income for tax purposes. The announcement has an effective date of July 20, 2012 with a deferral to July 20, 2016 under some circumstances. The directors are studying the effect of this announcement on LIORC, while they await the details of the proposed legislation.

Outlook

Although iron ore prices have retreated from their recent highs, the general market consensus seems to be that barring a major meltdown in Europe, the price should recover and remain closer to 2011 average levels going forward. The completion of the first phase of the Concentrator Expansion Project will have a positive effect on LIORC's future royalty revenue. The strength of the Canadian dollar against its U.S. counterpart has at least temporarily abated, which is positive for LIORC's results. We expect the final quarter of 2011 and next year to be positive for LIORC.

Bruce C. Bone
President and Chief Executive Officer
Toronto, Ontario
November 3, 2011


LABRADOR IRON ORE ROYALTY CORPORATION      
CONSOLIDATED BALANCE SHEETS      
       
       
       
  As at  
  September 30, December 31,  
Canadian $ 2011 2010  
  (Unaudited)  
Assets      
Current      
 Cash $69,196,124 $73,611,888  
 Amounts receivable 55,532,950 51,420,285  
   124,729,074 125,032,173  
       
Iron Ore Company of Canada ("IOC"),      
 royalty and commission interests 288,400,632 291,885,160  
       
Investment in IOC 283,121,441 247,925,657  
       
  $696,251,147 $664,842,990  
       
       
Liabilities and Shareholders' Equity      
Current      
 Accounts payable $11,328,677 $10,482,603  
 Income taxes payable 14,679,391 14,515,246  
 Interest payable on subordinated notes 7,488,000 7,488,000  
 Distributions payable to shareholders 40,512,000 56,512,000  
  74,008,068 88,997,849  
       
Subordinated notes 248,000,000 248,000,000  
       
Deferred income taxes 112,830,000 108,690,000  
  434,838,068 445,687,849  
       
Equity      
 Share capital 69,708,147 69,708,147  
 Retained earnings 197,097,932 153,724,994  
 Accumulated other comprehensive loss (5,393,000) (4,278,000)  
  261,413,079 219,155,141  
  $696,251,147 $664,842,990  
       




LABRADOR IRON ORE ROYALTY CORPORATION
       
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME       
        
        
        
   For the Nine Months 
   Ended September 30, 
Canadian $  2011  2010 
   (Unaudited) 
Revenue       
 IOC royalties $122,456,324 $109,069,404 
 IOC commissions  952,746  1,009,820 
 Interest and other income  344,851  73,297 
   123,753,921  110,152,521 
Expenses       
 Newfoundland royalty taxes  24,491,265  21,851,956 
 Amortization of royalty and commission interests  3,484,528  4,221,168 
 Administrative expenses  1,631,063  2,622,164 
 Interest expense:       
  Credit facility  280,480  280,479 
  Subordinated notes  22,464,000  7,488,000 
   52,351,336  36,463,767 
        
Income before equity earnings and income taxes  71,402,585  73,688,754 
Equity earnings in IOC  96,667,045  90,672,626 
        
Income before income taxes   168,069,630  164,361,380 
        
Provision for income taxes       
 Current  22,831,692  20,387,750 
 Deferred  4,329,000  1,078,000 
   27,160,692  21,465,750 
        
Net income for the period  140,908,938  142,895,630 
        
Other comprehensive loss       
 Share of other comprehensive loss of IOC  (1,115,000)  (789,000) 
        
Comprehensive income for the period $139,793,938 $142,106,630 
        
Net income per common share/unit (1) $2.20 $2.23 
        
(1)Per share/unit amounts have been retroactively adjusted to reflect the two-for-one share subdivision completed on July 1, 2011.        
        
        

LABRADOR IRON ORE ROYALTY CORPORATION       
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME       
        
        
        
   For the Three Months 
   Ended September 30, 
Canadian $  2011  2010 
   (Unaudited) 
Revenue       
 IOC royalties $54,421,894 $40,591,042 
 IOC commissions  411,443  314,834 
 Interest and other income  107,890  24,162 
   54,941,227  40,930,038 
Expenses       
 Newfoundland royalty taxes  10,884,379  8,118,208 
 Amortization of royalty and commission interests  1,313,290  1,425,809 
 Administrative expenses  525,507  1,181,534 
 Interest expense:       
  Credit facility  94,521  94,521 
  Subordinated notes  7,488,000  7,488,000 
   20,305,697  18,308,072 
        
Income before equity earnings and income taxes  34,635,530  22,621,966 
Equity earnings in IOC  46,984,091  39,186,091 
        
Income before income taxes   81,619,621  61,808,057 
        
Provision for (recovery of) income taxes       
 Current  10,933,465  7,833,099 
 Deferred  1,923,000  (3,896,000) 
   12,856,465  3,937,099 
        
Net income for the period  68,763,156  57,870,958 
        
Other comprehensive loss       
 Share of other comprehensive loss of IOC  (372,000)  (263,000) 
        
Comprehensive income for the period $68,391,156 $57,607,958 
        
Net income per common share/unit (1) $1.07 $0.90 
         
(1)Per share/unit amounts have been retroactively adjusted to reflect the two-for-one share subdivision completed on July 1, 2011.         
        
        
        

LABRADOR IRON ORE ROYALTY CORPORATION         
CONSOLIDATED STATEMENTS OF CASH FLOWS         
          
          
          
          
     For the Nine Months 
     Ended September 30, 
Canadian $    2011  2010 
     (Unaudited) 
Net inflow (outflow) of cash related to the following activities        
          
Operating         
 Net income for the period   $140,908,938 $142,895,630 
 Items not affecting cash:         
  Equity earnings in IOC    (96,667,045)  (90,672,626) 
  Deferred income taxes    4,329,000  1,078,000 
  Amortization of royalty and commission interests    3,484,528  4,221,168 
 Common share dividend from IOC    60,167,261  73,662,686 
 Change in amounts receivable, accounts and income taxes payable and interest payable on subordinated notes    (3,102,446)  (63,523,464) 
 Cash flow from operating activities    109,120,236  67,661,394 
          
Financing         
 Distributions paid to unitholders/shareholders    (113,536,000)  (64,000,000) 
 Cash flow used in financing activities    (113,536,000)  (64,000,000) 
          
Increase/(decrease) in cash and cash equivalents during the period    (4,415,764)  3,661,394 
          
Cash and cash equivalents, beginning of period    73,611,888  6,203,013 
          
Cash and cash equivalents, end of period   $69,196,124 $9,864,407 
          
Cash and cash equivalents are comprised of:         
 Cash in bank   $69,196,124 $864,708 
 Term deposits      8,999,699 
    $69,196,124 $9,864,407 
          
          
Cash income taxes paid   $22,667,547 $15,382,745 
          
Cash interest paid   $22,744,480 $280,480 
          
          
          

LABRADOR IRON ORE ROYALTY CORPORATION               
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY               
                
   Capital  Trust  Retained  Accumulated  Total
   stock  units  earnings  other   
            comprehensive   
Canadian $           loss   
 (Unaudited)
                
Balance as at January 1, 2010 $ $317,708,147 $83,634,152 $ $401,342,299
                
Subordinated notes distributed to trust unitholders pursuant               
to the Arrangement on July 1, 2010     (248,000,000)        (248,000,000)
Exchange of trust units for common shares on July 1, 2010  69,708,147  (69,708,147)        
Net income for the period      142,895,630    142,895,630
Distributions/dividends to unitholders/shareholders      (72,512,000)    (72,512,000)
Other comprehensive loss        (789,000)  (789,000)
Balance as at September 30, 2010 $69,708,147 $ $154,017,782 $(789,000) $222,936,929
                
                
                
Balance as at December 31, 2010 $69,708,147 $ $153,724,994 $(4,278,000) $219,155,141
                
Net income for the period      140,908,938     140,908,938
Dividends to shareholders      (97,536,000)     (97,536,000)
Other comprehensive loss         (1,115,000)  (1,115,000)
Balance as at September 30, 2011 $69,708,147 $ $197,097,932 $(5,393,000) $261,413,079
                
                

 

 

 


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