TORONTO, Aug. 9, 2011 /CNW/ - Labrador Iron Ore Royalty Corporation ("LIORC") (TSX: LIF.UN) announced the results of its operations for the second quarter ended June 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 rather than the 32 million in previous statements, with all prior per unit figures being restated.

Royalty income for the second quarter of 2011 amounted to $37.8 million as compared to $52.1 million for the second 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 second quarter was $23.0 million or $0.36 per unit as compared to $30.5 million or $0.48 per unit for the same period in 2010.  Net income was $48.2 million or $0.75 per unit compared to $69.3 million or $1.08 per unit for the same period in 2010. Equity earnings from IOC amounted to $30.4 million or $0.48 per unit as compared to $46.7 million or $0.73 per unit in 2010. Had the price adjustments which occurred in the second quarter of 2010 and related to the first quarter not been included, 2010 royalty income would have been reduced by $10.4 million or $0.33 per unit and equity earnings from IOC by $14.2 million or $0.44 per unit. Without the inclusion of these amounts, second quarter of 2010 net income would have been $0.84 per unit and adjusted cash flow $0.38 per unit.

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 $14,976,000 ($0.234 per stapled unit) interest on the subordinated notes for the three months and six months period ended June 30, 2011, respectively.

Royalty income for the quarter was slightly below the adjusted second quarter of 2010 due to lower IOC sales and a higher Canadian dollar (against its U.S. counterpart) offset by higher iron ore prices in 2011. The lower IOC sales were the result of a shortage of products due to production shortfalls and timing of shipments.

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 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

Second quarter saleable iron ore production was 14 per cent lower than the same quarter of 2010 as a result of truck and labour availability issues, but 31 per cent higher than the first quarter of 2011 as progress was made to stabilize and improve production capability. Concentrate for sinter production was maximized in the quarter to respond to market demand, and this resulted in lower pellet production relative to the first quarter. While the overall pellet capacity was temporarily reduced, it enabled significant plant maintenance work to be undertaken.

The Concentrator Expansion Project Phase 1, increasing capacity to 22Mt/a, is on track for completion in late 2011 and Phase 2, improving the magnetite recovery circuit, which will increase capacity to 23Mt/a, is progressing as planned, with first production expected in late 2012.

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

^{Note:  (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 directors are studying the effect of this announcement on LIORC.

Outlook

Iron ore markets and pricing remain firm and IOC expects to be able to sell all the pellets and concentrate it can produce. IOC believes that the production problems faced in the first half of the year have been substantially remedied and production for the balance of the year will be at normal levels, with the first benefits from Phase 1 of the expansion occurring late in the year. The continued strength of the Canadian dollar against its U.S. counterpart is a negative but is more than offset by increased prices for iron ore.

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

Bruce C. Bone
President and Chief Executive Officer
August 9, 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 rather than the 32 million in previous statements, with all prior per unit figures being restated.

Royalty income for the second quarter of 2011 amounted to $37.8 million as compared to $52.1 million for the second 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 second quarter was $23.0 million or $0.36 per unit as compared to $30.5 million or $0.48 per unit for the same period in 2010.  Net income was $48.2 million or $0.75 per unit compared to $69.3 million or $1.08 per unit for the same period in 2010. Equity earnings from IOC amounted to $30.4 million or $0.48 per unit as compared to $46.7 million or $0.73 per unit in 2010. Had the price adjustments which occurred in the second quarter of 2010 and related to the first quarter not been included, 2010 royalty income would have been reduced by $10.4 million or $0.33 per unit and equity earnings from IOC by $14.2 million or $0.44 per unit. Without the inclusion of these amounts, second quarter of 2010 net income would have been $0.84 per unit and adjusted cash flow $0.38 per unit.

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 $14,976,000 ($0.234 per stapled unit) interest on the subordinated notes for the three months and six months period ended June 30, 2011, respectively.

Royalty income for the quarter was slightly below the adjusted second quarter of 2010 due to lower IOC sales and a higher Canadian dollar (against its U.S. counterpart) offset by higher iron ore prices in 2011. The lower IOC sales were the result of a shortage of products due to production shortfalls and timing of shipments.

The six month results were affected by the same factors as the second quarter with the decreased sales volume and higher Canadian dollar being offset by higher prices for pellets and concentrates.

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

Iron Ore Company of Canada

Second quarter saleable iron ore production was 14 per cent lower than the same quarter of 2010 as a result of truck and labour availability issues, but 31 per cent higher than the first quarter of 2011 as progress was made to stabilize and improve production capability. Concentrate for sinter production was maximized in the quarter to respond to market demand, and this resulted in lower pellet production relative to the first quarter. While the overall pellet capacity was temporarily reduced, it enabled significant plant maintenance work to be undertaken.

The Concentrator Expansion Project Phase 1, increasing capacity to 22Mt/a, is on track for completion in late 2011 and Phase 2, improving the magnetite recovery circuit, which will increase capacity to 23Mt/a, is progressing as planned, with first production expected in late 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 $0.67⁽¹⁾ for the quarter (2010 - $0.16). Cumulative standardized cash flow from inception of the Corporation is $15.12 per unit and total cash distributions since inception are $14.37⁽¹⁾ per unit, for a payout ratio of 95%.

^{(1) Excludes interest on subordinated notes paid directly to unitholders of $0.234 and $0.468, 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.

^{(1) Three months and six months ended June 30, 2011 exclude interest on subordinated notes paid directly to unitholders of $7,488,000 ($0.117 per unit) and $14,976,000 ($0.234) respectively.}

Liquidity

The Corporation has a $50 million revolving credit facility to September 18, 2013 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 six months ended June 30, 2011, the Corporation's share of net income and comprehensive income from IOC has not materially changed from what 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 directors are studying the effect of this announcement on LIORC.

Outlook

Iron ore markets and pricing remain firm and IOC expects to be able to sell all the pellets and concentrate it can produce. IOC believes that the production problems faced in the first half of the year have been substantially remedied and production for the balance of the year will be at normal levels, with the first benefits from Phase 1 of the expansion occurring late in the year. The continued strength of the Canadian dollar against its U.S. counterpart is a negative but is more than offset by increased prices for iron ore.

Bruce C. Bone
President and Chief Executive Officer
Toronto, Ontario
August 9, 2011