TORONTO, Aug. 14, 2019 /CNW/ - Labrador Iron Ore Royalty Corporation ("LIORC", TSX: LIF) announced today its operation and cash flow results for the second quarter ended June 30, 2019.

Royalty revenue for the second quarter of 2019 amounted to $52.6 million as compared to $5.1 million for the second quarter of 2018. Equity earnings from IOC amounted to $33.9 million or $0.53 per share in the second quarter of 2019 as compared to a loss of $6.1 million or $0.09 per share in the second quarter of 2018. Net income was $61.1 million or $0.95 per share for the second quarter of 2019 compared to a net loss of $3.2 million or $0.05 per share for the same period in 2018. Cash flow from operations for the second quarter was $47.8 million or $0.75 per share as compared to $15.5 million or $0.24 per share for the same period in 2018. LIORC received a dividend from Iron Ore Company of Canada ("IOC") in the second quarter of 2019 in the amount of $25.4 million or $0.40 per share, whereas LIORC received no dividend in the second quarter of 2018. The 2018 production was negatively impacted by a nine-week work stoppage.

The cash flow from operations, equity earnings and net income for the second quarter of 2019 were higher than the second quarter of 2018, as a result of higher prices for concentrate and pellets, and higher production.

The average price for the Platts index for 62% Fe Iron Ore, CFR China ("62% Fe index") increased 53% to US$100 per tonne in the second quarter of 2019 compared to the average price in the second quarter of 2018 of US$65 per tonne. IOC's total sales for calculating the royalty to LIORC - concentrate for sale ("CFS") plus pellets - was 4.6 million tonnes in the second quarter of 2019 compared to 0.5 million tonnes in the same period in 2018, largely because 2018 CFS tonnages and pellet sales tonnages were negatively impacted by the work stoppage.

LIORC's results for the three months and six months ended June 30 are summarized below:

 

Iron Ore Company of Canada Operations

Production
Total concentrate production in the second quarter of 2019 of 4.5 million tonnes was 201% higher than the second quarter of 2018, which was negatively impacted by the work stoppage, and 1% higher than the first quarter of 2019, which was negatively impacted by frozen material and blocked feeders in the ore barn. Total concentrate production in the second quarter of 2019 was negatively impacted by a delay in the restart after the planned annual outage in June as a result of a flooding issue.

CFS production in the second quarter of 2019 of 2.0 million tonnes was 109% higher than in the second quarter of 2018 and 34% higher than the previous quarter. Pellet production in the second quarter of 2019 of 2.3 million tonnes was 347% higher than the second quarter of 2018 and 16% lower than the previous quarter. The pellet plant production in the second quarter of 2019 was negatively impacted by lack of feed as a result of lower concentrate production than planned, as well as lower indurating machine availability during the quarter.

Sales as Reported for the LIORC Royalty
Total iron ore tonnage sold by IOC (CFS plus pellets) was 4.6 million tonnes in the second quarter of 2019 compared to 0.5 million tonnes in the same period in 2018, largely as a result of the lower production in 2018 due to the work stoppage. Second quarter 2019 sales tonnage of CFS was 2.1 million tonnes and pellet sales tonnage was 2.4 million tonnes, compared to second quarter 2018 sales tonnage of 0.05 million tonnes of CFS and 0.5 million tonnes of pellets.

IOC sells CFS based on the Platts index for 65% Fe Iron Ore, CFR China ("65% Fe index"). The average price for the 65% Fe index was US$115 per tonne in the second quarter of 2019, a 34% increase over the average price in the second quarter of 2018 of US$86 per tonne, and 20% higher than the average price in the first quarter of 2019 of US$95 per tonne. The seaborne iron ore prices continued to be positively affected by a reduction of iron ore supply as a result of mine closures in Brazil and lower production in Australia. The premium for the 65% Fe index compared to the 62% Fe index, which had been expanding over the last few years as the Chinese governments enacted and enforced measures to reduce pollution, remained lower in the second quarter of 2019 at 15%, as compared to 31% in the second quarter of 2018 and 15% in the first quarter of 2019, as steel producers continued to react to lower profit margins by substituting higher quality iron ore with cheaper lower quality iron ore. The quarterly Atlantic Basin blast furnace pellet premium, as reported by Platts, averaged US$68 per tonne in the second quarter of 2019, a 17% increase over the second quarter of 2018 and 1% higher than the first quarter of 2019.

A summary of IOC's sales for calculating the royalty to LIORC in millions of tonnes is as follows:

 

Outlook

As a result of lower than anticipated first half production, Rio Tinto lowered the 2019 guidance for IOC's saleable production of CFS and pellets on a 100% basis to between 18.2 and 19.2 million tonnes from between 19.2 and 20.9 million tonnes.

Benchmark prices for concentrate and pellet premiums remain attractive relative to historical levels despite recent price declines due to softer demand and uncertainty over trade tensions.  On August 7, 2019 the 62% Fe index was US$93 per tonne as compared to an average of US$120 per tonne in July.  Supply continues to be constrained, predominantly as a result of mine closures in Brazil. Vale reaffirmed its 2019 iron ore sales guidance of 307 to 332 million tonnes, stating that expected sales volume will move towards the midpoint of the range with the restart of the Brucutu mine in June and the partial resumption of dry processing operations at Vargem Grande. This compares to Vale's 2018 iron ore production of 385 million tonnes.

China crude steel production was up 9.9% in the first half of 2019 as compared to the same period in 2018, and the immediate outlook for China steel production continues to be positive despite higher iron ore prices and weaker steel producer margins. Weaker steel producer margins are expected to continue to have some effect on iron ore demand outside of China. Despite the pullback, higher China import fines prices have made iron ore pellet premiums under existing formulas unaffordable for some producers given prevailing steel and raw materials prices.  As a result, some steel producers in Europe have reduced output or replaced high cost pellets where possible with lower quality grades. Longer term, we would expect an increase in the global seaborne iron ore supply and for iron ore prices to begin to revert to levels more in line with historical averages.    

The LIORC cash balance at June 30, 2019 stood at $47.7 million before LIORC dividends payable on July 25, 2019 of $0.90 per share or $57.6 million. The net royalty from IOC was paid on the same date, maintaining the Corporation's strong cash balance.

On August 7, 2019 the Board of IOC declared a dividend of US$200 million, payable to shareholders of IOC on August 22, 2019.

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

John F. Tuer
President and Chief Executive Officer 
August 14, 2019

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 2018 Annual Report, and the financial statements and notes contained therein and the June 30, 2019 interim condensed consolidated financial statements. The Corporation's revenues are entirely dependent on the operations of 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 first quarter sales of IOC are traditionally adversely affected by the closing of the St. Lawrence Seaway and general winter operating conditions and are usually 15% – 20% of the annual volume, 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.

Royalty revenue for the second quarter of 2019 amounted to $52.6 million as compared to $5.1 million for the second quarter of 2018. Equity earnings from IOC amounted to $33.9 million or $0.53 per share in the second quarter of 2019 as compared to a loss of $6.1 million or $0.09 per share in the second quarter of 2018. Net income was $61.1 million or $0.95 per share for the second quarter of 2019 compared to a net loss of $3.2 million or $0.05 per share for the same period in 2018. Cash flow from operations for the second quarter was $47.8 million or $0.75 per share as compared to $15.5 million or $0.24 per share for the same period in 2018. LIORC received a dividend from IOC in the second quarter of 2019 in the amount of $25.4 million or $0.40 per share, whereas LIORC received no dividend in the second quarter of 2018. The 2018 production was negatively impacted by a nine-week work stoppage.

The cash flow from operations, equity earnings and net income for the second quarter of 2019 were higher than the second quarter of 2018, as a result of higher prices for concentrate and pellets, and higher production.

The average price for 62% Fe index increased 53% to US$100 per tonne in the second quarter of 2019 compared to the average price in the second quarter of 2018 of US$65 per tonne. IOC's total sales for calculating the royalty to LIORC - CFS plus pellets - was 4.6 million tonnes in the second quarter of 2019 compared to 0.5 million tonnes in the same period in 2018, largely because 2018 CFS tonnages and pellet sales tonnages were negatively impacted by the work stoppage.

Total concentrate production in the second quarter of 2019 of 4.5 million tonnes was 201% higher than the second quarter of 2018, which was negatively impacted by the work stoppage, and 1% higher than the first quarter of 2019, which was negatively impacted by frozen material and blocked feeders in the ore barn. Total concentrate production in the second quarter of 2019 was negatively impacted by a delay in the restart after the planned annual outage in June as a result of a flooding issue.

CFS production in the second quarter of 2019 of 2.0 million tonnes was 109% higher than in the second quarter of 2018 and 34% higher than the previous quarter. Pellet production in the second quarter of 2019 of 2.3 million tonnes was 347% higher than the second quarter of 2018 and 16% lower than the previous quarter. The pellet plant production in the second quarter of 2019 was negatively impacted by lack of feed as a result of lower concentrate production than planned, as well as lower indurating machine availability during the quarter.

Total iron ore tonnage sold by IOC (CFS plus pellets) was 4.6 million tonnes in the second quarter of 2019 compared to 0.5 million tonnes in the same period in 2018, largely as a result of the lower production in 2018 due to the work stoppage. Second quarter 2019 sales tonnage of CFS was 2.1 million tonnes and pellet sales tonnage was 2.4 million tonnes, compared to second quarter 2018 sales tonnage of 0.05 million tonnes of CFS and 0.5 million tonnes of pellets.

IOC sells CFS based on the 65% Fe index. The average price for the 65% Fe index was US$115 per tonne in the second quarter of 2019, a 34% increase over the average price in the second quarter of 2018 of US$86 per tonne, and 20% higher than the average price in the first quarter of 2019 of US$95 per tonne. The seaborne iron ore prices continued to be positively affected by a reduction of iron ore supply as a result of mine closures in Brazil and lower production in Australia. The premium for the 65% Fe index compared to the 62% Fe index, which had been expanding over the last few years as the Chinese governments enacted and enforced measures to reduce pollution, remained lower in the second quarter of 2019 at 15%, as compared to 31% in the second quarter of 2018 and 15% in the first quarter of 2019, as steel producers continued to react to lower profit margins by substituting higher quality iron ore with cheaper lower quality iron ore. The quarterly Atlantic Basin blast furnace pellet premium, as reported by Platts, averaged US$68 per tonne in the second quarter of 2019, a 17% increase over the second quarter of 2018 and 1% higher than the first quarter of 2019.

Results for the six months were affected by the same factors as affected the three month period. Royalty and commission interests amortization expense increased by $1.1 million for the six months compared to the same period in 2018 due to the increase in production. The 2018 production was negatively impacted by a nine-week work stoppage.

The following table sets out quarterly revenue, net income, cash flow and dividend data for 2019, 2018 and 2017.

 

(1)  "Adjusted cash flow" (see below)
(2)  Includes $25.4 million IOC dividend.
(3)  Includes $58.6 million IOC dividend.
(4)  Includes $25.3 million IOC dividend.
(5)  Includes $10.0 million IOC dividend.
(6)  Includes $15.2 million IOC dividend.
(7)  Includes $32.2 million IOC dividend.
(8)  Includes $19.3 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 dividends.  Standardized cash flow per share was $0.75 for the quarter (2018 - $0.24). Cumulative standardized cash flow from inception of the Corporation is $28.61 per share and total cash distributions since inception is $28.29 per share, for a payout ratio of 99%.

The Corporation also reports "Adjusted cash flow" which is defined as cash flow from operating activities after adjustments for changes in amounts receivable, accounts payable and income taxes recoverable and payable.  It is not a recognized measure under International Financial Reporting Standards ("IFRS").  The Directors believe that adjusted cash flow is a useful analytical measure as it better reflects cash available for dividends to shareholders.

The following reconciles standardized cash flow from operating activities to adjusted cash flow (in '000's).

 

Liquidity and Capital Resources

The Corporation had $47.7 million in cash as at June 30, 2019 (December 31, 2018 - $80.5 million) with total current assets of $102.8 million (December 31, 2018 - $127.0 million). The Corporation had working capital of $27.6 million as at June 30, 2019 (December 31, 2018 - $76.3 million). The Corporation's operating cash flow for the quarter was $47.8 million and the dividend paid during the quarter was $67.2 million, resulting in cash balances decreasing by $19.4 million during the second quarter of 2019.

Cash balances consist of deposits in Canadian dollars with Canadian chartered banks. Amounts receivable primarily consist of royalty payments from IOC. Royalty payments are received in U.S. dollars and converted to Canadian dollars on receipt, usually 25 days after the quarter end. The Corporation does not normally attempt to hedge this short-term foreign currency exposure.

Operating cash flow of the Corporation is sourced entirely from IOC through the Corporation's 7% royalty, 10 cents commission per tonne and dividends from its 15.10% equity interest in IOC. The Corporation normally pays cash dividends from its net income to the maximum extent possible, subject to the maintenance of appropriate levels of working capital.

The Corporation has a $50 million revolving credit facility with a term ending September 18, 2021 with provision for annual one-year extensions.  No amount is currently drawn under this facility (2018– nil) leaving $50.0 million available to provide for any capital required by IOC or requirements of the Corporation.

Outlook

As a result of lower than anticipated first half production, Rio Tinto lowered the 2019 guidance for IOC's saleable production of CFS and pellets on a 100% basis to between 18.2 and 19.3 million tonnes from between 19.2 and 20.9 million tonnes.

Benchmark prices for concentrate and pellet premiums remain attractive relative to historical levels despite recent price declines due to softer demand and uncertainty over trade tensions.  On August 7, 2019 the 62% Fe index was US$93 per tonne as compared to an average of US$120 per tonne in July.  Supply continues to be constrained, predominantly as a result of mine closures in Brazil. Vale reaffirmed its 2019 iron ore sales guidance of 307 to 332 million tonnes, stating that expected sales volume will move towards the midpoint of the range with the restart of the Brucutu mine in June and the partial resumption of dry processing operations at Vargem Grande. This compares to Vale's 2018 iron ore production of 385 million tonnes.

China crude steel production was up 9.9% in the first half of 2019 as compared to the same period in 2018, and the immediate outlook for China steel production continues to be positive despite higher iron ore prices and weaker steel producer margins. Weaker steel producer margins are expected to continue to have some effect on iron ore demand outside of China. Despite the pullback, higher China import fines prices have made iron ore pellet premiums under existing formulas unaffordable for some producers given prevailing steel and raw materials prices.  As a result, some steel producers in Europe have reduced output or replaced high cost pellets where possible with lower quality grades. Longer term, we would expect an increase in the global seaborne iron ore supply and for iron ore prices to begin to revert to levels more in line with historical averages.   

The LIORC cash balance at June 30, 2019 stood at $47.7 million before LIORC dividends payable on July 25, 2019 of $0.90 per share or $57.6 million. The net royalty from IOC was paid on the same date, maintaining the Corporation's strong cash balance.

On August 7, 2019 the Board of IOC declared a dividend of US$200 million, payable to shareholders of IOC on August 22, 2019.

John F. Tuer
President and Chief Executive Officer
Toronto, Ontario
August 14, 2019

Forward-Looking Statements
This report may contain "forward-looking" statements that involve risks, uncertainties and other factors that may cause the actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Words such as "may", "will", "expect", "believe", "plan", "intend", "should", "would", "anticipate" and other similar terminology are intended to identify forward-looking statements. These statements reflect current assumptions and expectations regarding future events and operating performance as of the date of this report. Forward-looking statements involve significant risks and uncertainties, should not be read as guarantees of future performance or results, and will not necessarily be accurate indications of whether or not such results will be achieved. A number of factors could cause actual results to vary significantly, including iron ore price and volume volatility, exchange rates, the performance of IOC, market conditions in the steel industry, mining risks and insurance, the renewal of the mining leases, outcomes of existing or future litigation, relationships with aboriginal groups, changes affecting IOC's customers, competition from other iron ore producers, estimates of reserves and resources and government regulation and taxation.  A discussion of these factors is contained in LIORC's annual information form dated March 7, 2019 under the heading, "Risk Factors". Although the forward-looking statements contained in this report are based upon what management of LIORC believes are reasonable assumptions, LIORC cannot assure investors that actual results will be consistent with these forward-looking statements. These forward-looking statements are made as of the date of this report and LIORC assumes no obligation, except as required by law, to update any forward-looking statements to reflect new events or circumstances. This report should be viewed in conjunction with LIORC's other publicly available filings, copies of which can be obtained electronically on SEDAR at www.sedar.com.

Notice:
The following unaudited interim condensed consolidated financial statements of the Corporation have been prepared by and are the responsibility of the Corporation's management. The Corporation's independent auditor has not reviewed these interim financial statements.

 

 

 

 

 

 

The complete consolidated financial statements for the second quarter ended June 30, 2019, including the notes thereto, are posted on sedar.com and labradorironore.com. 

SOURCE Labrador Iron Ore Royalty Corporation

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