LABRADOR IRON ORE ROYALTY CORPORATION - RESULTS, MD&A AND FINANCIAL STATEMENTS FOR THE FIRST QUARTER ENDED MARCH 31, 2011

May 18, 2011

TORONTO, May 18 /CNW/ - Labrador Iron Ore Royalty Corporation ("LIORC") (TSX: LIF.UN) released its results including MD&A and financial statements for the first quarter ended March 31, 2011.

Royalty income for the first quarter of 2011 amounted to $30.3 million as compared to $16.4 million for the first 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 first quarter was $48.0 million or $1.50 per unit as compared to $22.3 million or $0.70 per unit for the same period in 2010.  Net income was $38.9 million or $1.22 per unit compared to $15.7 million or $0.49 per unit for the same period in 2010. Equity earnings from IOC amounted to $19.2 million or $0.60 per unit as compared to $4.8 million or $0.15 per unit in 2010. The higher cash flow for the quarter reflected an IOC dividend of which our share was $29.0 million or $0.91 per unit as compared to $11.5 million or $0.36 per unit in 2010. Had the price adjustments which occurred in the second quarter of 2010 and related to the first quarter been included, 2010 royalty income would have been increased by $10.4 million or $0.33 per unit and equity earning from IOC by $14.2 million or $0.44 per unit. The inclusion of these amounts would have increased 2010 first quarter net income by $0.49 per unit and adjusted cash flow by $0.18 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 ($0.234 per stapled unit) interest on the subordinated notes for the period January 1 to March 31, 2011.

The first quarter sales of Iron Ore Company of Canada ("IOC") are traditionally adversely affected by the closing of the St. Lawrence Seaway and general winter shipping conditions and are not indicative of the full year's sales.

Iron ore markets remain firm and pricing which is now on a quarterly basis was slightly higher than the fourth quarter of 2010. IOC sales volumes were slightly below 2010 first quarter sales due to a particularly severe winter and timing of shipments. The severe winter also caused some reduced production as it affected truck availability resulting in ore shortages which reduced the supply of concentrate. The continuing strength of the Canadian dollar against its U.S. counterpart adversely affected 2011 results.

Results for the three months ended March 31 are summarized below:

 2011 2010
 (Unaudited)
    
Revenue (in millions)$30.7 $16.7
Adjusted cash flow (in millions)$48.0 $22.3
Adjusted cash flow per unit$  1.50 $  0.70
Net income (in millions)$ 38.9 $ 15.7
Net income per unit$  1.22 $  0.49

"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.

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

 3 Months
Ended
Mar. 31,
2011
 3 Months
Ended
Mar. 31,
2010
 Year
Ended
Dec. 31,
2010
      
Pellets2.27 2.67 12.05
Concentrates0.28 0.31 3.02(1)
      
Total2.55 2.98 15.07

Note:  (1) Excludes third party ore sales

Outlook

Iron ore markets remain firm and prices for the second quarter of 2011 are expected to be over 10% higher than those in the first quarter. Production for the first quarter was disappointing due to severe winter conditions and some equipment failures. The second quarter is expected to have production approach more normal levels but the month of April still faced severe weather and the operations were shut down for almost three days as the result of an industrial accident which resulted in the death of a contractor employee. IOC has orders for all the concentrate and pellets it can produce. 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
May 18, 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.

Royalty income for the first quarter of 2011 amounted to $30.3 million as compared to $16.4 million for the first quarter of 2010. The Corporation's cash flow from operating activities after adjustments for changes in amounts receivable, accounts payable and income taxes payable (adjusted cash flow) for the first quarter was $48.0 million or $1.50 per unit as compared to $22.3 million or $0.70 per unit for the same period in 2010.  Net income was $38.9 million or $1.22 per unit compared to $15.7 million or $0.49 per unit for the same period in 2010.  Equity earnings from IOC amounted to $19.2 million or $0.60 per unit as compared to $4.8 million or $0.15 per unit in 2010. The higher cash flow for the quarter reflected an IOC dividend of which our share was $29.0 million or $0.91 per unit as compared to $11.5 million or $0.36 per unit in 2010. Had the price adjustments which occurred in the second quarter of 2010 and related to the first quarter been included, 2010 royalty income would have been increased by $10.4 million or $0.33 per unit and equity earning from IOC by $14.2 million or $0.44 per unit. The inclusion of these amounts would have increased 2010 first quarter net income by $0.49 per unit and adjusted cash flow by $0.18 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 ($0.234 per stapled unit) interest on the subordinated notes for the period January 1 to March 31, 2011.

The first quarter sales of IOC are traditionally adversely affected by the closing of the St. Lawrence Seaway and general winter shipping conditions and are not indicative of the full year's sales.

Iron ore markets remain firm and pricing which is now on a quarterly basis was slightly higher than the fourth quarter of 2010. IOC sales volumes were slightly below 2010 first quarter sales due to a particularly severe winter and timing of shipments. The severe winter also caused some reduced production as it affected truck availability resulting in ore shortages which reduced the supply of concentrate. The continuing strength of the Canadian dollar against its U.S. counterpart adversely affected 2011 results.

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

  Revenue Net
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)
             
2011            
First Quarter(2) $30.7 $38.9 $1.22 $48.02(3) $1.50 $1.50
2010            
First Quarter $16.7 $15.7 $0.49 $22.3 (4) $0.70 $0.75
Second Quarter $52.5 $69.1 $2.16 $30.5 $0.95 $0.75
Third Quarter (2) $40.9 $64.4 $2.01 $85.9 (5) $2.68 $1.00
Fourth Quarter(2) $54.3 $62.8 $1.96 $31.9 $1.00 $2.00
2009            
First Quarter $16.6 $16.5 $0.52 $11.1 $0.35 $0.50
Second Quarter $19.7 $17.8 $0.55 $12.6 $0.39 $0.50
Third Quarter $15.8 $13.6 $0.43 $18.8(6) $0.59 $0.50
Fourth Quarter $24.9 $27.2 $0.85 $15.8 $0.49 $0.50

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 ($0.234 per unit) interest on the subordinated notes
 (3)Includes a $29.0 million IOC dividend
 (4)Includes a $11.5 million IOC dividend
 (5)Includes a $62.5 million IOC dividend
 (6)Includes a $8.2 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 $0.46(1) for the quarter (2010 - $0.87). Cumulative standardized cash flow from inception of the Corporation is $28.90 per unit and total cash distributions since inception are $28.23(1) per unit, for a payout ratio of 98%.

"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.

(1) Excludes note interest on subordinated notes paid directly to unitholders of $0.234 and $0.702, respectively.

The following reconciles cash flow from operating activities to adjusted cash flow.

 3 Months Ended
Mar. 31, 2011
   3 Months Ended
Mar. 31, 2010
Standardized cash flow from operating activities$14,721,526   $27,859,313
Excluding: changes in amounts receivable, accounts payable and income taxes payable25,811,810   (5,527,017)
Adjusted cash flow(1)$40,533,336    $22,332,296 
Adjusted cash flow per unit(1)$1.27   $0.70

(1) March 31, 2011 excludes note interest on subordinated notes paid directly to unitholders of $7,488,000 ($0.234 per unit).

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.

Transition to International Financial Reporting Standards ("IFRS")

The CICA Accounting Standards Board required all Canadian publicly accountable enterprises to adopt International Financial Reporting Standards for fiscal years beginning on or after January 1, 2011. Accordingly, the financial statements of the Corporation for the three months ended March 31, 2011 have been prepared in accordance with IFRS. As this is the first report issued under these standards certain additional information, as required by these international standards, have been included in the report.

The adjustments necessary to convert the Corporation's financial statements from Canadian Generally Accepted Accounting Principles ("GAAP") to IFRS are explained in more detail in Note 17 to the financial statements, and these adjustments have been recorded retroactively to January 1, 2010. The overall impact is 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, $13.7 million at December 31, 2010 and $13.6 at March 31, 2011. For the three months ended March 31, 2011, the Corporation's share of net income and comprehensive income from IOC is $0.1 million higher 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.

Outlook

Iron ore markets remain firm and prices for the second quarter of 2011 are expected to be over 10% higher than those in the first quarter. Production for the first quarter was disappointing due to severe winter conditions and some equipment failures. The second quarter is expected to have production approach more normal levels but the month of April still faced severe weather and the operations were shut down for almost three days as the result of an industrial accident which resulted in the death of a contractor employee. IOC has orders for all the concentrate and pellets it can produce. 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.

LABRADOR IRON ORE ROYALTY CORPORATION
CONSOLIDATED BALANCE SHEETS
      
  As at
  March 31 December 31 January 1
Canadian $ 2011 2010 2010
  (Unaudited)
Assets     
Current     
 Cash and cash equivalents $          31,821,414  $         73,611,888  $           6,203,013
 Amounts receivable              59,325,155             51,420,285             24,987,043
               91,146,569           125,032,173             31,190,056
       
Iron Ore Company of Canada ("IOC"),     
 royalty and commission interests            290,826,792           291,885,160           297,489,943
       
Investment in IOC           237,747,310           247,925,657           197,506,091
       
   $        619,720,671  $       664,842,990  $       526,186,090
       
       
Liabilities and Shareholders'/Unitholders' Equity     
Current     
 Accounts payable $            6,178,381  $         10,482,603  $           5,233,229
 Income taxes payable                  912,528             14,515,246                  509,562
 Interest payable on subordinated notes                7,488,000               7,488,000                            -  
 Distributions payable to shareholders/unitholders             40,512,000             56,512,000             16,000,000
               55,090,909             88,997,849             21,742,791
       
Subordinated notes            248,000,000           248,000,000                            -  
       
Deferred income taxes            106,931,000           108,690,000           103,101,000
             410,021,909           445,687,849           124,843,791
       
Equity      
 Share capital/Trust units              69,708,147             69,708,147           317,708,147
 Retained earnings            144,640,615           153,724,994             83,634,152
 Accumulated other comprehensive loss             (4,650,000)              (4,278,000)                            -  
             209,698,762           219,155,141           401,342,299
   $        619,720,671  $       664,842,990  $       526,186,090

 


LABRADOR IRON ORE ROYALTY CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
 
  For the Three Months 
  Ended March 31,
Canadian $ 2011 2010
  (Unaudited)
Revenue   
 IOC royalties $       30,280,217  $       16,374,491
 IOC commissions               250,969                293,725
 Interest and other income                132,789                    4,743
            30,663,975           16,672,959
Expenses   
 Newfoundland royalty taxes            6,056,043             3,274,898
 Amortization of royalty and commission interests            1,058,368             1,297,470
 Administrative expenses                400,152                722,230
 Interest expense:   
   Credit facility                 92,465                  92,462
   Subordinated notes            7,488,000                         -  
            15,095,028             5,387,060
     
Income before equity earnings and income taxes          15,568,947           11,285,899
Equity earnings in IOC           19,251,468             4,806,415
     
Income before income taxes           34,820,415           16,092,314
     
Provision for income taxes    
 Current             5,088,794             1,756,125
 Deferred           (1,696,000)           (1,348,000)
              3,392,794                408,125
     
Net income for the period          31,427,621           15,684,189
     
Other comprehensive income   
 Share of other comprehensive loss of IOC              (372,000)              (263,000)
     
Comprehensive income for the period          31,055,621           15,421,189
     
Net income per common share/unit $                  0.98  $                  0.49

 

LABRADOR IRON ORE ROYALTY CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
  
 For the Three Months
Ended March 31,
Canadian $  2011  2010
 (Unaudited)
Net inflow (outflow) of cash related to the following activities     
      
Operating     
 Net income for the period  $   31,427,621 $15,684,189
 Items not affecting cash:     
  Equity earnings in IOC     (19,251,468)  (4,806,415)
  Deferred income taxes       (1,696,000)  (1,348,000)
  Amortization of royalty and commission interests         1,058,368  1,297,470
 Common share dividend from IOC       28,994,815  11,505,052
 Change in amounts receivable, accounts and income taxes payable
and interest payable on subordinated notes    
 (25,811,810)  5,527,017
 Cash flow from operating activities       14,721,526  27,859,313
       
Financing     
 Distributions paid to unitholders     (56,512,000)  (16,000,000)
 Cash flow used in financing activities     (56,512,000)  (16,000,000)
       
Increase/(decrease) in cash and cash equivalents during the period     (41,790,474)  11,859,313
      
Cash and cash equivalents, beginning of period       73,611,888  6,203,013
      
Cash and cash equivalents, end of period  $   31,821,414 $18,062,326
      
Cash and cash equivalents are comprised of:     
 Cash in bank  $   31,821,414 $11,948,430
 Term deposits                        6,113,896
  $   31,821,414 $18,062,326
       
Cash income taxes paid  $   18,629,510 $  2,714,000
      
Cash interest paid  $     7,582,521 $       94,521


 

LABRADOR IRON ORE ROYALTY CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
Canadian $ Capital
stock
Trust
Units
Retained
earnings
Accumulated
Other compre-
hensive 
loss
Total
 (Unaudited)
      
Balance 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, 201069,708,147(69,708,147)-  -  -
Net income for the year                         -  -  199,114,842-  199,114,842
Dividends/distributions to shareholders/unitholders -  -  (129,024,000)-  (129,024,000)
Other comprehensive loss-  -  -  (4,278,000)(4,278,000)
Balance as at December 31, 201069,708,147      153,724,994       (4,278,000)219,155,141
      
Net income for the period                         -  -  31,427,621 31,427,621
Dividends to shareholders                          -  -  (40,512,000) (40,512,000)
Other comprehensive loss-  -   (372,000)(372,000)
Balance as at March 31, 2011 $    69,708,147  $                    -  $ 144,640,615  $  (4,650,000) $               209,698,762

The complete consolidated financial statements for the first quarter ended March 31, 2011, including the notes thereto, are posted on sedar.com and labradorironore.com.  

Bruce C. Bone
President & Chief Executive Officer
(416) 863-7133



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