Labrador Iron Ore Royalty Income Fund - 2006 Results of Operations
TORONTO, March 16 /CNW/ - Labrador Iron Ore Royalty Income Fund announced the results of its operations for the year ended December 31, 2006. Following are some of the financial highlights of the Fund's 2006 results with comparison to the 2005 results:
------------------------------------------------------------------------- Years Ended December 31 2006 2005 ($ in millions except per unit information) Revenue 83.2 79.6 Expenses (including royalty taxes) 23.9 23.2 Net Income 94.4 86.1 Adjusted Cash Flow(1)(2) 72.9 74.6 Net Income per Unit $ 2.95 $ 2.69 Adjusted Cash Flow per Unit(1)(2) $ 2.28 $ 2.33 Cash Distributions per Unit $ 2.15 $ 2.15(3) -------------------------------------------------------------------------
(1) See Management's Discussion & Analysis for definition
(2) Includes IOC dividends totaling $20.9 million or $0.65 per Unit
(2005 - $24.1 million or $0.75 per Unit)
(3) $0.85 is considered 2006 taxable income to unitholders
Financial Performance
The Fund's adjusted cash flow (see Management's Discussion & Analysis for definition and calculation) for the year ended December 31, 2006 was $72.9 million or $2.28 per unit as compared to $74.6 million or $2.33 per unit for 2005. Iron ore sales of Iron Ore Company of Canada (IOC) amounted to 15.8 million tonnes compared to 15 million tonnes in 2005. Prices received were approximately neutral with decreases in pellet prices offsetting increases in concentrate pricing. Somewhat offsetting the increased sales volume was the continued strengthening of the Canadian dollar against its U.S. counterpart, averaging $1.13 for the year as compared to 2005's average of $1.21. The Fund's adjusted cash flow was increased by $20.9 million in dividends received from IOC (2005 - $24.1 million).
The Fund's consolidated net income for the year ended December 31, 2006 was $94.4 million or $2.95 per unit compared to $86.1 million or $2.69 per unit in 2005. The Fund's share of IOC's earnings amounted to $38.6 million compared to $42.3 million in 2005. The increase in net income was mainly due to the $10.5 million reduction in future income tax liabilities as a result of the 3% reduction in the federal corporate tax rate by 2010 and the elimination of surtax by January 1, 2008.
IOC Developments
On August 31, 2006 agreement was reached with IOC to simplify the Labrador Sublease dated February 25, 1953 between Labrador Mining Company Limited ("Labmin") and IOC, as amended, with Labmin granting IOC rights to mine 100% of the ore for a 7% royalty. The previously excluded Wabush 3 property is now included in the Labrador Sublease in consideration of a 7% royalty on sales of iron ore products derived from that property. Parts of the Knight deposit previously held exclusively by IOC are also now included in the Labrador Sublease and subject to the 7% royalty.
IOC is proceeding with a drilling program on the Wabush 3 deposit to evaluate it for inclusion in IOC's ore reserves. In 2006, IOC completed 3,583 meters of drilling on the Wabush 3 deposit and results of sample analysis are currently being evaluated for inclusion in IOC's geological models.
This is an important step in IOC's planning to increase production. An increase in production and sales of iron ore products from properties covered by the Labrador Sublease would increase the 7% royalty receivable by the Fund.
IOC continued to make progress on its cost reduction program, although price increases are offsetting some of the savings. Efforts to increase production are being realized and several production records were achieved during the year. The project to increase annual concentrate production to 17.5 million tonnes was largely completed during the year, with plans for further expansion currently under consideration.
The collective agreement with the United Steelworkers of America expired on February 28, 2007. On March 9, 2007, the employees at Labrador City rejected the most recent contract offer and voted to commence a legal strike.
Outlook
With expected price increases of around 5% for pellets and 9% for concentrates (based on settlement achieved to date by IOC's competitors) and potential further production and sales increases and with the strength of the Canadian dollar against its U.S. counterpart somewhat abated, barring a lengthy strike, 2007 is expected to be a positive year for the Fund.
I would like to take this opportunity to thank our unitholders for their interest and loyalty and my fellow Trustees for their wisdom and support.
Respectfully submitted on behalf of the
Trustees of Labrador Iron Ore Royalty Income Fund,
Bruce C. Bone
Chairman and Chief Executive Officer
March 13, 2007
LABRADOR IRON ORE ROYALTY INCOME FUND
CONSOLIDATED BALANCE SHEETS
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As at December 31 2006 2005
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Assets
Current
Cash and cash equivalents $ 141,937 $ 23,600,474
Amounts receivable 28,995,350 25,616,617
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29,137,287 49,217,091
Deferred charges, net of accumulated
amortization of $656,271
(2005 - $531,267) 343,729 468,733
Iron Ore Company of Canada ("IOC"),
royalty and commission interests 311,577,494 316,702,318
Investment in IOC 169,050,037 151,382,144
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$ 510,108,547 $ 517,770,286
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Liabilities and Unitholders' Equity
Current
Accounts payable $ 6,269,559 $ 5,623,809
Income taxes payable 1,327,432 11,456,479
Distributions payable to unitholders 17,600,000 38,400,000
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25,196,991 55,480,288
Long-term debt 6,123,088 -
Future income tax liability 116,550,000 125,670,000
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147,870,079 181,150,288
Unitholders' equity
Trust units 317,708,147 317,708,147
Undistributed income 44,530,321 18,911,851
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$ 510,108,547 $ 517,770,286
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--------------- ---------------
CONSOLIDATED STATEMENTS OF INCOME
AND UNDISTRIBUTED INCOME
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For the years ended December 31 2006 2005
--------------- ---------------
Revenue
IOC royalties $ 81,583,339 $ 77,988,487
IOC commissions 1,559,731 1,474,933
Interest and other income 86,173 133,710
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83,229,243 79,597,130
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Expenses
Newfoundland royalty taxes 16,316,668 15,597,697
Amortization of royalty and
commission interests 5,124,824 4,859,354
Administrative expenses 1,526,433 1,884,313
Interest expense 958,133 844,056
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23,926,058 23,185,420
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Income before equity earnings and
income taxes 59,303,185 56,411,710
Equity earnings in IOC 38,585,689 42,334,777
--------------- ---------------
Income before income taxes 97,888,874 98,746,487
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Provision for (recovery of) income taxes
Current 12,590,404 10,860,000
Future (9,120,000) 1,840,100
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3,470,404 12,700,100
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Net income for the year 94,418,470 86,046,387
Undistributed income, beginning of year 18,911,851 1,665,464
Distributions to unitholders (68,800,000) (68,800,000)
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Undistributed income, end of year $ 44,530,321 $ 18,911,851
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--------------- ---------------
Net income per unit $ 2.95 $ 2.69
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LABRADOR IRON ORE ROYALTY INCOME FUND
CONSOLIDATED STATEMENTS OF CASH FLOWS
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For the years ended December 31 2006 2005
--------------- ---------------
Net inflow (outflow) of cash related
to the following activities
Operating
Net income for the year $ 94,418,470 $ 86,046,387
Items not affecting cash:
Equity earnings in IOC (38,585,689) (42,334,777)
Future income taxes (9,120,000) 1,840,100
Amortization of royalty and
commission interests 5,124,824 4,859,354
Amortization of deferred charges 125,004 125,004
Common share dividend received from IOC 20,917,796 24,077,022
Change in amounts receivable, accounts
and income taxes payable (12,862,030) (1,906,201)
--------------- ---------------
Cash flow from operating activities 60,018,375 72,706,889
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Financing
Distributions paid to unitholders (89,600,000) (38,400,000)
Proceeds from (repayment of)
long-term debt 6,123,088 (10,856,708)
--------------- ---------------
(83,476,912) (49,256,708)
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Increase (decrease) in cash and cash
equivalents during the year (23,458,537) 23,450,181
Cash and cash equivalents, beginning
of year 23,600,474 150,293
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Cash and cash equivalents, end of year $ 141,937 $ 23,600,474
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--------------- ---------------
Cash and cash equivalents are comprised
of the following:
Cash in bank $ 141,937 $ 73,300
Term deposits - 23,527,174
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$ 141,937 $ 23,600,474
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--------------- ---------------
Cash income taxes paid $ 22,719,451 $ 564,447
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Cash interest paid $ 778,565 $ 847,787
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LABRADOR IRON ORE ROYALTY INCOME FUND
Management's Discussion and Analysis ("MD&A")
The following is a discussion of the consolidated financial condition and results of operations of the Fund for the years ended December 31, 2006 and 2005. This discussion should be read in conjunction with the audited consolidated financial statements of the Fund and notes thereto for the years ended December 31, 2006 and 2005. The consolidated financial statements are prepared in accordance with Canadian Generally Accepted Accounting Principles ("GAAP"). All amounts contained in the MD&A are shown in Canadian dollars unless otherwise indicated.
The consolidated balance sheets as at December 31, 2006 and 2005, the consolidated statements of income and undistributed income and the consolidated statements of cash flows reflect the results of the Fund's operations for the years ended December 31, 2006 and 2005 and its financial position at the respective year ends.
General
The Fund is dependent on the operations of IOC. IOC's earnings and cash flows are affected by the volume of iron ore products sold and the prices received. Iron ore demand and prices fluctuate and are affected by numerous factors which include demand for steel and steel products, the relative exchange rate of the US dollar, global and regional demand and production, political and economic conditions and production costs in major producing areas.
Liquidity and Capital Resources
Operating cash flow of the Fund is sourced entirely from IOC through the Fund's 7% royalty, 10 cents commission per tonne and its 15.10% equity interest in IOC. The Fund intends to make cash distributions of the net income derived from IOC to the maximum extent possible, subject to the maintenance of appropriate levels of working capital and debt.
At December 31, 2006, the Fund had borrowed $6.1 million under its $75 million term line of credit, $4.1 million was repaid in January 2007.
Operating Results
The following table summarizes the Fund's 2006 operating results as compared to 2005 results.
Revenue 2006 2005
------------------------------
IOC royalties (net of 20% Newfoundland
royalty tax) $ 65,266,671 $ 62,390,790
IOC commissions 1,559,731 1,474,933
Other 86,173 133,710
------------------------------
66,912,575 63,999,433
------------------------------
Expenses
Administrative expenses 1,526,433 1,884,313
Interest expense (net of amortization
of $125,004; 2005-$125,004) 833,129 719,052
Income taxes expense - current 12,590,404 10,860,000
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14,949,966 13,463,365
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51,962,609 50,536,068
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Non cash revenue (expense)
Equity earnings in IOC 38,585,689 42,334,777
Future income taxes 9,120,000 (1,840,100)
Amortization (5,249,828) (4,984,358)
------------------------------
42,455,861 35,510,319
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Net income $ 94,418,470 $ 86,046,387
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The Fund's 2006 net royalty income was $2.9 million higher than 2005 as a result of higher volume somewhat offset by the appreciation of the Canadian dollar. Prices received were approximately neutral with decreases in pellet prices offsetting increases in concentrate pricing. The Fund's share of IOC's earnings amounted to $38.6 million compared to $42.3 million in 2005. The increase in net income was mainly due to the $10.5 million reduction in future income tax liabilities as a result of the 2% reduction in the federal corporate tax rate by 2010 and the elimination of surtax by January 1, 2008. Current income taxes represent federal and provincial income taxes payable by Labmin on IOC royalties, net of interest, royalty taxes and administrative expenses.
The operating cash flow of the Fund is dependent on the royalty, commission and dividend payments from IOC. Royalty payments to the Fund vary considerably from quarter to quarter. This is because sales revenue of IOC is not constant throughout the year, being lower during the winter months when the St. Lawrence Seaway is closed.
It had been IOC's policy to declare an annual dividend each December, the amount of which varies according to the estimated profits and cash flows for the year. As a result of its decision to expand production, IOC suspended its common share dividend beginning in 1998. With substantially improved cash flow, IOC reinstated its dividend in 2005. The Fund's share of IOC's dividend amounted to $20.9 or $0.65 per unit in 2006 as compared to $24.1 million or $0.75 per unit in 2005.
Although the 2006 fourth quarter results were below the 2005 fourth quarter as shown in the results by quarter table, this was entirely due to increased provision for future taxes. Royalty revenue for the quarter was $28.9 million compared to $25.6 million in 2005 and equity earnings from IOC were $15.0 million compared to $14.6 million in 2005. Adjusted cash flow for the period was $17.6 million ($0.56 per unit) compared to $40.1 million ($1.26 per unit) in 2005. The 2005 quarter included IOC's dividend of $24.1 million ($0.75 per unit) whereas IOC's 2006 dividend was received in prior quarters.
Selected Consolidated Financial Information
The following table sets out financial data for the three years ended December 31, 2006, 2005 and 2004.
Years Ended December 31
Description 2006 2005 2004
----------- ---- ---- ----
(in millions except per Unit
information)
Revenue $ 83.22 $ 79.60 $ 37.70
Net Income $ 94.41 $ 86.10 $ 19.90
Net Income per Unit $ 2.95 $ 2.69 $ 0.64
Adjusted Cash Flow(1) $ 72.90 $ 74.60 $ 30.60
Adjusted Cash Flow per Unit(1) $ 2.28 $ 2.33 $ 0.98
Total Assets $510.11 $517.80 $464.50
Total Long-Term Debt $ 6.12 - $ 10.90
Cash Distribution per Unit $ 2.15 $ 2.15(2) $ 1.00
Number of Units outstanding (millions) 32.00 32.00 32.00
Notes: (1) "Adjusted cash flow" ( see below)
(2) $0.85 is considered 2006 taxable income to unitholders
The following table sets out quarterly revenue, net income and cash flow
data for 2006 and 2005.
Adjusted Distri-
Net Adjusted Cash butions
Net Income Cash Flow per Declared
Revenue Income per Unit Flow(1) Unit(1) per Unit
-------- -------- -------- -------- -------- --------
(in millions except per Unit information)
2006
----
First Quarter $14.4 $11.9 $0.37 $ 9.4 $0.29 $0.35
Second Quarter $19.2 $33.5 $1.05 $25.3(2) $0.79 $0.65
Third Quarter $20.2 $20.3 $0.63 $20.6(3) $0.64 $0.60
Fourth Quarter $29.4 $28.7 $0.90 $17.6 $0.56 $0.55
2005
----
First Quarter $14.9 $15.5 $0.48 $10.0 $0.31 $0.25
Second Quarter $21.3 $21.3 $0.67 $13.5 $0.42 $0.35
Third Quarter $17.2 $17.9 $0.56 $11.0 $0.34 $0.35
Fourth Quarter $26.2 $31.4 $0.98 $40.1(4) $1.26 $1.20
Notes: (1) "Adjusted cash flow" (see below)
(2) Includes a $12.5 million IOC dividend
(3) Includes a $8.5 million IOC dividend
(4) Includes a $24.1 million IOC dividend
Adjusted Cash Flow
"Adjusted cash flow" is defined as cash flow from operating activities after adjustments for changes in amounts receivable, accounts payable and income taxes payable. It is not a recognized measure under Canadian GAAP. The Trustees 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.
2006 2005
------------------------------
Cash flow from operating activities $ 60,018,375 $ 72,706,889
Excluding : changes in amounts receivable,
accounts payable and income taxes payable 12,862,030 1,906,201
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Adjusted cash flow $ 72,880,405 $ 74,613,090
Adjusted cash flow per unit $ 2.28 $ 2.33
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Disclosure Controls and Internal Control Over Financial Reporting
The Chairman and CEO and the Secretary-Treasurer are responsible for establishing and maintaining disclosure controls and procedures and internal control over financial reporting for the Fund. The two officers serve as directors of IOC and IOC provides monthly reports on its operations to them. The Fund also relies on financial information provided by IOC, including its audited financial statements, and other material information provided to the Chairman and CEO and to the Secretary-Treasurer by officers of IOC. IOC is a private corporation, and its financial statements are not publicly available.
The Trustees are informed of all material information relating to the Fund and its subsidiaries by the officers of the Fund on a timely basis and approve all core disclosure documents including the Management Information Circular, the annual and interim financial statements and related Management's Discussion and Analysis, the Annual Information Form, any prospectuses and all press releases.
The Chairman and CEO and the Secretary-Treasurer have designed internal control over financial reporting to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with Canadian GAAP.
The Chairman and CEO and the Secretary-Treasurer have concluded that the Fund's disclosure controls and procedures were effective in ensuring that material information relating to the Fund was accumulated and communicated in the annual filings for the year ended December 31, 2006.
No change in the Fund's internal control over financial reporting occurred during the Fund's most recent interim period.
Outlook
The market for iron ore remains firm, especially in Asia, and IOC expects to be able to sell all the pellets and concentrate it can produce. Prices for 2007, which for most IOC contracts are effective January 1, have yet to be settled but are expected to increase approximately 5% for pellets and 9% for concentrates which is in line with prices settled with other iron ore suppliers.
The project to increase annual concentrate production to 17.5 million tonnes was largely completed during 2006, with plans for further expansion currently under consideration. Under current market conditions we expect that, subject to capital requirements, IOC will be able to continue its previous policy of paying dividends annually. The strengthening of the Canadian dollar against its US counterpart appears to have abated and it is currently below its 2006 average. The collective agreement with the United Steelworkers of America expired on February 28, 2007.
On March 9, 2007, the employees at Labrador City rejected the most recent contract offer and voted to commence a legal strike. Barring a lengthy strike, 2007 promises to be a satisfactory year for IOC and for the Fund.
Additional information
Additional information relating to the Fund, including the Annual Information Form, is on SEDAR at www.sedar.com.
Bruce C. Bone
Chairman and Chief Executive Officer
Toronto, Ontario
March 13, 2007
%SEDAR: 00002722E