Labrador Iron Ore Royalty Income Fund - 2007 results of operations
TORONTO, March 6 /CNW/ - Labrador Iron Ore Royalty Income Fund announced the results of its operations for the year ended December 31, 2007. Following are some of the financial highlights of the Fund's 2007 results with comparison to the 2006 results:
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Years Ended December 31 2007 2006
($ in millions except per unit information)
Revenue 67.6 83.2
Expenses (including royalty taxes) 22.6 23.9
Net Income 80.9 94.4
Adjusted Cash Flow(1)(2) 60.5 72.9
Net Income per Unit $ 2.53 $ 2.95
Adjusted Cash Flow per Unit(1)(2) $ 1.89 $ 2.28
Cash Distributions per Unit $ 1.95 $ 2.15
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(1) See Management's Discussion & Analysis for definition
(2) Includes IOC dividends totaling $18.8 million or $0.59 per Unit
(2006 - $20.9 million or $0.65 per Unit)
Financial Performance
The Fund's adjusted cash flow (see Management's Discussion & Analysis for definition and calculation) for the year ended December 31, 2007 was $60.5 million or $1.89 per unit as compared to $72.9 million or $2.28 per unit for 2006.
Iron ore sales of the Iron Ore Company of Canada ("IOC") amounted to 13.4 million tonnes compared to 15.8 million tonnes in 2006. The lower sales volume was a result of a shortage of product for sale due to lost production due to a strike of IOC's unionized work force which shut down all of the production facilities from March 9, 2007 to April 27, 2007. Iron ore markets remained strong with U.S dollar benchmark prices increasing 5.8% and 10.4% for pellets and concentrates, respectively. These increases were unfortunately offset by the continued strength of the Canadian dollar against its U.S. counterpart, averaging $1.07 for the year as compared to 2006's average of $1.13. The Fund's adjusted cash flow includes a dividend from IOC of $18.8 million (2006 - $20.9 million).
The Fund's consolidated net income for the year ended December 31, 2007 was $80.9 million or $2.53 per unit compared to $94.4 million or $2.95 per unit in 2006. The Fund's share of IOC's earnings amounted to $30.7 million compared to $38.6 million in 2006. The net income and equity earnings from IOC were substantially reduced because of the strike.
IOC Developments
On August 1, 2007, IOC announced a $60 million program to increase total concentrate production to 18.4 million tonnes by mid 2008 and to conduct a feasibility study to increase concentrate production further to 22 million tonnes annually. A decision on the further increase is expected in March 2008. The settlement which followed the strike in April 2007 was for a five year period to February 28, 2012 which will provide labour stability for IOC's operations. As a result of assessment work and re-examination of pit designs during the year, IOC has increased its Ore Reserves by 34% to 1,293 million tonnes and Mineral Resources by 12% to 3,529 million tonnes. The net increase during the year of reserves and resources included the transfer of some resources to reserves and the inclusion of 600 million tonnes of resources in the Wabush 3 deposit which was subleased from Labmin in 2006.
Outlook
The iron ore market remains strong and prices for some concentrate contracts have been settled with resulting $U.S. price increases of 65 to 71 percent over 2007. Prices for pellet contracts have not yet been settled and IOC has not yet settled any concentrate contracts with its customers. When IOC's contracts are settled the increases are expected to be of similar magnitude and the prices will be retroactive to January 1 for most of IOC's contracts. Barring any unforeseen circumstances the Fund expects IOC's 2008 production to exceed 17 million tonnes. With IOC expecting to be able to sell all of its production, the Fund expects to receive substantially increased royalty payments in 2008 and the Fund's share of IOC's earnings should be greater than in 2007.
CONSOLIDATED BALANCE SHEETS
As at December 31 2007 2006
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Assets
Current
Cash and cash equivalents $ 151,256 $ 141,937
Amounts receivable (note 2) 18,838,481 28,995,350
Income taxes recoverable 1,389,717 -
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20,379,454 29,137,287
Deferred charges, net of accumulated
amortization of $781,275
(2006 - $656,271) 218,725 343,729
Iron Ore Company of Canada ("IOC"),
royalty and commission interests (note 3) 307,252,600 311,577,494
Investment in IOC (note 4) 180,887,115 169,050,037
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$508,737,894 $510,108,547
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Liabilities and Unitholders' Equity
Current
Accounts payable $ 5,542,158 $ 6,269,559
Income taxes payable - 1,327,432
Distributions payable to unitholders
(note 5) 17,600,000 17,600,000
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23,142,158 25,196,991
Long-term debt (note 6) 1,334,150 6,123,088
Future income tax liability (note 7) 103,500,000 116,550,000
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127,976,308 147,870,079
Unitholders' equity
Trust units (note 8) 317,708,147 317,708,147
Undistributed income 63,053,439 44,530,321
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$508,737,894 $510,108,547
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CONSOLIDATED STATEMENTS OF INCOME,
COMPREHENSIVE INCOME AND UNDISTRIBUTED INCOME
For the years ended December 31 2007 2006
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Revenue
IOC royalties $ 66,118,040 $ 81,583,339
IOC commissions 1,318,723 1,559,731
Interest and other income 182,745 86,173
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67,619,508 83,229,243
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Expenses
Newfoundland royalty taxes 13,223,608 16,316,668
Amortization of royalty and commission
interests 4,324,894 5,124,824
Administrative expenses (note 9) 3,986,122 1,526,433
Interest expense 1,092,224 958,133
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22,626,848 23,926,058
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Income before equity earnings and
income taxes 44,992,660 59,303,185
Equity earnings in IOC (note 4) 30,680,688 38,585,689
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Income before income taxes 75,673,348 97,888,874
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Provision for (recovery of) income taxes
(note 7)
Current 7,800,230 12,590,404
Future (13,050,000) (9,120,000)
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(5,249,770) 3,470,404
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Net income and comprehensive income for the
year 80,923,118 94,418,470
Undistributed income, beginning of year 44,530,321 18,911,851
Distributions to unitholders (note 5) (62,400,000) (68,800,000)
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Undistributed income, end of year $ 63,053,439 $ 44,530,321
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Net income per unit (note 8) $ 2.53 $ 2.95
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CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended December 31 2007 2006
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Net inflow (outflow) of cash related to the
following activities
Operating
Net income and comprehensive income for
the year $ 80,923,118 $ 94,418,470
Items not affecting cash:
Equity earnings in IOC (30,680,688) (38,585,689)
Future income taxes (13,050,000) (9,120,000)
Amortization of royalty and commission
interests 4,324,894 5,124,824
Amortization of deferred charges 125,004 125,004
Common share dividend received from IOC 18,843,610 20,917,796
Change in amounts receivable, accounts
payable and income taxes
payable/recoverable 6,712,319 (12,862,030)
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Cash flow from operating activities 67,198,257 60,018,375
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Financing
Distributions paid to unitholders (62,400,000) (89,600,000)
Proceeds from (repayment of) long-term
debt (4,788,938) 6,123,088
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(67,188,938) (83,476,912)
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Increase (decrease) in cash and cash
equivalents during the year 9,319 (23,458,537)
Cash and cash equivalents, beginning of year $ 141,937 $ 23,600,474
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Cash and cash equivalents, end of year $ 151,256 $ 141,937
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Cash and cash equivalents are comprised of:
Cash in bank $ 151,256 $ 141,937
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Cash income taxes paid $ 10,517,379 $ 22,719,451
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Cash interest paid $ 1,056,105 $ 778,565
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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, 2007 and 2006. This discussion should be read in conjunction with the Consolidated Financial Statements of the Fund and notes thereto for the years ended December 31, 2007 and 2006. This information is prepared in accordance with Canadian Generally Accepted Accounting Principles ("GAAP") and all amounts are shown in Canadian dollars unless otherwise indicated.
The consolidated balance sheets as at December 31, 2007 and 2006, the consolidated statements of income, comprehensive 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, 2007 and 2006 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, 2007, the Fund had borrowed $1.3 million under its $50 million term line of credit and borrowed a further $2.5 million in January 2008.
Operating Results
The following table summarizes the Fund's 2007 operating results as
compared to 2006 results.
Revenue 2007 2006
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IOC royalties (net of 20% Newfoundland
royalty tax) $ 52,894,432 $ 65,266,671
IOC commissions 1,318,723 1,559,731
Other 182,745 86,173
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54,395,900 66,912,575
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Expenses
Administrative expenses 3,986,122 1,526,433
Interest expense (net of amortization
of $125,004; 2006 - $125,004) 967,220 833,129
Income taxes expense - current 7,800,230 12,590,404
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12,753,572 14,949,966
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41,642,328 51,962,609
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Non cash revenue (expense)
Equity earnings in IOC 30,680,688 38,585,689
Reduction in future income taxes 13,050,000 9,120,000
Amortization (4,449,898) (5,249,828)
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39,280,790 42,455,861
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Net income and comprehensive income $80,923,118 $94,418,470
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The Fund's 2007 net royalty income was $12.4 million lower than 2006 primarily because of the strike by IOC's unionized work force which closed down all production facilities from March 9, 2007 to April 27, 2007. Price increases for pellets and concentrate of approximately of 5.8% and 10.4% respectively were offset by the strength of the Canadian dollar against its U.S. counterpart which averaged $1.07 in 2007 compared to the 2006 average of $1.13. Administrative expenses were $2.5 million higher than 2006 primarily as a result of accrued amounts in connection with unexercised unit appreciation rights and payments made in respect of unit appreciation rights exercised during the year. Current income taxes represent federal and provincial income taxes payable by Labmin on IOC royalties, net of interest, royalty taxes and administrative expenses. The Fund's share of IOC's earnings amounted to $30.7 million as compared to $38.6 million in 2006. The future income tax provision was reduced by $13.1 million as a result of tax legislation enacted in December 2007 reducing the corporate income tax rates in 2008 through 2011. The prior year included a $10.5 million reduction relating to the reduction in corporate tax rates enacted during 2006.
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 and can vary because of the timing of ship loadings.
It had been IOC's policy to declare an annual dividend, the amount of which varied 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 $18.8 million ($0.59 per unit) in 2007 as compared to $20.9 million ($0.65 per unit) in 2006.
The fourth quarter results for 2007 were substantially below the 2006 fourth quarter mainly because of a lack of product available for sale due to the strike earlier in the year and also to a lesser extent, the timing of shipments. Royalty revenue for the quarter was $18.3 million compared to $28.9 in 2006 and equity earnings from IOC were $11.1 million compared to $15.0 million in 2006. The adjusted cash flow for the quarter decreased from $17.6 million in 2006 to $11.5 million in 2007.
Commencing January 1, 2007, the Fund adopted Section 3855, "Financial Instruments - Recognition and Measurement" of the CICA Handbook. This new standard requires all financial assets and liabilities to be carried at fair value with the exception of certain financial instruments that do not have quoted market values in an active market. The adoption of this standard does not have an impact on the Fund's financial statements.
Selected Consolidated Financial Information
The following table sets out financial data for the three years ended
December 31, 2007, 2006 and 2005.
Years Ended December 31
Description 2007 2006 2005
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(in millions except per Unit information)
Revenue $67.6 $83.2 $79.6
Net Income $80.9 $94.4 $86.1
Net Income per Unit $2.53 $2.95 $2.69
Adjusted Cash Flow(1) $60.5 $72.9 $74.6
Adjusted Cash Flow per Unit(1) $1.89 $2.28 $2.33
Total Assets $508.7 $510.1 $517.8
Total Long-Term Debt $1.3 $6.1 -
Cash Distribution per Unit $1.95 $2.15 $2.15(2)
Number of Units outstanding (millions) 32.0 32.0 32.0
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 2007 and 2006.
Adjusted Distrib-
Net Adjusted Cash utions
Net Income Cash Flow per Declared
Revenue Income per Unit Flow(1) Unit(1) per Unit
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(million except per Unit information)
2007
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First Quarter $ 13.1 $ 10.7 $ 0.34 $ 8.7 $ 0.27 $ 0.35
Second Quarter $ 15.7 $ 15.2 $ 0.47 $ 9.5 $ 0.30 $ 0.35
Third Quarter $ 20.1 $ 23.0 $ 0.72 $30.8(2) $ 0.96 $ 0.70
Fourth Quarter $ 18.7 $ 32.0 $ 1.00 $ 11.5 $ 0.36 $ 0.55
2006
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First Quarter $ 14.4 $ 11.9 $ 0.37 $ 9.4 $ 0.29 $ 0.35
Second Quarter $ 19.2 $ 33.5 $ 1.05 $25.3(3) $ 0.79 $ 0.65
Third Quarter $ 20.2 $ 20.3 $ 0.63 $20.6(4) $ 0.64 $ 0.60
Fourth Quarter $ 29.4 $ 28.7 $ 0.90 $ 17.6 $ 0.56 $ 0.55
Notes: (1) "Adjusted cash flow" (see below)
(2) Includes a $18.8 million IOC dividend
(3) Includes a $12.5 million IOC dividend
(4) Includes a $8.5 million IOC dividend
Standardized Cash Flow and Adjusted Cash Flow
On July 6, 2007, the Canadian Securities Administrators (CSA) published revised National Policy Statement 41-201 for Income Trusts, recommending that all income trusts report distributable cash flow on a standardized basis. For the Fund, this newly defined standardized cash flow is the same as cash flow from operating activities as recorded in the Fund's cash flow statements as the Fund does not incur capital expenditures or have any restrictions on distributions. Standardized cash flow per unit was $2.10 for 2007 (2006 - $1.88). Cumulative standardized cash flow from inception of the trust is $16.42 per unit and total cash distributions since inception are $16.28 per unit, for a payout ratio of 99%.
"Adjusted cash flow" is defined as cash flow from operating activities after adjustments for changes in amounts receivable, accounts payable and income taxes payable/recoverable. 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 standardized cash flow from operating activities to adjusted cash flow.
2007 2006
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Standardized cash flow from
operating activities $ 67,198,257 $ 60,018,375
Excluding: changes in amounts receivable,
accounts payable and income taxes
payable/recoverable (6,712,319) 12,862,030
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Adjusted cash flow $ 60,485,938 $ 72,880,405
Adjusted cash flow per unit $ 1.89 $ 2.28
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Disclosure Controls and Internal Control Over Financial Reporting
The Chairman and CEO and the CFO are responsible for establishing and maintaining disclosure controls and procedures and internal control over financial reporting for the Fund. 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, the Secretary and the CFO 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 CFO 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 CFO 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, 2007.
No change in the Fund's internal control over financial reporting occurred during the year.
Outlook
The iron ore market remains strong and prices for some concentrate contracts have been settled with resulting $U.S. price increases of 65 to 71 percent over 2007. Prices for pellet contracts have not yet been settled and IOC has not yet settled any concentrate contracts with its customers. When IOC's contracts are settled the increases are expected to be of similar magnitude and the prices will be retroactive to January 1 for most of IOC's contracts. Barring any unforeseen circumstances the Fund expects IOC's 2008 production to exceed 17 million tonnes. With IOC expecting to be able to sell all of its production, the Fund expects to receive substantially increased royalty payments in 2008 and the Fund's share of IOC's earnings should be greater than in 2007.
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