Labrador Iron Ore Royalty Income Fund - 2008 Results of Operations

February 28, 2009

TORONTO, Feb. 27 /CNW/ - Labrador Iron Ore Royalty Income Fund announced the results of its operations for the year ended December 31, 2008. Following are some of the financial highlights of the Fund's 2008 results with comparison to the 2007 results:

-------------------------------------------------------------------------
Years Ended December 31                             2008            2007
($ in millions except per unit information)

Revenue                                            163.4            67.6

Expenses (including royalty taxes)                  38.8            22.6

Net Income                                         176.5            80.9

Adjusted Cash Flow(1)(2)                           174.9            60.5

Net Income per Unit                               $ 5.52          $ 2.53

Adjusted Cash Flow per Unit(1)(2)                 $ 5.46          $ 1.89

Cash Distributions per Unit                       $ 4.85          $ 1.95
-------------------------------------------------------------------------

(1) See Management's Discussion & Analysis for definition
(2) Includes IOC dividends totaling $77.9 million or $2.44 per Unit
    (2007 - $18.8 million or $0.59 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, 2008 was $174.9 million or $5.46 per unit as compared to $60.5 million or $1.89 per unit for 2007.

Iron ore sales of the Iron Ore Company of Canada ("IOC") amounted to 15.1 million tonnes compared to 13.4 million tonnes in 2007. 2008 sales, although higher than 2007, were disappointing as we had expected sales to exceed 16 million tonnes, but the iron ore markets deteriorated very suddenly in the last two months of the year resulting in reduced sales. Sales in 2007 had been restricted due to the lost production caused by the strike of IOC's unionized work force which shut down all production facilities from March 9 to April 27, 2007. Iron ore markets remained very strong during the first three quarters of the year and benchmark prices increased 86.67% for pellets and 68.75% for concentrate. The decline during the year of the Canadian dollar against its US counterpart from $0.9913 to $1.2180 positively affected results for the year. The Fund's adjusted cash flow includes a dividend from IOC of $77.9 million (2007 - $18.8 million).

The Fund's consolidated net income for the year ended December 31, 2008 was $176.5 million or $5.52 per unit compared to $80.9 million or $2.53 per unit in 2007. The Fund's share of IOC's earnings amounted to $84.5 million compared to $30.7 million in 2007. The 2008 earnings were reduced by an after tax charge of $26 million ($0.81 per unit) in the fourth quarter relating to IOC's decision to write down the value of the partly refurbished pellet plant at Sept-Iles.

IOC Developments

During the year IOC completed its program to increase annual concentrate production capacity to 18.4 million tonnes. On March 11, 2008, IOC announced an additional $500 million expansion program to increase annual concentrate production capacity to 22 million tonnes and on September 4, 2008, it announced a $300 million expansion program to further increase production capacity to 22.8 million tonnes, including $75 million towards a feasibility study to increase production capacity to 26 million tonnes. In December 2008, in addition to cutting back production, IOC suspended the $800 million expansion programs in response to adverse market conditions.

The continued re-evaluation of reserves during the year (after mining almost 40 million tonnes) resulted in an increase of 100 million tonnes to 1,393 million tonnes at year-end. Resources totalled 3,121 million tonnes after transfers to reserves and some reduction in inferred resources.

Outlook

During the fourth quarter of 2008 steel producers were faced with a sharp decline in demand for steel products and as a result many cut back production and sharply reduced their demand for iron ore. This caused a sudden deterioration of the iron ore markets and most producers, including IOC, cut back production to avoid building excessive inventories. The market currently remains unsettled and IOC expects to continue to operate below production capacity until demand recovers. Pricing for 2008 remains unsettled with some sales taking place at prices considerably below 2008 benchmark prices, although some firming of prices appears to be occurring. A positive factor is the US - Canadian dollar exchange rate, with the Canadian dollar currently trading about 27% lower than at the beginning of 2008.

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
February 27, 2009

Fund Structure

The Fund is an unincorporated limited purpose trust whose sole investment is all of the issued and outstanding common shares and $247.8 million notes of Labrador Mining Company Limited ("Labmin"). Labmin directly holds a 7% gross overriding royalty on IOC's sales revenue, a 9.56% equity interest in IOC and 100% of Hollinger-Hanna Limited. Hollinger-Hanna holds a 5.54% equity interest in IOC. It also receives a commission of 10 cents per tonne on all iron ore products sold by IOC. Net income earned from these investments is used by Labmin to service interest payments on the $247.8 million of notes held by the Fund, with any excess after expenses and working capital requirements being distributed in the form of dividends.

Six Trustees are responsible for the governance of the Fund and also serve as directors of Labmin and Hollinger-Hanna. The Trustees, in addition to managing the affairs of the Fund, Labmin and Hollinger-Hanna, oversee Labmin's interests in IOC. Two of the six Trustees sit on the board of IOC and the three independent Trustees serve as members of the Audit and Compensation Committees. Scotia Capital Inc. pursuant to an administration agreement acts as the administrator of the Fund, Labmin and Hollinger-Hanna.

Taxation

The Fund is a taxable trust under the Income Tax Act. By electing to have income earned from its investments taxed in the unitholders' hands, it reduces its taxable income to nil. Labmin is a taxable corporation. Dividend income received from IOC and Hollinger-Hanna is received tax free while royalty income, less the expenses of Labmin, is subject to income tax. Expenses of Labmin include $30.0 million a year in interest payments relating to the $247.8 million notes held by the Fund plus interest on any bank loans. Hollinger-Hanna is a taxable corporation.

On June 22, 2007, the federal government enacted tax legislation that taxes certain publicly traded trusts on the "non-portfolio earnings" distributed to its unitholders at a rate similar to the combined federal and provincial corporate tax rates. Generally, there is a four year transition period for a publicly traded fund, such as the Fund, such that the Fund will not be subject to this tax until 2011, provided the Fund does not exceed its "normal growth", as determined by reference to the normal growth guidelines issued by the Department of Finance on December 15, 2006, as amended from time to time. The Trustees continue to review the implications of these changes on the Fund.

Income Taxes

Distributions to a unitholder that are paid or payable within a particular year are to be included in the calculation of the unitholder's taxable income for that year. Quarterly distributions are normally comprised of both an interest and a dividend component. The dividend component will be eligible for the dividend tax credit and, accordingly, will be subject to a lower effective tax rate than that applicable to the interest component. The dividends paid in 2008 were "eligible dividends" under the Income Tax Act.

Quarterly Distributions

Distributions of $4.85 per unit to unitholders were declared by the Trustees of the Fund in 2008 (2007 - $1.95) including special distributions of $3.00 per unit (2007 - $0.55 per unit). Due to economic uncertainties the Trustees did not declare a special distribution in the fourth quarter in order to reduce net liabilities to zero and to retain funds to support 2009 distributions. These distributions were allocated as follows:

-------------------------------------------------------------------------
                                 Dividend  Interest              Total
-------------------------------------------------------------------------
                                                      Distri-   Distri-
Period              Payment       Income    Income    bution    bution
Ended                 Date       per Unit  Per Unit  Per Unit (S Million)
-------------------------------------------------------------------------

Mar. 31, 2008    Apr. 25, 2008    $ 0.100   $ 0.250   $ 0.350     $ 11.2
Jun. 30, 2008    Jul. 25, 2008      0.250     0.250     0.500       16.0
  Special
   distribution  Jul. 25, 2008      0.500         -     0.500       16.0
Sep. 30, 2008    Oct. 24, 2008      0.250     0.250     0.500       16.0
  Special
   distribution  Oct. 24, 2008      2.500         -     2.500       80.0
Dec. 31, 2008    Jan. 26, 2009      0.357     0.143     0.500       16.0
-------------------------------------------------------------------------

Distribution to
 Unitholders -2008                $ 3.957   $ 0.893   $ 4.850     $155.2
-------------------------------------------------------------------------

Mar. 31, 2007     Apr. 25, 2007   $ 0.100   $ 0.250   $ 0.350     $ 11.2
Jun. 30, 2007     Jul. 25, 2007     0.100     0.250     0.350       11.2
Sep. 30, 2007     Oct. 25, 2007     0.100     0.250     0.350       11.2
  Special
   distribution   Oct. 25, 2007     0.350         -     0.350       11.2
Dec. 31,2007      Jan. 25, 2008     0.207     0.143     0.350       11.2
  Special
   distribution   Jan. 25, 2008     0.200         -     0.200        6.4
-------------------------------------------------------------------------

Distribution to
 Unitholders -2007                $ 1.057   $ 0.893   $ 1.950     $ 62.4
-------------------------------------------------------------------------

The quarterly distributions are payable to all unitholders of record on the last day of each calendar quarter and are paid on the 25th day of the following month. Unitholders of record on December 31, 2008 will be required to include the fourth quarter distribution of $0.50 as income in the 2008 taxation year.

Review of Operations

Iron Ore Company of Canada

The income of the Fund is entirely dependent on IOC as the only assets of the Fund and its subsidiaries are related to IOC and its operations. IOC is Canada's largest iron ore producer, operating a mine, concentrator and pellet plant at Labrador City, Newfoundland, and is among the top five producers of iron ore pellets in the world. It has been producing and processing iron ore concentrate and pellets since 1954. IOC is strategically situated to serve the markets of the Great Lakes and the balance of the world from its year-round port facilities at Sept-Iles, Quebec.

IOC has ore reserves sufficient for at least 30 years at current production rates with additional resources of a greater magnitude. It currently has the nominal capacity to extract around 43 million tonnes of crude ore annually. The crude ore is processed into iron ore concentrate and then either sold or converted into many different qualities of iron ore pellets to meet its customers' needs. The iron ore concentrate and pellets are transported to IOC's port facilities at Sept-Iles, Quebec via its wholly-owned Quebec North Shore and Labrador Railway, a 418 kilometer rail line which links the mine and the port. From there, the products are shipped to markets throughout North America, Europe, the Middle East and the Asia-Pacific region.

IOC's 2008 sales totaled 15.1 million tonnes comprised of 2.8 million tonnes of iron ore concentrate and 12.3 million tonnes of iron ore pellets. IOC generated revenues of $2,200.0 million in 2008 (2007 - $1,014.8 million). IOC sales traditionally are approximately 35% in North America, 40% in Europe and 25% in the Asia-Pacific region.

Selected IOC Financial Information

                          2008              2007              2006
-------------------------------------------------------------------------
                                      ($ in thousands)
Revenue              2,199,908         1,014,843         1,197,378
Cash from
 operations          1,195,472           218,315           274,690
Net income (loss)(1)   567,122(1)        206,267(1),(2)    261,115(1)
Capital
 expenditures          262,861           175,874           169,252


                          2005              2004
-------------------------------------------------------------------------
                                      ($ in thousands)
Revenue              1,157,250           555,687
Cash from
 operations            439,212            37,202
Net income (loss)(1)   285,899(1)        (34,966)(1),(2)
Capital
 expenditures          118,774            70,301

(1) Net income includes unrealized foreign exchange gains(losses) before
    tax on U.S. debt translation of $8,643 in 2008, $31,639 in 2007, $473
    in 2006, ($227) in 2005 and $16,725 in 2004.
(2) Revenue in 2007 was negatively affected by the strike by IOC's
    unionized work force which closed down all production facilities
    from March 9, 2007 until April 27, 2007.
(3) Revenue in 2004 was negatively affected by the strike by IOC's
    unionized work force which closed down all production facilities
    from July 19, 2004 until September 29, 2004. IOC's loss of pellet and
    concentrate production as a result of the strike was the principal
    reason that a net loss for the year occurred.

IOC Royalty

The Fund, through its subsidiary Labmin, holds certain leases and licenses covering approximately 18,200 hectares of land near Labrador City. IOC has leased certain portions of these lands from which it currently mines iron ore. In return, IOC pays Labmin a 7% gross overriding royalty on all sales of iron ore products produced from these lands. A 20% tax on the royalty is payable to the Government of Newfoundland and Labrador. For the five years prior to 2008, the average royalty (net of the 20% tax) had been approximately $48.2 million per year and in 2008 it was $129.1 million (2007 - $52.9 million).

Because the royalty is "off-the-top", it is not dependent on the profitability of IOC. However, it is affected by changes in sales volumes, iron ore prices and, because iron ore prices are denominated in US dollars, the United States - Canadian dollar exchange rate.

IOC Equity

In addition to the royalty interest, the Fund through its wholly owned subsidiaries, Labmin and Hollinger-Hanna, owns a 15.10% equity interest in IOC. The other shareholders of IOC are Rio Tinto Limited with 58.72% and Mitsubishi Corporation with 26.18%.

IOC Commissions

Hollinger-Hanna has the right to receive a payment of 10 cents per tonne on the products sold by IOC. Pursuant to an agreement, IOC is obligated to make the payment to Hollinger-Hanna so long as Hollinger-Hanna is in existence and solvent. In 2008, Hollinger-Hanna received a total of $1.5 million in commissions from IOC (2007 - $1.3 million).

Management's Discussion and Analysis

The following is a discussion of the consolidated financial condition and results of operations of the Fund for the years ended December 31, 2008 and 2007. This discussion should be read in conjunction with the Consolidated Financial Statements of the Fund and notes thereto for the years ended December 31, 2008 and 2007. 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, 2008 and 2007, 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, 2008 and 2007 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. Starting in November 2008, iron ore markets weakened substantially with most producers, including IOC, cutting back production to avoid building up excessive inventories.

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.

The Fund extended the term of its $50 million revolving credit facility to September 18, 2011 with provision for annual one-year extensions. No amounts are currently drawn under this facility leaving $50.0 million available to provide for any capital required by IOC or other Fund requirements.

Operating Results

The following table summarizes the Fund's 2008 operating results as compared to 2007 results.

Revenue                                             2008            2007
                                          -------------------------------
IOC royalties (net of 20% Newfoundland
 royalty tax)                              $ 129,122,510   $  52,894,432
IOC commissions                                1,481,981       1,318,723
Other                                            496,103         182,745
                                          -------------------------------
                                             131,100,594      54,395,900
                                          -------------------------------
Expenses
Administrative expenses                          686,583       3,986,122
Interest expense (net of amortization of
 $239,391; 2007 S125,004)                        498,379         967,220
Income taxes expenses - current               32,983,609       7,800,230
                                          -------------------------------
                                              34,168,571      12,753,572
                                          -------------------------------
                                              96,932,023      41,642,328
                                          -------------------------------
Non cash revenue (expense)
Equity earnings in IOC                        84,488,582      30,680,688
Reduction in future income taxes                 390,000      13,050,000
Amortization                                  (5,293,892)     (4,449,898)
                                          -------------------------------
                                              79,584,690      39,280,790

                                          -------------------------------
Net income and comprehensive income        $ 176,516,713   $  80,923,118
                                          -------------------------------

The Fund's 2008 results were very satisfactory with net royalty income $76.2 million higher than 2007 and the dividend received from IOC being $77.9 million (2007 - $18.8). Although these results were much improved from 2007 they were somewhat disappointing as we had expected sales to exceed 16 million tonnes, but the iron ore market deteriorated very suddenly in the last two months of the year resulting in reduced sales. Sales in 2007 had been restricted due to the lost production caused by the strike of IOC's unionized work force which shut down all production facilities from March 9 to April 27, 2007. Iron ore markets remained very strong during the first three quarters of the year, resulting in benchmark price increases of 86.67% for pellets and 68.75% for concentrate. The decline during the year of the Canadian dollar against its US counterpart from $0.9913 to $1.2180 positively affected results for the year. The Fund's adjusted cash flow includes a dividend from IOC of $77.9 million (2007 - $18.8 million).

The decrease in administrative expenses of $3.3 million was primarily a result of the change in the expense relating to unit appreciation rights, which was a credit of $0.8 million in 2008 (2007 an expense of $2.6 million). 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 $84.5 million as compared to $30.7 million in 2007.

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 $77.9 million ($2.43 per unit) in 2008 as compared to $18.8 million ($0.59 per unit) in 2007.

Although the fourth quarter was negatively affected by the slowdown in sales that commenced in November, revenue was substantially greater than 2007 due to the higher price levels and the lower value of the Canadian dollar against its U.S. counterpart. Royalty income for the quarter was $44.2 million (2007 - $18.3 million) and adjusted cash flow from operations was $27.5 million ($0.86 per unit) compared to 2007 of $11.6 million ($0.36 per unit). Net income for the 2008 quarter was reduced by $26 million ($0.81 per unit), being the Fund's share of an after tax charge incurred by IOC relating to IOC's decision to write down the value of its partly refurbished pellet plant at Sept-Iles.

Due to the sharp drop in world demand for raw materials, including iron ore, IOC found the refurbishment of its Sept-Iles pellet plant (which has been idle since 1981 and was partially refurbished in 2001) to no longer be viable and decided not to proceed with the project. The trustees of the Fund support this decision as it will allow IOC to concentrate its efforts on its current operations.

Selected Consolidated Financial Information

The following table sets out financial data for the three years ended December 31, 2008, 2007 and 2006.

                                               Years Ended December 31

Description                                 2008        2007        2006
-----------                                 ----        ----        ----
                                           (in millions  except per Unit
                                                   information)

Revenue                                  $ 163.4     $  67.6     $  83.2

Net Income                               $ 176.5     $  80.9     $  94.4

Net Income per Unit                      $  5.52     $  2.53     $  2.95

Adjusted Cash Flow(1)                    $ 174.9     $  60.5     $  72.9

Adjusted Cash Flow per Unit(1)           $  5.46     $  1.89     $  2.28

Total Assets                             $ 554.3     $ 508.7     $ 510.1

Total Long-Term Debt                           -     $   1.3     $   6.1

Cash Distribution per Unit               $  4.85     $  1.95     $  2.15

Number of Units outstanding (millions)      32.0        32.0        32.0

Notes: (1) "Adjusted cash flow" (see below)



The following table sets out quarterly revenue, net income and cash flow
data for 2008 and 2007.

                                                       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)

2008
----
First Quarter        $16.6    $10.8    $0.34   $ 10.4    $0.32    $0.35

Second Quarter       $58.1    $73.9    $2.31   $ 32.9    $1.03    $1.00

Third Quarter        $43.7    $65.6    $2.05   $104.1(2) $3.25    $3.00

Fourth Quarter       $45.0    $26.2    $0.82   $ 27.5    $0.86    $0.50

2007
----
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(3) $0.96    $0.70

Fourth Quarter       $18.7    $32.0    $1.00   $ 11.5    $0.36    $0.55

Notes: (1) "Adjusted cash flow" (see below)

       (2) Includes a $77.9 million IOC dividend

       (3)   Includes a $18.8 million IOC dividend

Standardized Cash Flow and Adjusted Cash Flow

For the Fund, 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 $5.82 for 2008 (2007 - $2.10). Cumulative standardized cash flow from inception of the trust is $22.24 per unit and total cash distributions since inception are $20.93 per unit, for a payout ratio of 94%.

"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.

                                                 2008            2007
                                          -------------------------------
Standardized cash flow from operating
 activities                                $ 186,191,796   $  67,198,257
Excluding: changes in amounts receivable,
 accounts payable and income taxes
 payable/recoverable                         (11,336,209)     (6,712,319)
                                          -------------------------------
Adjusted cash flow                         $ 174,855,587   $  60,485,938
                                          -------------------------------
Adjusted cash flow per unit                $        5.46   $        1.89
                                          -------------------------------

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 Vice Chairman and 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. An evaluation of the design and operating effectiveness of the Fund's disclosure controls and procedures was conducted under the supervision of the CEO and CFO. Based on their evaluation, they concluded that the Fund's disclosure controls and procedures were effective in ensuring that material information relating to the Fund was accumulated and communicated for the year ended December 31, 2008.

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. An evaluation of the design and operating effectiveness of the Fund's internal control over financial reporting was conducted under the supervision of the CEO and CFO. Based on their evaluation, they concluded that the Fund's internal control over financial reporting was effective and that there were no material weaknesses therein for the year ended December 31, 2008.

No material change in the Fund's internal control over financial reporting occurred during the year ended December 31, 2008.

Transition to International financial reporting standards ("IFRS")

The CICA Accounting Standards Board requires all Canadian publically accountable enterprises to adopt International Financial Reporting Standards for the years beginning on or after January 1, 2011. The objective of the change is to move towards the use of single set of world-wide accounting standards, thereby facilitating and improving global cash flows, as well as improving financial reporting and transparency. The Fund will adopt IFRS starting January 1, 2011.

In order to prepare for the transition to IFRS, the Fund has performed a preliminary assessment of the impact of significant accounting differences between IFRS and Canadian GAAP including the impact to business processes, systems and internal control over financial reporting. Based on management's review, while there are accounting differences between IFRS and Canadian GAAP, it does not appear that these differences will have a material impact on the Fund's net income and comprehensive income. Rules for determining possible impairment of long lived assets under IFRS are different from current Canadian GAAP, and could result in greater volatility in booking possible losses and gains on the Fund's investment in IOC and royalty and commission interests, if future circumstances indicated a possible impairment in those carrying values. Management has reviewed the impact of IFRS on its business processes, information technology and internal controls over financial reporting and does not believe that the adoption of IFRS will materially impact any of these areas.

Further updates on implementation progress and any changes to reporting impacts from the adoption of IFRS will be provided during the implementation period leading up to January 1, 2011.

Outlook

During the fourth quarter of 2008 steel producers were faced with a sharp decline in demand for steel products and as a result many cut back production and sharply reduced their demand for iron ore. This caused a sudden deterioration of the iron ore markets and most producers, including IOC, cut back production to avoid building excessive inventories. The market currently remains unsettled and IOC expects to continue to operate below production capacity until demand recovers. Pricing for 2008 remains unsettled with some sales taking place at prices considerably below 2008 benchmark prices, although some firming of prices appears to be occurring. A positive factor is the US - Canadian dollar exchange rate, with the Canadian dollar currently trading about 27% lower than at the beginning of 2008.

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
February 27, 2009



CONSOLIDATED BALANCE SHEETS

As at December 31                               2008            2007
                                           --------------  --------------

Assets
Current
  Cash and cash equivalents                $  27,795,570   $     151,256
  Amounts receivable (note 2)                 36,476,337      18,838,481
  Income taxes recoverable                             -       1,389,717
                                           --------------  --------------
                                              64,271,907      20,379,454

Deferred charges, net of accumulated
 amortization of $20,666 (2007 - $781,275)       392,666         218,725

Iron Ore Company of Canada ("IOC"),
 royalty and commission interests (note 3)   302,198,099     307,252,600

Investment in IOC (note 4)                   187,452,133     180,887,115
                                           --------------  --------------
                                           $ 554,314,805   $ 508,737,894
                                           --------------  --------------
                                           --------------  --------------

Liabilities and Unitholders' Equity
Current
  Accounts payable                         $   7,484,614   $   5,542,158
  Income taxes payable                        25,641,892               -
  Distributions payable to
   unitholders (note 5)                       16,000,000      17,600,000
                                           --------------  --------------
                                              49,126,506      23,142,158

Long-term debt (note 6)                                -       1,334,150

Future income tax liability (note 7)         103,110,000     103,500,000
                                           --------------  --------------
                                             152,236,506     127,976,308

Unitholders' equity
 Trust units (note 8)                        317,708,147     317,708,147
 Undistributed income                         84,370,152      63,053,439
                                           --------------  --------------
                                           $ 554,314,805   $ 508,737,894
                                           --------------  --------------
                                           --------------  --------------



CONSOLIDATED STATEMENTS OF INCOME,
COMPREHENSIVE INCOME AND UNDISTRIBUTED INCOME

For the years ended December 31                 2008            2007
                                           --------------  --------------

Revenue
  IOC royalties                            $ 161,403,138   $  66,118,040
  IOC commissions                              1,481,981       1,318,723
  Interest and other income                      496,103         182,745
                                           --------------  --------------
                                             163,381,222      67,619,508
                                           --------------  --------------

Expenses
  Newfoundland royalty taxes                  32,280,628      13,223,608
  Amortization of royalty and
   commission interests                        5,054,501       4,324,894
  Administrative expenses (note 9)               686,583       3,986,122
  Interest expense                               737,770       1,092,224
                                           --------------  --------------
                                              38,759,482      22,626,848
                                           --------------  --------------

Income before equity earnings
 and income taxes                            124,621,740      44,992,660
Equity earnings in IOC (note 4)               84,488,582      30,680,688
                                           --------------  --------------
Income before income taxes                   209,110,322      75,673,348
                                           --------------  --------------
Provision for (recovery of)
 income taxes (note 7)
  Current                                     32,983,609       7,800,230
  Future                                        (390,000)    (13,050,000)
                                           --------------  --------------
                                              32,593,609      (5,249,770)
                                           --------------  --------------
Net income and comprehensive
 income for the year                         176,516,713      80,923,118

Undistributed income, beginning of year       63,053,439      44,530,321

Distributions to unitholders (note 5)       (155,200,000)    (62,400,000)
                                           --------------  --------------
Undistributed income, end of year          $  84,370,152   $  63,053,439
                                           --------------  --------------
                                           --------------  --------------
Net income per unit (note 8)               $        5.52   $        2.53
                                           --------------  --------------
                                           --------------  --------------



CONSOLIDATED STATEMENTS OF CASH FLOWS

For the years ended December 31                 2008            2007
                                           --------------  --------------

Net inflow (outflow) of cash related
 to the following activities

Operating
  Net income for the year                  $ 176,516,713   $  80,923,118
  Items not affecting cash:
    Equity earnings in IOC                   (84,488,582)    (30,680,688)
    Future income taxes                         (390,000)    (13,050,000)
    Amortization of royalty and
     commission interests                      5,054,501       4,324,894
    Amortization of deferred charges             239,391         125,004
  Common share dividend received from IOC     77,923,564      18,843,610
  Change in amounts receivable,
   accounts payable and income
   taxes payable/recoverable                  11,336,209       6,712,319
                                           --------------  --------------
  Cash flow from operating activities        186,191,796      67,198,257
                                           --------------  --------------

Financing
  Distributions paid to unitholders         (156,800,000)    (62,400,000)
  Repayment of long-term debt                 (1,334,150)     (4,788,938)
  Financing cost                                (413,332)              -
                                           --------------  --------------
                                            (158,547,482)    (67,188,938)
                                           --------------  --------------

Increase in cash and cash equivalents
 during the year                              27,644,314           9,319
Cash, beginning of year                          151,256   $     141,937
                                           --------------  --------------
Cash and cash equivalents, end of year     $  27,795,570   $     151,256
                                           --------------  --------------
                                           --------------  --------------

Cash and cash equivalents are comprised of:
  Cash in bank                             $     114,949   $     151,256
  Term deposits                               27,680,621               -
                                           --------------  --------------
                                           $  27,795,570   $     151,256
                                           --------------  --------------
                                           --------------  --------------

Cash income taxes paid                     $   5,952,000   $  10,517,379
                                           --------------  --------------
                                           --------------  --------------
Cash interest paid                         $     494,248   $   1,106,106
                                           --------------  --------------
                                           --------------  --------------

%SEDAR: 00002722E


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