Labrador Iron Ore Royalty Income Fund - Results for the third quarter ended September 30, 2009
TORONTO, Oct. 29 /CNW/ -- Labrador Iron Ore Royalty Income Fund (TSX: LIF.UN) announced its results for the third quarter ended September 30, 2009.
Royalty income for the third quarter of 2009 amounted to $15.51 million as compared to $43.20 million for the third quarter of 2008. The Fund's cash flow from operating activities after adjustments for changes in amounts receivable, accounts payable and income taxes payable/recoverable (adjusted cash flow) for the third quarter was $18.81 million or $0.59 per unit as compared to $104.10 million or $3.25 per unit for the same period in 2008. Net income was $13.63 million or $0.43 per unit compared to $65.64 million or $2.05 per unit for the same period in 2008.
Royalty income for the quarter was substantially below the 2008 quarter due to the 2009 benchmark price reduction for pellets of 48.3% and concentrates of 29.75% as compared to 2008 benchmark prices, and the lower volume of sales. Cash flow from operations was affected by the reduced royalty revenue and the reduction in the dividend from Iron Ore Company of Canada (IOC) which was $8.2 million compared to the $77.9 million received in the 2008 third quarter. Net income was affected by these factors as well as substantially lower equity earnings from IOC. The retroactive effect of the price settlements which occurred during the quarter (retroactive to January 1) had been provided for in previous quarters.
The world recession which started last year continued to cause the demand for iron ore, especially pellets, to be reduced from the previous year. As a result IOC, which had previously idled some pellet machines, shut down its Carol Lake operations in Labrador City from July 7 to August 10, 2009 in order to balance inventories with demand. Shipment from IOC's terminal in Sept-Iles continued during this period. With the revival of pellet demand in traditional markets, IOC resumed full pellet production subsequent to the summer shut down.
Equity earnings from IOC amounted to $3.26 million ($0.10 per unit) as compared to $34.19 million ($1.07 per unit) in 2008. IOC earnings were negatively affected by reduced sales volume and lower prices for concentrates and pellets as compare to 2008.
On September 30, 2009 the Fund received a dividend from IOC totaling US$7.5 million equating to CDN$8.2 million or $0.26 per unit.
Results for the three months and nine months ended September 30, 2009 are summarized below:
3 Months 3 Months 9 Months 9 Months
Ended Ended Ended Ended
Sept. 30, Sept. 30, Sept. 30, Sept. 30,
2009 2008 2009 2008
------------------------------------------
(Unaudited)
Revenue (in millions) $ 15.84 $ 43.72 $ 52.10 $118.42
--------- --------- --------- ---------
Adjusted cash flow (in
millions) $ 18.81 $104.10 $ 42.50 $147.40
--------- --------- --------- ---------
Adjusted cash flow per unit $ 0.59 $ 3.25 $ 1.33 $ 4.60
--------- --------- --------- ---------
Net income (in millions) $ 13.63 $ 65.64 $ 47.94 $150.34
--------- --------- --------- ---------
Net income per unit $ 0.43 $ 2.05 $ 1.50 $ 4.70
--------- --------- --------- ---------
"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/recoverable) 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.
A summary of IOC's sales in millions of tonnes is as follows:
3 Months 3 Months 9 Months 9 Months Year
Ended Ended Ended Ended Ended
Sept. 30, Sept. 30, Sept. 30, Sept. 30, Dec. 31,
2009 2008 2009 2008 2008
-----------------------------------------------------
Pellets 2.08 3.29 5.70 9.86 12.30
Concentrates 1.17 1.15 3.92 1.97 2.76
-----------------------------------------------------
Total 3.25 4.44 9.62 11.83 15.06
-----------------------------------------------------
Outlook
-------
During the quarter iron ore markets for concentrates and pellets continued to firm with the result that IOC, which is now back to operating at full capacity, expects to be able to sell all its production for the balance of the year. The prices on the spot market have firmed and are now comparable to benchmark prices. 2009 will be disappointing when compared to last year but the outlook for 2010 appears more promising.
Respectfully submitted on behalf of the Trustees of Labrador Iron Ore Royalty Income Fund,
Bruce C. Bone
Chairman and Chief Executive Officer
October 29, 2009
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 Fund's 2008 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 Fund's 2008 Annual Report.
The Fund'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 Fund'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. The current state of the market may cause 2009 sales to deviate from this pattern. 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 third quarter of 2009 amounted to $15.51 million as compared to $43.20 million for the third quarter of 2008. The Fund's cash flow from operating activities after adjustments for changes in amounts receivable, accounts payable and income taxes payable/recoverable (adjusted cash flow) for the third quarter was $18.81 million or $0.59 per unit as compared to $104.10 million or $3.25 per unit for the same period in 2008. Net income was $13.63 million or $0.43 per unit compared to $65.64 million or $2.05 per unit for the same period in 2008.
Royalty income for the quarter was substantially below the 2008 quarter due to the 2009 benchmark price reduction for pellets of 48.3% and concentrates of 29.75% as compared to 2008 benchmark prices, and the lower volume of sales. Cash flow from operations was affected by the reduced royalty revenue and the reduction in the dividend from Iron Ore Company of Canada (IOC) which was $8.2 million compared to the $77.9 million received in the 2008 third quarter. Net income was affected by these factors as well as substantially lower equity earnings from IOC. The retroactive effect of the price settlements which occurred during the quarter (retroactive to January 1) had been provided for in previous quarters.
The world recession which started last year caused the demand for iron ore, especially pellets, to be reduced from the previous year. As a result IOC, which had previously idled some pellet machines, shut down its Carol Lake operations in Labrador City from July 7 to August 10, 2009 in order to balance inventories with demand. Shipment from IOC's terminal in Sept-Iles continued during this period.
Equity earnings from IOC amounted to $3.26 million ($0.10 per unit) as compared to $34.19 million ($1.07 per unit) in 2008. IOC earnings were negatively affected by reduced sales volume and lower prices for concentrates and pellets as compared to 2008. The nine months results were affected by the same factors as the quarter and reflect the lower volume and lower pricing. Because of particularly weak pellet demand, IOC idled a portion of its pellet plant during the first half of the year in order to have more concentrate available for sale in spot markets. With the revival of the pellet market, IOC resumed full pellet production subsequent to the summer shut down.
The following table sets out quarterly revenue, net income and cash flow data for 2009, 2008 and 2007.
Adjusted Distrib-
Net Adjusted Cash utions
Net Income Cash Flow per Declared
Revenue Income per Unit Flow(1) Unit(1) per Unit
-------- -------- -------- -------- -------- --------
(in millions except per Unit information)
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(2) $ 0.59 $ 0.50
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(3) $ 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(4) $ 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 an $8.2 million IOC dividend
(3) Includes a $77.9 million IOC dividend
(4) Includes an $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 $0.56 for the quarter (2008 - $3.82). Cumulative standardized cash flow from inception of the trust is $23.21 per unit and total cash distributions since inception are $22.43 per unit, for a payout ratio of 97%.
"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/ 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 cash flow from operating activities to adjusted cash flow.
3 Months 3 Months 9 Months 9 Months
Ended Ended Ended Ended
Sept. 30, Sept. 30, Sept. 30, Sept. 30,
2009 2008 2009 2008
-----------------------------------------------------
Standardized cash
flow from
operating
activities $17,849,913 $122,172,571 $31,053,382 $146,858,827
Excluding: changes
in amounts
receivable,
accounts payable
and income taxes
payable/
(recoverable) 961,659 (18,075,891) 11,448,989 542,625
-----------------------------------------------------
Adjusted cash flow $18,811,572 $104,096,680 $42,502,371 $147,401,452
-----------------------------------------------------
Adjusted cash flow
per unit $0.59 $3.25 $1.33 $4.61
-----------------------------------------------------
Liquidity
---------
The Fund has a $50 million revolving credit facility with a term ending September 18, 2012 with provision for annual one-year extensions. No amounts are currently drawn under this facility leaving $50 million available to provide for any capital required by IOC or other Fund requirements. IOC has suspended its previously announced expansion plans and intends to fund capital expenditures from internally generated funds.
Transition to International Financial Reporting Standards ("IFRS")
------------------------------------------------------------------
As indicated in the 2008 annual report, the Canadian Accounting Standards Board will require all Canadian publically accountable enterprises, including the Fund, to adopt International Financial Reporting Standards (IFRS) for the years beginning January 1, 2011. Management has developed a project plan for the conversion to IFRS for the Fund. The project is progressing as planned, and to date there are no changes to the disclosure outlined in the December 31, 2008 MD&A in the 2008 annual report.
Outlook
-------
During the quarter iron ore markets for concentrates and pellets continued to firm with the result that IOC, which is now back to operating at full capacity, expects to be able to sell all its production for the balance of the year. The prices on the spot market have firmed and are now comparable to benchmark prices. 2009 will be disappointing when compared to last year but the outlook for 2010 appears more promising.
Bruce C. Bone
Chairman and Chief Executive Officer
Toronto, Ontario
October 29, 2009
LABRADOR IRON ORE ROYALTY INCOME FUND
CONSOLIDATED BALANCE SHEETS
-------------------------------------------------------------------------
As at
-----------------------------
September 30 December 31
2009 2008
-----------------------------
(Unaudited)
Assets
Current
Cash and cash equivalents $ 10,848,952 $ 27,795,570
Amounts receivable 17,120,621 36,476,337
Income taxes recoverable 1,335,358 -
-------------- --------------
29,304,931 64,271,907
Deferred charges 330,666 392,666
Iron Ore Company of Canada ("IOC"),
royalty and commission interests 298,824,331 302,198,099
Investment in IOC 196,557,418 187,452,133
-------------- --------------
$ 525,017,346 $ 554,314,805
-------------- --------------
-------------- --------------
Liabilities and Unitholders' Equity
Current
Accounts payable $ 3,657,159 $ 7,484,614
Income taxes payable - 25,641,892
Distributions payable to unitholders 16,000,000 16,000,000
-------------- --------------
19,657,159 49,126,506
Future income tax liability 103,340,000 103,110,000
-------------- --------------
122,997,159 152,236,506
Unitholders' equity
Trust units 317,708,147 317,708,147
Undistributed income 84,312,040 84,370,152
-------------- --------------
$ 525,017,346 $ 554,314,805
-------------- --------------
-------------- --------------
LABRADOR IRON ORE ROYALTY INCOME FUND
CONSOLIDATED STATEMENTS OF INCOME AND
COMPREHENSIVE INCOME AND UNDISTRIBUTED INCOME
-------------------------------------------------------------------------
For the Three Months
Ended September 30,
2009 2008
-----------------------------
(Unaudited)
Revenue
IOC royalties $ 15,514,566 $ 43,200,281
IOC commissions 320,284 437,089
Interest and other income 4,363 84,604
-------------- --------------
15,839,213 43,721,974
-------------- --------------
Expenses
Newfoundland royalty taxes 3,102,913 8,640,056
Amortization of royalty and commission
interests 1,332,629 1,424,051
Administrative expenses (note 2) 447,476 (267,623)
Interest expense 115,187 144,614
-------------- --------------
4,998,205 9,941,098
-------------- --------------
Income before equity earnings and income taxes 10,841,008 33,780,876
Equity earnings in IOC 3,261,695 34,190,307
-------------- --------------
Income before income taxes 14,102,703 67,971,183
-------------- --------------
Provision for (recovery of) income taxes
Current 1,582,827 9,063,062
Future (1,110,000) (6,730,000)
-------------- --------------
472,827 2,333,062
-------------- --------------
Net income and comprehensive
income for the period 13,629,876 65,638,121
Undistributed income, beginning of period 86,682,164 104,550,599
Distributions to unitholders (16,000,000) (96,000,000)
-------------- --------------
Undistributed income, end of period $ 84,312,040 $ 74,188,720
-------------- --------------
-------------- --------------
Net income per unit $ 0.43 $ 2.05
-------------- --------------
-------------- --------------
LABRADOR IRON ORE ROYALTY INCOME FUND
CONSOLIDATED STATEMENTS OF INCOME AND
COMPREHENSIVE INCOME AND UNDISTRIBUTED INCOME
-------------------------------------------------------------------------
For the Nine Months
Ended September 30,
2009 2008
-----------------------------
(Unaudited)
Revenue
IOC royalties $ 51,016,686 $ 117,170,887
IOC commissions 947,045 1,164,218
Interest and other income 134,831 88,942
-------------- --------------
52,098,562 118,424,047
-------------- --------------
Expenses
Newfoundland royalty taxes 10,203,337 23,434,177
Amortization of royalty and commission
interests 3,373,768 3,815,050
Administrative expenses (note 2) 1,346,269 1,266,865
Interest expense 342,479 497,175
-------------- --------------
15,265,853 29,013,267
-------------- --------------
Income before equity earnings and income taxes 36,832,709 89,410,780
Equity earnings in IOC 17,305,381 84,726,196
-------------- --------------
Income before income taxes 54,138,090 174,136,976
-------------- --------------
Provision for (recovery of) income taxes
Current 5,966,202 23,841,695
Future 230,000 (40,000)
-------------- --------------
6,196,202 23,801,695
-------------- --------------
Net income and comprehensive
income for the period 47,941,888 150,335,281
Undistributed income, beginning of period 84,370,152 63,053,439
Distributions to unitholders (48,000,000) (139,200,000)
-------------- --------------
Undistributed income, end of period $ 84,312,040 $ 74,188,720
-------------- --------------
-------------- --------------
Net income per unit $ 1.50 $ 4.70
-------------- --------------
-------------- --------------
LABRADOR IRON ORE ROYALTY INCOME FUND
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------------------------------------------
For the Three Months
Ended September 30,
2009 2008
-----------------------------
(Unaudited)
Net inflow (outflow) of cash related
to the following activities
Operating
Net income for the period $ 13,629,876 $ 65,638,121
Items not affecting cash:
Equity earnings in IOC (3,261,695) (34,190,307)
Future income taxes (1,110,000) (6,730,000)
Amortization of royalty and commission
interests 1,332,629 1,424,051
Amortization of deferred charges 20,666 31,251
Common share dividend received from IOC 8,200,096 77,923,564
Change in amounts receivable, accounts and
income taxes payable/recoverable (961,659) 18,075,891
-------------- --------------
Cash flow from operating activities 17,849,913 122,172,571
-------------- --------------
Financing
Distributions paid to unitholders (16,000,000) (32,000,000)
Repayment of long-term debt - (5,405,519)
-------------- --------------
(16,000,000) (37,405,519)
-------------- --------------
Increase in cash and cash equivalents
during the period 1,849,913 84,767,052
Cash and cash equivalents, beginning of period 8,999,039 108,881
-------------- --------------
Cash and cash equivalents, end of period $ 10,848,952 $ 84,875,933
-------------- --------------
-------------- --------------
Cash income taxes paid $ 4,849,155 $ 1,896,000
-------------- --------------
-------------- --------------
Cash interest paid $ 93,493 $ 64,480
-------------- --------------
-------------- --------------
LABRADOR IRON ORE ROYALTY INCOME FUND
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------------------------------------------
For the Nine Months
Ended September 30,
2009 2008
-----------------------------
(Unaudited)
Net inflow (outflow) of cash related
to the following activities
Operating
Net income for the period $ 47,941,888 $ 150,335,281
Items not affecting cash:
Equity earnings in IOC (17,305,381) (84,726,196)
Future income taxes 230,000 (40,000)
Amortization of royalty and commission
interests 3,373,768 3,815,050
Amortization of deferred charges 62,000 93,753
Common share dividend received from IOC 8,200,096 77,923,564
Change in amounts receivable, accounts
payable and income taxes
payable/recoverable (11,448,989) (542,625)
-------------- --------------
Cash flow from operating activities 31,053,382 146,858,827
-------------- --------------
Financing
Distributions paid to unitholders (48,000,000) (60,800,000)
Repayment of long-term debt - (1,334,150)
-------------- --------------
(48,000,000) (62,134,150)
-------------- --------------
Increase (decrease) in cash and cash
equivalents during the period (16,946,618) 84,724,677
Cash and cash equivalents, beginning
of period 27,795,570 151,256
-------------- --------------
Cash and cash equivalents, end of period $ 10,848,952 $ 84,875,933
-------------- --------------
-------------- --------------
Cash income taxes paid $ 32,943,452 $ 4,056,000
-------------- --------------
-------------- --------------
Cash interest paid $ 280,480 $ 317,062
-------------- --------------
-------------- --------------
%SEDAR: 00002722E