Labrador Iron Ore Royalty Income Fund - Results for the second quarter ended June 30, 2009
Labrador Iron Ore Royalty Income Fund (TSX: LIF.UN) announced its results for the second quarter ended June 30, 2009.
TORONTO, Aug. 6 /CNW/ - Royalty income for the second quarter of 2009 amounted to $19.24 million as compared to $57.61 million for the second quarter of 2008. The Fund's cash flow from operating activities after adjustments for changes in amounts receivable, accounts payable and income taxes payable (adjusted cash flow) for the second quarter was $12.58 million or $0.39 per unit as compared to $32.95 million or $1.03 per unit for the same period in 2008. Net income was $17.78 million or $0.55 per unit compared to $73.92 million or $2.31 per unit for the same period in 2008.
The second quarter of 2008 included a retroactive pricing adjustment relating to the 2008 first quarter resulting from the price increase of 87.67% for pellets and 68.75% for concentrates that occurred in the second quarter of 2008 but were retroactive to January. These retroactive adjustments increased 2008 second quarter royalty income by $6.6 million or $0.20 per unit and equity earnings from Iron Ore Company of Canada (IOC) by $16 million or $0.50 per unit. Without these adjustments adjusted cash flow per unit in 2008 would have been $0.83 per unit and net income per unit would have been $1.61 per unit.
The world recession which started last year and sharply reduced demand for iron ore starting in the fourth quarter of 2008 continued into the second quarter of 2009, resulting in pellet sales for the quarter being sharply lower than 2008. However this was substantially offset by increased spot sales of concentrates. In order to manage inventories, IOC shut down all production facilities from July 7 to August 10, 2009. This will not affect its shipping operations at Sept-Iles.
IOC has yet to settle 2009 contract pricing, but when settled the prices are expected to approximate other settlements that have taken place and have resulted in reductions of 48.3% for pellets and 28.2% for concentrates. Spot prices, which had fallen below the 2009 Asian settlement prices, recovered during the quarter. The expected price settlements have been recorded in earnings for the quarter so that a retroactive adjustment such as occurred in 2008 should not occur in 2009.
Equity earnings from IOC amounted to $7.25 million ($0.23 per unit) as compared to $49.21 million ($1.54 per unit) in 2008. If the 2008 retroactive price increase had been included in the first quarter, 2008 second quarter equity earnings would have been reduced by $16 million or $0.50 per unit to $1.04 per unit.
Results for the three months and six months ended June 30, 2009 are summarized below:
3 Months 3 Months 6 Months 6 Months
Ended Ended Ended Ended
June 30, June 30, June 30, June 30,
2009 2008 2009 2008
------------------------------------------
(Unaudited)
Revenue (in millions) $ 19.66 $ 58.06 $ 36.26 $ 74.70
--------- --------- --------- ---------
Adjusted cash flow (in
millions) $ 12.58 $ 32.95 $ 23.69 $ 43.30
--------- --------- --------- ---------
Adjusted cash flow per unit $ 0.39 $ 1.03 $ 0.74 $ 1.35
--------- --------- --------- ---------
Net income (in millions) $ 17.78 $ 73.92 $ 34.31 $ 84.70
--------- --------- --------- ---------
Net income per unit $ 0.55 $ 2.31 $ 1.07 $ 2.65
--------- --------- --------- ---------
"Adjusted cash flow" (defined as cash flow from operating activities as shown on the attached financial statements less changes in amounts receivable, accounts payable and income taxes payable) 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 6 Months 6 Months Year
Ended Ended Ended Ended Ended
June 30, June 30, June 30, June 30, June 30,
2009 2008 2009 2008 2008
-----------------------------------------------------
Pellets 2.41 4.02 3.62 6.57 12.30
Concentrates 1.83 0.56 2.75 0.82 2.76
-----------------------------------------------------
Total 4.24 4.58 6.37 7.39 15.06
-----------------------------------------------------
Outlook
-------
At the present time, iron ore markets for concentrates and pellets are firming and we anticipate sales volumes to approach more normal levels. With the substantial price reductions that have occurred, both royalty revenue and equity earnings from IOC in 2009 are expected to be substantially below 2008 levels. Steel markets remain relatively strong in Asia and the very weak markets in Europe and North America have recently been firming, so more normal sales levels should occur in the last half of 2009. Nevertheless, 2009 will be disappointing when compared to last year's results. With the firming of prices in the spot market and the appearance of increased demand, 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 August 6, 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. 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. The current state of the market may cause 2009 sales to deviate from this pattern.
Royalty income for the second quarter of 2009 amounted to $19.24 million as compared to $57.61 million for the second quarter of 2008. The Fund's cash flow from operating activities after adjustments for changes in amounts receivable, accounts payable and income taxes payable (adjusted cash flow) for the second quarter was $12.58 million or $0.39 per unit as compared to $32.95 million or $1.03 per unit for the same period in 2008. Net income was $17.78 million or $0.55 per unit compared to $73.92 million or $2.31 per unit for the same period in 2008.
The second quarter of 2008 included a retroactive pricing adjustment relating to the 2008 first quarter resulting from the price increase of 87.67% for pellets and 68.75% for concentrates that occurred in the second quarter of 2008 but were retroactive to January. These retroactive adjustments increased 2008 second quarter royalty income by $6.6 million or $0.20 per unit and equity earnings from Iron Ore Company of Canada (IOC) by $16 million or $0.50 per unit. Without these adjustments adjusted cash flow per unit in 2008 would have been $0.83 per unit and net income per unit would have been $1.61 per unit.
The world recession which started last year and sharply reduced demand for iron ore starting in the fourth quarter of 2008 continued into the second quarter of 2009, resulting in pellet sales for the quarter being sharply lower than 2008. However this was substantially offset by increased spot sales of concentrates. In order to manage inventories, IOC shut down all production facilities from July 7 to August 10, 2009. This will not affect its shipping operations at Sept-Iles.
IOC has yet to settle 2009 contract pricing, but when settled the prices are expected to approximate other settlements that have taken place and have resulted in reductions of 48.3% for pellets and 28.2% for concentrates. Spot prices, which had fallen below the 2009 Asian settlement prices, recovered during the quarter. The expected price settlements have been recorded in earnings for the quarter so that a retroactive adjustment such as occurred in 2008 should not occur in 2009.
Equity earnings from IOC amounted to $7.25 million ($0.23 per unit) as compared to $49.21 million ($1.54 per unit) in 2008. If the 2008 retroactive price increase had been included in the first quarter, 2008 second quarter equity earnings would have been reduced by $16 million or $0.50 per unit to $1.04 per unit.
Net income for the second quarter was $17.78 million or $0.55 per unit as compared to $73.92 million or $2.31 per unit in 2008. Had the 2008 price increase been recorded in the first quarter of 2008, net income would have been reduced by $22.6 million or $0.70 per unit to $1.61.
Cash flow from operating activities after adjustments for changes in amounts receivable, accounts payable and income taxes payable (adjusted cash flow) for the quarter was $12.58 million or $0.39 per unit as compared to $32.95 million or $1.03 per unit for the same period in 2008.
The six month results were affected by the same factors as the quarter and reflect the lower volume and substantially lower pricing which have occurred as a result of the global recession.
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
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 this 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 $0.39 for the quarter (2008 - $1.03). Cumulative standardized cash flow from inception of the trust is $22.65 per unit and total cash distributions since inception are $21.93 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 less 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.
3 Months 3 Months 6 Months 6 Months
Ended Ended Ended Ended
June 30, June 30, June 30, June 30,
2009 2008 2009 2008
-----------------------------------------------------
Standardized cash
flow from
operating
activities $10,681,572 $ 9,898,335 $13,203,469 $24,686,256
Excluding: changes in
amounts receivable,
accounts payable and
income taxes
payable/recoverable 1,894,773 23,050,965 10,487,330 18,618,516
-----------------------------------------------------
Adjusted cash flow $12,576,345 $32,949,300 $23,690,799 $43,304,472
-----------------------------------------------------
Adjusted cash flow
per unit $ 0.39 $ 1.03 $ 0.74 $ 1.35
-----------------------------------------------------
Liquidity
---------
The Fund has a $50 million revolving credit facility with a term ending September 18, 2011 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.
Outlook -------
At the present time, iron ore markets for concentrates and pellets are firming and we anticipate sales volumes to approach more normal levels. With the substantial price reductions that have occurred, both royalty revenue and equity earnings from IOC in 2009 are expected to be substantially below 2008 levels. Steel markets remain relatively strong in Asia and the very weak markets in Europe and North America have recently been firming, so more normal sales levels should occur in the last half of 2009. Nevertheless, 2009 will be disappointing when compared to last year's results. With the firming of prices in the spot market and the appearance of increased demand, the outlook for 2010 appears more promising.
Bruce C. Bone
Chairman and Chief Executive Officer
Toronto, Ontario
August 6, 2009
LABRADOR IRON ORE ROYALTY INCOME FUND
CONSOLIDATED BALANCE SHEETS
-------------------------------------------------------------------------
As at
------------------------------
June 30 December 31
2009 2008
------------------------------
(Unaudited)
Assets
Current
Cash and cash equivalents $ 8,999,039 $ 27,795,570
Amounts receivable 20,034,962 36,476,337
-------------- --------------
29,034,001 64,271,907
Deferred charges 351,332 392,666
Iron Ore Company of Canada ("IOC"),
royalty and commission interests 300,156,960 302,198,099
Investment in IOC 201,495,819 187,452,133
-------------- --------------
$ 531,038,112 $ 554,314,805
-------------- --------------
-------------- --------------
Liabilities and Unitholders' Equity
Current
Accounts payable $ 4,266,831 $ 7,484,614
Income taxes payable 1,930,970 25,641,892
Distributions payable to unitholders 16,000,000 16,000,000
-------------- --------------
22,197,801 49,126,506
Future income tax liability 104,450,000 103,110,000
-------------- --------------
126,647,801 152,236,506
Unitholders' equity
Trust units 317,708,147 317,708,147
Undistributed income 86,682,164 84,370,152
-------------- --------------
$ 531,038,112 $ 554,314,805
-------------- --------------
-------------- --------------
LABRADOR IRON ORE ROYALTY INCOME FUND
CONSOLIDATED STATEMENTS OF INCOME AND
COMPREHENSIVE INCOME AND UNDISTRIBUTED INCOME
-------------------------------------------------------------------------
For the Three Months
Ended June 30,
2009 2008
------------------------------
(Unaudited)
Revenue
IOC royalties (Unaudited) $ 19,237,019 $ 57,609,343
IOC commissions 417,231 450,793
Interest and other income 11,498 2,572
-------------- --------------
19,665,748 58,062,708
-------------- --------------
Expenses
Newfoundland royalty taxes 3,847,404 11,521,869
Amortization of royalty and commission
interests 1,359,002 1,485,584
Administrative expenses (note 2) 580,514 529,303
Interest expense 114,160 180,128
-------------- --------------
5,901,080 13,716,884
-------------- --------------
Income before equity earnings and income
taxes 13,764,668 44,345,824
Equity earnings in IOC 7,248,111 49,208,618
-------------- --------------
Income before income taxes 21,012,779 93,554,442
-------------- --------------
Provision for income taxes
Current 2,567,992 12,913,359
Future 660,000 6,720,000
-------------- --------------
3,227,992 19,633,359
-------------- --------------
Net income and comprehensive income for
the period 17,784,787 73,921,083
Undistributed income, beginning of period 84,897,377 62,629,516
Distributions to unitholders (16,000,000) (32,000,000)
-------------- --------------
Undistributed income, end of period $ 86,682,164 $ 104,550,599
-------------- --------------
-------------- --------------
Net income per unit $ 0.55 $ 2.31
-------------- --------------
-------------- --------------
LABRADOR IRON ORE ROYALTY INCOME FUND
CONSOLIDATED STATEMENTS OF INCOME AND
COMPREHENSIVE INCOME AND UNDISTRIBUTED INCOME
-------------------------------------------------------------------------
For the Six Months
Ended June 30
2009 2008
------------------------------
(Unaudited)
Revenue
IOC royalties $ 35,502,120 $ 73,970,606
IOC commissions 626,760 727,129
Interest and other income 130,468 4,338
-------------- --------------
36,259,348 74,702,073
-------------- --------------
Expenses
Newfoundland royalty taxes 7,100,424 14,794,121
Amortization of royalty and commission
interests 2,041,139 2,390,999
Administrative expenses (note 2) 898,792 1,534,488
Interest expense 227,292 352,561
-------------- --------------
10,267,647 19,072,169
-------------- --------------
Income before equity earnings and income
taxes 25,991,701 55,629,904
Equity earnings in IOC 14,043,686 50,535,889
-------------- --------------
Income before income taxes 40,035,387 106,165,793
-------------- --------------
Provision for income taxes
Current 4,383,375 14,778,633
Future 1,340,000 6,690,000
-------------- --------------
5,723,375 21,468,633
-------------- --------------
Net income and comprehensive
income for the period 34,312,012 84,697,160
Undistributed income, beginning of period 84,370,152 63,053,439
Distributions to unitholders (32,000,000) (43,200,000)
-------------- --------------
Undistributed income, end of period $ 86,682,164 $ 104,550,599
-------------- --------------
-------------- --------------
Net income per unit $ 1.07 $ 2.65
-------------- --------------
-------------- --------------
LABRADOR IRON ORE ROYALTY INCOME FUND
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------------------------------------------
For the Three Months
Ended June 30,
2009 2008
------------------------------
(Unaudited)
Net inflow (outflow) of cash related to
the following activities
Operating
Net income for the period $ 17,784,787 $ 73,921,083
Items not affecting cash:
Equity earnings in IOC (7,248,111) (49,208,618)
Future income taxes 660,000 6,720,000
Amortization of royalty and commission
interests 1,359,002 1,485,584
Amortization of deferred charges 20,667 31,251
Change in amounts receivable, accounts
and income taxes payable (1,894,773) (23,050,965)
-------------- --------------
Cash flow from operating activities 10,681,572 9,898,335
-------------- --------------
Financing
Distributions paid to unitholders (16,000,000) (11,200,000)
Proceeds from long-term debt - 1,222,889
-------------- --------------
(16,000,000) (9,977,111)
-------------- --------------
Decrease in cash and cash equivalents
during the period (5,318,428) (78,776)
Cash and cash equivalents, beginning of
period 14,317,467 187,657
-------------- --------------
Cash and cash equivalents, end of period $ 8,999,039 $ 108,881
-------------- --------------
-------------- --------------
Cash income taxes paid $ 799,150 $ 1,900,000
-------------- --------------
-------------- --------------
Cash interest paid $ 92,466 $ 154,667
-------------- --------------
-------------- --------------
LABRADOR IRON ORE ROYALTY INCOME FUND
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------------------------------------------
For the Six Months
Ended June 30,
2009 2008
------------------------------
(Unaudited)
Net inflow (outflow) of cash related to
the following activities
Operating
Net income for the period $ 34,312,012 $ 84,697,160
Items not affecting cash:
Equity earnings in IOC (14,043,686) (50,535,889)
Future income taxes 1,340,000 6,690,000
Amortization of royalty and commission
interests 2,041,139 2,390,999
Amortization of deferred charges 41,334 62,502
Change in amounts receivable, accounts
payable and income taxes payable (10,487,330) (18,618,516)
-------------- --------------
Cash flow from operating activities 13,203,469 24,686,256
-------------- --------------
Financing
Distributions paid to unitholders (32,000,000) (28,800,000)
Proceeds from long-term debt - 4,071,369
-------------- --------------
(32,000,000) (24,728,631)
-------------- --------------
Decrease in cash and cash equivalents
during the period (18,796,531) (42,375)
Cash and cash equivalents, beginning of
period 27,795,570 151,256
-------------- --------------
Cash and cash equivalents, end of period $ 8,999,039 $ 108,881
-------------- --------------
-------------- --------------
Cash income taxes paid $ 28,094,297 $ 2,160,000
-------------- --------------
-------------- --------------
Cash interest paid $ 186,987 $ 252,582
-------------- --------------
-------------- --------------
Notes to Consolidated Financial Statements
1. Basis of Presentation
The financial statements have not been reviewed in accordance with
section 7050 of the CICA Handbook, Auditor Review of the Interim
Financial Statements, by the Fund's Auditor.
Not all disclosures required by Canadian generally accepted
accounting principles for annual financial statements have been
presented and, accordingly, these interim financial statements should
be read in conjunction with the most recently prepared annual
financial statements for the year ended December 31, 2008.
These interim financial statements follow the same accounting
policies and method of application as the most recent annual
financial statements for the year ended December 31, 2008.
Seasonality
The results of operations and operating cash flows of the Fund vary
considerably from quarter to quarter. The operations of the Fund are
dependent on the royalty and commission revenues from IOC, whose
production and revenues are not constant throughout the year, being
lower during the winter months when the St. Lawrence Seaway is
closed.
2. Unit Appreciation Rights
In 2005, the Fund adopted a unit appreciation rights plan which
granted 50,000 units to each of its six trustees, all as more fully
described in the annual financial statements. Since the grant date,
287,000 unit appreciation rights have been exercised.
Compensation expense is not recognized when rights are issued, but is
accrued as an expense over the period that the rights vest. The unit
appreciation rights are marked to market each quarter to the extent
the unit price exceeds $23.00. Compensation expense of $231,000
(2008- $184,625) for the three months ended June 30, 2009 and
$384,000 (2008 - $876,625) for the six months ended June 30, 2009
have been recorded in administrative expenses in connection with the
unit appreciation rights.
During the quarter, Trustees exercised unit appreciation rights in
respect of 22,500 units at a market value of $35.00 resulting in a
total payment of $270,000.
3. Capital Management
The Fund's capital consists of the unitholders' equity and a long-
term debt facility. The Trustees are responsible for managing the
investments and affairs of the Fund, including the receipt of
revenues and the payment of distributions to the unitholders. The
Fund makes cash distributions of the net income to the maximum extent
possible, subject to the maintenance of appropriate levels of working
capital.
4. Financial Instruments
The Fund derives dividends and royalty income from IOC denominated in
US dollars. From time to time the Fund may enter into financial
agreements with banks and other financial institutions to reduce the
underlying risks associated with this foreign currency denominated
income. As at June 30, 2009, there were no foreign exchange
contracts outstanding.
%SEDAR: 00002722E