Labrador Iron Ore Royalty Income Fund - Results for the second quarter ended June 30, 2009

August 7, 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


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