Labrador Iron Ore Royalty Income Fund - Results for the third quarter ended September 30, 2008
TORONTO, Oct. 21 /CNW/ - Labrador Iron Ore Royalty Income Fund (TSX: LIF.UN) announced its results for the third quarter ended September 30, 2008.
Royalty income for the third quarter of 2008 amounted to $43.20 million as compared to $19.61 million for the third quarter of 2007, an increase of 120% from the same period last year. Equity earnings from Iron Ore Company of Canada (IOC) in the third quarter amounted to $34.19 million ($1.07 per unit) as compared to $10.71 million ($0.33 per unit) in 2007. Royalties and equity earnings were higher than in the 2007 period due to the 86.67% and 68.75% price increases for pellets and concentrates, respectively, slightly higher sales and the lower value of the Canadian dollar versus its U.S. counterpart. The Fund's cash flow from operating activities adjusted for changes in amounts receivable, accounts payable and income taxes payable/recoverable (adjusted cash flow) for the third quarter was $104.10 million or $3.25 per unit as compared to $30.76 million or $0.96 per unit for the same period in 2007. Net income was $65.64 million or $2.05 per unit compared to $22.98 million or $0.72 per unit for the same period in 2007. The increase in net income was the result of increases in royalties and the Fund's share of IOC earnings.
On September 25, 2008 the Fund received a dividend from IOC totaling US$75.5 million equating to CDN$77.9 million or $2.43 per unit.
Results for the three months and nine months ended September 30 are summarized below:
3 Months 3 Months 9 Months 9 Months
Ended Ended Ended Ended
Sept. 30 Sept. 30 Sept. 30 Sept. 30
2008 2007 2008 2007
-----------------------------------------
(Unaudited)
-----------
Revenue (in millions) $ 43.72 $ 20.07 $118.42 $ 48.90
-------- -------- -------- --------
Adjusted cash flow
(in millions) $104.10 $ 30.76 $147.40 $ 48.92
-------- -------- -------- --------
Adjusted cash flow per unit $ 3.25 $ 0.96 $ 4.60 $ 1.53
-------- -------- -------- --------
Net income (in millions) $ 65.64 $ 22.98 $150.34 $ 48.87
-------- -------- -------- --------
Net income per unit $ 2.05 $ 0.72 $ 4.70 $ 1.53
-------- -------- -------- --------
"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
2008 2007 2008 2007 2007
----------------------------------------------------
Pellets 3.29 3.33 9.86 7.84 10.99
Concentrates 1.15 0.82 1.97 1.55 2.41
----------------------------------------------------
Total 4.44 4.15 11.83 9.39 13.40
----------------------------------------------------
IOC completed its $60 million program to expand production to 18.4 million tonnes of concentrate and is progressing on the $500 million program to expand production to 22 million tonnes annually. During the quarter, IOC announced a further $225 million program which will increase concentrate production to 23 million tonnes and a $75 million expenditure for a feasibility study to increase production to 26 million tonnes by 2011. On completion of these programs, including projects to debottleneck pellet production, the capacity to produce pellets from the concentrate will increase from 13.5 to 14.5 million tonnes.
Respectfully submitted on behalf of the Trustees of Labrador Iron Ore Royalty Income Fund. Bruce C. Bone Chairman and Chief Executive Officer October 21, 2008
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 2007 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 2007 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, which is usually set in US dollar terms, and thus 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.
Royalty income for the third quarter of 2008 amounted to $43.20 million as compared to $19.61 million for the third quarter of 2007, an increase of 120%. Equity earnings from IOC in the third quarter amounted to $34.19 million ($1.07 per unit) as compared to $10.71 million ($0.33 per unit) in 2007. Royalties and equity earnings were higher than in the 2007 period due to the 86.67% and 68.75% price increases for pellets and concentrates, respectively, slightly higher sales and the lower value of the Canadian dollar versus its U.S. counterpart. The Fund's cash flow from operating activities adjusted for changes in amounts receivable, accounts payable and income taxes payable/recoverable (adjusted cash flow) for the third quarter was $104.10 million or $3.25 per unit as compared to $30.76 million or $0.96 per unit for the same period in 2007. Net income was $65.64 million or $2.05 per unit compared to $22.98 million or $0.72 per unit for the same period in 2007. The increase in net income was the result of increased royalties and increased equity earnings from IOC.
The nine month results were affected by the same price increases as the quarter and a 26% increase in overall sales volumes over the 2007 period. 2007 was affected by a strike which shut down production facilities from March 9, 2007 to April 27, 2007.
The following table sets out quarterly revenue, net income and cash flow data for 2008, 2007 and 2006.
Adjusted Distrib-
Net Adjusted Cash utions
Net Income Cash Flow per Declared
Revenue Income per Unit Flow(1) Unit(1) per Unit
-------- -------- -------- -------- -------- --------
(million 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
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
2006
----
First Quarter $ 14.4 $ 11.9 $ 0.37 $ 9.4 $ 0.29 $ 0.35
Second Quarter $ 19.2 $ 33.5 $ 1.05 $25.3(4) $ 0.79 $ 0.65
Third Quarter $ 20.2 $ 20.3 $ 0.63 $20.6(5) $ 0.64 $ 0.60
Fourth Quarter $ 29.4 $ 28.7 $ 0.90 $ 17.6 $ 0.56 $ 0.55
Notes: (1) "Adjusted cash flow" (see below)
(2) Includes a $77.9 million IOC dividend
(3) Includes a $18.8 million IOC dividend
(4) Includes a $12.5 million IOC dividend
(5) Includes a $8.5 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 $3.82 for the quarter (2007 - $0.66). Cumulative standardized cash flow from inception of the trust is $21.01 per unit and total cash distributions since inception are $18.18 per unit, for a payout ratio of 87%. Inclusion of the dividend received from IOC during the quarter and not paid out until October would increase the payout ratio to 98%.
"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/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
2008 2007 2008 2007
-------------------------------------------------------
Cash flow from
operating
activities $122,172,571 $ 21,112,818 $146,858,827 $ 45,837,840
Excluding:
changes in
amounts
receivable,
accounts
payable and
income taxes
payable/
recoverable (18,075,891) 9,644,215 542,625 3,084,558
-------------------------------------------------------
Adjusted
cash flow $104,096,680 $ 30,757,033 $147,401,452 $ 48,922,398
-------------------------------------------------------
Adjusted cash
flow per unit $ 3.25 $ 0.96 $ 4.60 $ 1.53
-------------------------------------------------------
Liquidity
---------
The Fund renewed 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 ($11.7 million at September 30, 2007)
leaving $50.0 million available to provide for any capital required by IOC or
other Fund requirements.
Outlook
-------
IOC completed its $60 million program to expand production to 18.4 million tonnes of concentrate and is progressing on the $500 million program to expand production to 22 million tonnes annually. During the quarter, IOC announced a further $225 million program which will increase concentrate production to 23 million tonnes and a $75 million expenditure for a feasibility study to increase production to 26 million tonnes by 2011. On completion of these programs, including projects to debottleneck pellet production, the capacity to produce pellets from the concentrate will increase from 13.5 to 14.5 million tonnes.
IOC expects to be able to sell all its production for the balance of the year and with the current pricing and the weakening of the Canadian dollar, 2008 promises to be an excellent year for the Fund. Looking forward to 2009, IOC is expecting solid sales performance but recognizes that the current turmoil in the financial markets has caused weakness in steel production which is starting to affect the iron ore markets. If the weakness in the Canadian dollar against its U.S. counterpart continues, currently 20% below the level of a year ago, it will provide some offset to any weakness in the iron ore market.
Bruce C. Bone
Chairman and Chief Executive Officer
Toronto, Ontario
October 21, 2008
LABRADOR IRON ORE ROYALTY INCOME FUND
CONSOLIDATED BALANCE SHEETS
-------------------------------------------------------------------------
As at
-------------------------------
September 30 December 31
2008 2007
-------------------------------
(Unaudited)
Assets
Current
Cash and cash equivalents $ 84,875,933 $ 151,256
Amounts receivable 44,046,537 18,838,481
Income taxes recoverable - 1,389,717
--------------- ---------------
128,922,470 20,379,454
Deferred charges 124,972 218,725
Iron Ore Company of Canada ("IOC"),
royalty and commission interests 303,437,550 307,252,600
Investment in IOC 187,689,747 180,887,115
--------------- ---------------
$ 620,174,739 $ 508,737,894
--------------- ---------------
--------------- ---------------
Liabilities and Unitholders' Equity
Current
Accounts payable $ 10,421,894 $ 5,542,158
Income taxes payable 18,395,978 -
Distributions payable to unitholders 96,000,000 17,600,000
--------------- ---------------
124,817,872 23,142,158
Long-term debt - 1,334,150
Future income tax liability 103,460,000 103,500,000
--------------- ---------------
228,277,872 127,976,308
Unitholders' equity
Trust units 317,708,147 317,708,147
Undistributed income 74,188,720 63,053,439
--------------- ---------------
$ 620,174,739 $ 508,737,894
--------------- ---------------
--------------- ---------------
LABRADOR IRON ORE ROYALTY INCOME FUND
CONSOLIDATED STATEMENTS OF INCOME AND
COMPREHENSIVE INCOME AND UNDISTRIBUTED INCOME
-------------------------------------------------------------------------
For the Three Months
Ended September 30,
2008 2007
-------------------------------
(Unaudited)
Revenue
IOC royalties $ 43,200,281 $ 19,606,122
IOC commissions 437,089 407,953
Interest and other income 84,604 58,885
--------------- ---------------
43,721,974 20,072,960
--------------- ---------------
Expenses
Newfoundland royalty taxes 8,640,056 3,921,224
Amortization of royalty and commission
interests 1,424,051 1,336,146
Administrative expenses (note 2) (267,623) 1,048,861
Interest expense 144,614 344,706
--------------- ---------------
9,941,098 6,650,937
--------------- ---------------
Income before equity earnings and
income taxes 33,780,876 13,422,023
Equity earnings in IOC 34,190,307 10,717,796
--------------- ---------------
Income before income taxes 67,971,183 24,139,819
--------------- ---------------
Provision for (recovery of) income taxes
Current 9,063,062 2,874,486
Future (6,730,000) (1,710,000)
--------------- ---------------
2,333,062 1,164,486
--------------- ---------------
Net income and comprehensive
income for the period 65,638,121 22,975,333
Undistributed income, beginning of period 104,550,599 48,025,443
Distributions to unitholders (96,000,000) (22,400,000)
--------------- ---------------
Undistributed income, end of period $ 74,188,720 $ 48,600,776
--------------- ---------------
--------------- ---------------
Net income per unit $ 2.05 $ 0.72
--------------- ---------------
--------------- ---------------
LABRADOR IRON ORE ROYALTY INCOME FUND
CONSOLIDATED STATEMENTS OF INCOME AND
COMPREHENSIVE INCOME AND UNDISTRIBUTED INCOME
-------------------------------------------------------------------------
For the Nine Months
Ended September 30,
2008 2007
-------------------------------
(Unaudited)
Revenue
IOC royalties $ 117,170,887 $ 47,831,924
IOC commissions 1,164,218 924,694
Interest and other income 88,942 144,386
--------------- ---------------
118,424,047 48,901,004
--------------- ---------------
Expenses
Newfoundland royalty taxes 23,434,177 9,566,385
Amortization of royalty and commission
interests 3,815,050 3,032,700
Administrative expenses (note 2) 1,266,865 2,873,985
Interest expense 497,175 857,280
--------------- ---------------
29,013,267 16,330,350
--------------- ---------------
Income before equity earnings and income
taxes 89,410,780 32,570,654
Equity earnings in IOC 84,726,196 19,536,609
--------------- ---------------
Income before income taxes 174,136,976 52,107,263
--------------- ---------------
Provision for (recovery of) income taxes
Current 23,841,695 5,616,808
Future (40,000) (2,380,000)
--------------- ---------------
23,801,695 3,236,808
--------------- ---------------
Net income and comprehensive
income for the period 150,335,281 48,870,455
Undistributed income, beginning of period 63,053,439 44,530,321
Distributions to unitholders (139,200,000) (44,800,000)
--------------- ---------------
Undistributed income, end of period $ 74,188,720 $ 48,600,776
--------------- ---------------
--------------- ---------------
Net income per unit $ 4.70 $ 1.53
--------------- ---------------
--------------- ---------------
LABRADOR IRON ORE ROYALTY INCOME FUND
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------------------------------------------
For the Three Months
Ended September 30,
2008 2007
-------------------------------
(Unaudited)
Net inflow (outflow) of cash related to
the following activities
Operating
Net income for the period $ 65,638,121 $ 22,975,333
Items not affecting cash:
Equity earnings in IOC (34,190,307) (10,717,796)
Future income taxes (6,730,000) (1,710,000)
Amortization of royalty and
commission interests 1,424,051 1,336,146
Amortization of deferred charges 31,251 31,251
Common share dividend received from IOC 77,923,564 18,842,099
Change in amounts receivable, accounts
and income taxes payable/recoverable 18,075,891 (9,644,215)
--------------- ---------------
Cash flow from operating activities 122,172,571 21,112,818
--------------- ---------------
Financing
Distributions paid to unitholders (32,000,000) (11,200,000)
Proceeds from (repayment of)
long-term debt (5,405,519) 1,446,362
--------------- ---------------
(37,405,519) (9,753,638)
--------------- ---------------
Increase in cash and cash equivalents
during the period 84,767,052 11,359,180
Cash and cash equivalents, beginning
of period 108,881 238,650
--------------- ---------------
Cash and cash equivalents, end of period $ 84,875,933 $ 11,597,830
--------------- ---------------
--------------- ---------------
Cash income taxes paid $ 1,896,000 $ 2,332,816
--------------- ---------------
--------------- ---------------
Cash interest paid $ 64,480 $ 281,409
--------------- ---------------
--------------- ---------------
LABRADOR IRON ORE ROYALTY INCOME FUND
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------------------------------------------
For the Nine Months
Ended September 30,
2008 2007
-------------------------------
(Unaudited)
Net inflow (outflow) of cash related to
the following activities
Operating
Net income for the period $ 150,335,281 $ 48,870,455
Items not affecting cash:
Equity earnings in IOC (84,726,196) (19,536,609)
Future income taxes (40,000) (2,380,000)
Amortization of royalty and commission
interests 3,815,050 3,032,700
Amortization of deferred charges 93,753 93,753
Common share dividend received from IOC 77,923,564 18,842,099
Change in amounts receivable, accounts
payable and income taxes
payable/recoverable (542,625) (3,084,558)
--------------- ---------------
Cash flow from operating activities 146,858,827 45,837,840
--------------- ---------------
Financing
Distributions paid to unitholders (60,800,000) (40,000,000)
Proceeds from (repayment of)
long-term debt (1,334,150) 5,618,053
--------------- ---------------
(62,134,150) (34,381,947)
--------------- ---------------
Increase in cash and cash equivalents
during the period 84,724,677 11,455,893
Cash and cash equivalents, beginning
of period 151,256 141,937
--------------- ---------------
Cash and cash equivalents, end of period $ 84,875,933 $ 11,597,830
--------------- ---------------
--------------- ---------------
Cash income taxes paid $ 4,056,000 $ 9,467,235
--------------- ---------------
--------------- ---------------
Cash interest paid $ 317,062 $ 681,767
--------------- ---------------
--------------- ---------------
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 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, 2007.
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, 2007.
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 if its six trustees, all as more fully
described in the annual financial statements. Since the grant date,
242,000 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 units exceed $23.00. Compensation expense/(recovery) of
$(621,135) (2007 - $673,188) for the three months ended September 30,
2008 and $255,490 (2007 - $1,849,960) for the nine months ended
September 30, 2008 has been recorded in administrative expenses in
connection with the unit appreciation rights.
In September 2008, one Trustee exercised unit appreciation rights in
respect of 4,500 units at a market value of $52.97 resulting in a
total payment of $134,865.
3. Capital Management
The Fund's capital consists of the unitholders' equity and the 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 September 30, 2008, there were no foreign exchange
contracts outstanding.
%SEDAR: 00002722E