Labrador Iron Ore Royalty Income Fund - Results for the third quarter ended September 30, 2007
TORONTO, Oct. 30 /CNW/ - Labrador Iron Ore Royalty Income Fund (TSX: LIF.UN) announced its results for the third quarter ended September 30, 2007.
Royalty income for the third quarter of 2007 amounted to $19.61 million as compared to $19.86 million for the third quarter of 2006, a decrease of 1% from the same period last year. Royalties received in U.S. dollars were 15% higher than in the 2006 period due to the 5.8% and 10.4% price increases for pellets and concentrates, respectively, and slightly higher sales volume. The rise in the value of the Canadian dollar against its U.S. counterpart negatively affected revenues and earnings and offset the price increases for pellets and for concentrates. It is customary that the weakness of the U.S. dollar will be a factor in settling prices for 2008. Equity earnings from IOC in the third quarter amounted to $10.71 million ($0.33 per unit) as compared to $9.10 million ($0.28 per unit) in 2006. Revenue for the nine months was $48.90 million ($1.53 per unit) compared to $53.77 million ($1.68 per unit) for the first nine months of last year. IOC is making every effort to maximize production for the remainder of the year and several new production records for pellets have been achieved since the strike which occurred earlier in the year. Sales for the period continued to be restricted by the availability of product.
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 $30.76 million or $0.96 per unit as compared to $20.58 million or $0.64 per unit for the same period in 2006. Net income was $22.98 million or $0.72 per unit compared to $20.31 million or $0.63 per unit for the same period in 2006. The increase in net income was the result of increased earnings from IOC and a reduction in income taxes.
On August 30, 2007, IOC declared a dividend payable in two installments on September 30, 2007 and November 30, 2007. The Fund's share of the dividend was US$18.88 million equating to CDN$18.84 million or $0.59 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
2007 2006 2007 2006
-----------------------------------------
(Unaudited)
-----------
Revenue (in millions) $20.07 $20.25 $48.90 $53.77
-------- -------- -------- --------
Adjusted cash flow
(in millions) $30.76 $20.58 $48.92 $55.27
-------- -------- -------- --------
Adjusted cash flow per unit $ 0.96 $ 0.64 $ 1.53 $ 1.73
-------- -------- -------- --------
Net income (in millions) $22.98 $20.31 $48.87 $65.68
-------- -------- -------- --------
Net income per unit $ 0.72 $ 0.63 $ 1.53 $ 2.05
-------- -------- -------- --------
"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:
9 Months 9 Months Year
Ended Ended Ended
Sept. 30, Sept. 30, Dec. 31,
2007 2006 2006
-------- -------- --------
Pellets 7.84 8.63 12.94
Concentrates 1.55 1.52 2.91
-------- -------- --------
Total 9.39 10.15 15.85
-------- -------- --------
On August 1, 2007, IOC announced a $60 million program to increase total concentrate production to 18.4 million tonnes by mid 2008 and to conduct a feasibility study to increase concentrate production further to 21 million tonnes annually. This will enable IOC to increase sales resulting in increased royalty revenue for the Fund. Going forward, the future looks positive for IOC and thus for the Fund. The continued strength of the Canadian dollar against its U.S. counterpart continues to be a negative but should be offset by increased production and strong pricing.
Respectfully submitted on behalf of the Trustees of Labrador Iron Ore Royalty Income Fund,
Bruce C. Bone
Chairman and Chief Executive Officer
October 30, 2007
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 2006 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 2006 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 2007 amounted to $19.61 million as compared to $19.86 million for the third quarter of 2006, a decrease of 1% from the same period last year. Royalties received in U.S. dollars were 15% higher than in the 2006 period due to the 5.8% and 10.4% price increases for pellets and concentrates, respectively, and slightly higher sales volume. The rise in the value of the Canadian dollar against its U.S. counterpart negatively affected earnings and offset the price increases for pellets and for concentrates. As is customary, the weakness of the U.S. dollar will be a factor in settling prices for 2008. Equity earnings from IOC in the third quarter amounted to $10.71 million ($0.33 per unit) as compared to $9.10 million ($0.28 per unit) in 2006. Revenue for the nine months was $48.90 million ($1.53 per unit) compared to $53.77 million ($1.68 per unit) for the first nine months of last year. IOC is making every effort to maximize production for the remainder of the year and several new production records for pellets have been achieved since the strike which occurred earlier in the year. Sales for the period continued to be restricted by the availability of product.
Bill C-52 will impose a tax on certain distributions from specified publicly traded income flow-through trusts beginning in 2011. Other than the 0.5% corporate tax rate reduction effective in 2011, these measures have no impact on the Trust's future income tax liability as all timing differences had already been recorded.
On July 6, 2007, the Canadian Securities Administrators (CSA) published revised National Policy Statement 41-201 for Income Trusts, recommending that all income trusts report distributable cash flow on a standardized basis. For the Fund this newly defined 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 $0.66 for the third quarter and $1.43 for the first nine months of 2007 compared to $0.39 per unit and $1.22 per unit for the comparable periods in 2006. Cumulative standardized cash flow from inception of the trust is $15.75 per unit and total cash distributions since inception are $15.58 per unit, for a payout ratio of 99%. 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 $30.76 million or $0.96 per unit as compared to $20.58 million or $0.64 per unit for the same period in 2006. On August 30, 2007 IOC declared a dividend payable in two installments on September 30, 2007 and November 30, 2007. The Fund's share of the dividend was US$18.88 million equating to CDN$18.84 million or $0.59 per unit. Net income was $22.98 million or $0.72 per unit compared to $20.31 million or $0.63 per unit for the same period in 2006. The increase in net income was the result of increased earnings from IOC and a reduction in income taxes.
The following table sets out quarterly revenue, net income and cash flow data for 2007, 2006 and 2005.
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)
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(2) $ 0.96 $ 0.70
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(3) $ 0.79 $ 0.65
Third Quarter $ 20.2 $ 20.3 $ 0.63 $20.6(4) $ 0.64 $ 0.60
Fourth Quarter $ 29.4 $ 28.7 $ 0.90 $ 17.6 $ 0.56 $ 0.55
2005
----
First Quarter 14.9 15.5 0.48 10.0 $ 0.31 $ 0.25
Second Quarter 21.3 21.3 0.67 13.5 $ 0.42 $ 0.35
Third Quarter 17.2 17.9 0.56 11.0 $ 0.34 $ 0.35
Fourth Quarter 26.2 31.4 0.98 40.1(5) $ 1.26 $ 1.20
Notes: (1) "Adjusted cash flow" (see below)
(2) Includes a $18.8 million IOC dividend
(3) Includes a $12.5 million IOC dividend
(4) Includes a $8.5 million IOC dividend
(5) Includes a $24.1 million IOC dividend
Adjusted Cash Flow
------------------
"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,
2007 2006 2007 2006
---------------------------------------------------
Cash flow from
operating activities $21,112,818 $12,502,172 $45,837,840 $38,926,689
Excluding: changes in
amounts receivable,
accounts payable
and income taxes
payable/recoverable 9,644,215 8,076,874 3,084,558 16,344,231
---------------------------------------------------
Adjusted cash flow $30,757,033 $20,579,046 $48,922,398 $55,270,920
---------------------------------------------------
Adjusted cash flow
per unit $ 0.96 $ 0.64 $ 1.53 $ 1.73
---------------------------------------------------
Liquidity
---------
The Fund has a $50 million revolving credit facility reducing by $25 million in 2008 with the balance due in 2009. The amount drawn under this facility is currently $11.7 million ($11.7 million at September 30, 2007) leaving $38.3 million available to provide for any capital required by IOC or other Fund requirements.
Outlook
-------
Steel markets remain strong especially in Asia and IOC expects to be able to sell all the concentrate and pellets it can produce. Prices for 2007 increased by 5.8% for pellets and 10.4% for concentrates retroactive to January 1 for most contracts and a new five year labour agreement is in place. The strike, which closed down production facilities for 7 weeks from March 9 to April 27, 2007, will result in a loss of about 14% of annual production which, based on last year's production, would amount to approximately 2.3 million tonnes. Reduced sales due to this lost production occurred in the first half of the year and sales for the balance of the year will also be slightly lower than normal due to inventory replenishment. On August 1, 2007, IOC announced a $60 million program to increase total concentrate production to 18.4 million tonnes by mid 2008 and to conduct a feasibility study to increase concentrate production further to 21 million tonnes annually. This will enable IOC to increase sales resulting in increased royalty revenue for the Fund. Going forward, the future looks positive for IOC and thus for the Fund. The continued strength of the Canadian dollar against its U.S. counterpart continues to be a negative but should be offset by increased production and strong pricing.
Bruce C. Bone
Chairman and Chief Executive Officer
Toronto, Ontario
October 30, 2007
LABRADOR IRON ORE ROYALTY INCOME FUND
CONSOLIDATED BALANCE SHEETS
-------------------------------------------------------------------------
As at
------------------------------
September 30 December 31
2007 2006
------------------------------
(Unaudited)
Assets
Current
Cash $ 11,597,830 $ 141,937
Amounts receivable 27,803,815 28,995,350
Income taxes recoverable 2,522,995 -
-------------- --------------
41,924,640 29,137,287
Deferred charges 249,976 343,729
Iron Ore Company of Canada ("IOC"),
royalty and commission interests 308,544,794 311,577,494
Investment in IOC 169,744,547 169,050,037
-------------- --------------
$ 520,463,957 $ 510,108,547
-------------- --------------
-------------- --------------
Liabilities and Unitholders' Equity
Current
Accounts payable $ 5,843,893 $ 6,269,559
Income taxes payable - 1,327,432
Distributions payable to unitholders 22,400,000 17,600,000
-------------- --------------
28,243,893 25,196,991
Long-term debt 11,741,141 6,123,088
Future income tax liability 114,170,000 116,550,000
-------------- --------------
154,155,034 147,870,079
Unitholders' equity
Trust units 317,708,147 317,708,147
Undistributed income 48,600,776 44,530,321
-------------- --------------
$ 520,463,957 $ 510,108,547
-------------- --------------
-------------- --------------
LABRADOR IRON ORE ROYALTY INCOME FUND
CONSOLIDATED STATEMENTS OF INCOME
-------------------------------------------------------------------------
For the Three Months
Ended September 30,
2007 2006
------------------------------
(Unaudited)
Revenue
IOC royalties $ 19,606,122 $ 19,863,703
IOC commissions 407,953 378,883
Interest and other income 58,885 4,100
-------------- --------------
20,072,960 20,246,686
-------------- --------------
Expenses
Newfoundland royalty taxes 3,921,224 3,972,741
Amortization of royalty and commission
interests 1,336,146 1,265,823
Administrative expenses (note 2) 1,048,861 907,041
Interest expense 344,706 246,097
-------------- --------------
6,650,937 6,391,702
-------------- --------------
Income before equity earnings and
income taxes 13,422,023 13,854,984
Equity earnings in IOC 10,717,796 9,104,823
-------------- --------------
Income before income taxes 24,139,819 22,959,807
-------------- --------------
Provision for (recovery of) income
taxes (note 3)
Current 2,874,486 3,029,833
Future (1,710,000) (380,000)
-------------- --------------
1,164,486 2,649,833
-------------- --------------
Net income for the period 22,975,333 20,309,974
Undistributed income, beginning of period 48,025,443 32,281,300
Distributions to unitholders (22,400,000) (19,200,000)
-------------- --------------
Undistributed income, end of period $ 48,600,776 $ 33,391,274
-------------- --------------
-------------- --------------
Net income per unit $ 0.72 $ 0.63
-------------- --------------
-------------- --------------
LABRADOR IRON ORE ROYALTY INCOME FUND
CONSOLIDATED STATEMENTS OF INCOME
-------------------------------------------------------------------------
For the Nine Months
Ended September 30,
2007 2006
------------------------------
(Unaudited)
Revenue
IOC royalties $ 47,831,924 $ 52,690,502
IOC commissions 924,694 999,018
Interest and other income 144,386 83,743
-------------- --------------
48,901,004 53,773,263
-------------- --------------
Expenses
Newfoundland royalty taxes 9,566,385 10,538,100
Amortization of royalty and commission
interests 3,032,700 3,305,204
Administrative expenses (note 2) 2,873,985 1,270,545
Interest expense 857,280 721,916
-------------- --------------
16,330,350 15,835,765
-------------- --------------
Income before equity earnings and
income taxes 32,570,654 37,937,498
Equity earnings in IOC 19,536,609 23,575,256
-------------- --------------
Income before income taxes 52,107,263 61,512,754
-------------- --------------
Provision for (recovery of) income
taxes (note 3)
Current 5,616,808 6,983,331
Future (2,380,000) (11,150,000)
-------------- --------------
3,236,808 (4,166,669)
-------------- --------------
Net income for the period 48,870,455 65,679,423
Undistributed income, beginning of period 44,530,321 18,911,851
Distributions to unitholders (44,800,000) (51,200,000)
-------------- --------------
Undistributed income, end of period $ 48,600,776 $ 33,391,274
-------------- --------------
-------------- --------------
Net income per unit $ 1.53 $ 2.05
-------------- --------------
-------------- --------------
LABRADOR IRON ORE ROYALTY INCOME FUND
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------------------------------------------
For the Three Months
Ended September 30,
2007 2006
------------------------------
(Unaudited)
Net inflow (outflow) of cash related
to the following activities
Operating
Net income for the period $ 22,975,333 $ 20,309,974
Items not affecting cash:
Equity earnings in IOC (10,717,796) (9,104,823)
Future income taxes (1,710,000) (380,000)
Amortization of royalty and
commission interests 1,336,146 1,265,823
Amortization of deferred charges 31,251 31,251
Common share dividend received from IOC 18,842,099 8,456,821
Change in amounts receivable, accounts
and income taxes payable/recoverable (9,644,215) (8,076,874)
-------------- --------------
Cash flow from operating activities 21,112,818 12,502,172
-------------- --------------
Financing
Distributions paid to unitholders (11,200,000) (20,800,000)
Proceeds from long-term debt 1,446,362 8,146,984
-------------- --------------
(9,753,638) (12,653,016)
-------------- --------------
Increase/(decrease) in cash and cash
equivalents during the period 11,359,180 (150,844)
Cash, beginning of period 238,650 424,991
-------------- --------------
Cash and cash equivalents, end of period $ 11,597,830 $ 274,147
-------------- --------------
-------------- --------------
Cash income taxes paid $ 2,332,816 $ 3,109,679
-------------- --------------
-------------- --------------
Cash interest paid $ 281,409 $ 127,334
-------------- --------------
-------------- --------------
LABRADOR IRON ORE ROYALTY INCOME FUND
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------------------------------------------
For the Nine Months
Ended September 30,
2007 2006
------------------------------
(Unaudited)
Net inflow (outflow) of cash related
to the following activities
Operating
Net income for the period $ 48,870,455 $ 65,679,423
Items not affecting cash:
Equity earnings in IOC (19,536,609) (23,575,256)
Future income taxes (2,380,000) (11,150,000)
Amortization of royalty and
commission interests 3,032,700 3,305,204
Amortization of deferred charges 93,753 93,753
Common share dividend received from IOC 18,842,099 20,917,796
Change in amounts receivable, accounts
payable and income taxes
payable/recoverable (3,084,558) (16,344,231)
-------------- --------------
Cash flow from operating activities 45,837,840 38,926,689
-------------- --------------
Financing
Distributions paid to unitholders (40,000,000) (70,400,000)
Proceeds from long-term debt 5,618,053 8,146,984
-------------- --------------
(34,381,947) (62,253,016)
-------------- --------------
Increase/(decrease) in cash and cash
equivalents during the period 11,455,893 (23,326,327)
Cash and cash equivalents, beginning
of period 141,937 23,600,474
-------------- --------------
Cash and cash equivalents, end of period $ 11,597,830 $ 274,147
-------------- --------------
-------------- --------------
Cash income taxes paid $ 9,467,235 $ 19,881,451
-------------- --------------
-------------- --------------
Cash interest paid $ 681,767 $ 535,526
-------------- --------------
-------------- --------------
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, 2006.
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, 2006. On
January 1, 2007, the Fund adopted the Canadian Institute of Chartered
Accountants new accounting standards: Section 3855 "Financial
Instruments - Recognition and Measurement", Section 3861 "Financial
Instruments - Disclosure and Presentation" and Section 1530
"Comprehensive Income". Section 3855 establishes standards for
recognizing and measuring financial instruments. All financial
instruments are required to be measured at fair value on the initial
recognition with the exception of certain financial instruments that
do not have quoted market values in an active market. Financial
instruments that will be realized within the normal operating cycle
are measured at their carrying amount as this approximates fair
value. These standards have been applied prospectively without
restatement of prior periods. The adoption of these standards did not
have an impact on the Fund's financial statements. The Fund does not
have any other comprehensive income components and as such,
comprehensive income is equal to net income. Accordingly, a Statement
of Comprehensive Income is not presented.
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,
193,000 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 of $569,000 (2006 -
$521,000) for the three months and $1,304,000 (2006 - $319,000) for
the nine months ended September 30, 2007 have been accrued in
connection with the unit appreciation rights.
In September 2007, a Trustee exercised unit appreciation rights in
respect of 6,250 units at a market value of $39.67 resulting in a
total payment of $104,188 (2006 - Nil).
3. Income taxes
In the second quarter of 2007, the Federal Government enacted
legislation which will result in a 0.5% reduction in the federal
corporate income tax rate in 2011.
%SEDAR: 00002722E