Labrador Iron Ore Royalty Income Fund - Results for the second quarter ended June 30, 2007
TORONTO, Aug. 9 /CNW/ - Labrador Iron Ore Royalty Income Fund (TSX: LIF.UN) announced its results for the second quarter ended June 30, 2007.
Royalty income for the second quarter of 2007 amounted to $15.30 million as compared to $18.78 million for the second quarter of 2006, a decrease of 19% over the same period last year. The Fund's cash flow from operating activities after adjustments for changes in amounts receivable, accounts payable and income taxes payable/recoverable (adjusted cash flow) for the second quarter was $9.46 million or $0.30 per unit as compared to $25.28 million or $0.79 per unit for the same period in 2006. Net income was $15.16 million or $0.47 per unit compared to $33.45 million or $1.05 per unit for the same period in 2006.
Both production and sales at the Iron Ore Company of Canada (IOC) were negatively affected by the labour strike which closed down its production facilities from March 9 to April 27, 2007. A new five year collective agreement is now in place and a ramp up to full production was achieved in early May. 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. Sales for the period were restricted by the availability of product. The rise in the value of the Canadian dollar against its U.S. counterpart negatively affected earnings and tended to offset the price increases of 5.8% for pellets and 10.4% for concentrates. Equity earnings from IOC, which were affected by the work stoppage, amounted to $5.7 million ($0.18 per unit) as compared to $10.6 million ($0.33 per unit) in 2006. For the same reasons revenue for the six months was $28.8 million or 14% lower than the first six months of last year. During the quarter the Federal Government enacted legislation which will result in a 0.5% reduction in the corporate income tax rate in 2011. This change resulted in a reduction of $1.7 million to the provision for future income taxes in the quarter. The 2006 quarter included a $10.6 million reduction relating to the reduction in future income taxes enacted during that quarter. These changes resulted in increased earnings during the quarter of $0.05 per unit in 2007 and $0.33 per unit in 2006.
Results for the three months and six months ended June 30 are summarized below:
3 Months 3 Months 6 Months 6 Months
Ended Ended Ended Ended
June 30 June 30 June 30 June 30
2007 2006 2007 2006
------------------------------------------
(Unaudited)
-----------
Revenue (in millions) $ 15.68 $ 19.17 $ 28.83 $ 33.53
--------- --------- --------- ---------
Adjusted cash flow (in
millions) $ 9.46 $ 25.28 $ 18.17 $ 34.69
--------- --------- --------- ---------
Adjusted cash flow per unit $ 0.30 $ 0.79 $ 0.57 $ 1.08
--------- --------- --------- ---------
Net income (in millions) $ 15.16 $ 33.45 $ 25.90 $ 45.37
--------- --------- --------- ---------
Net income per unit $ 0.47 $ 1.05 $ 0.81 $ 1.42
--------- --------- --------- ---------
"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/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:
6 Months 6 Months Year
Ended Ended Ended
June 30, June 30, Dec. 31,
2007 2006 2006
--------- --------- ---------
Pellets 4.52 5.43 12.94
Concentrates 0.73 0.87 2.91
--------- --------- ---------
Total 5.25 6.30 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 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.
Respectfully submitted on behalf of the Trustees of Labrador Iron Ore Royalty Income Fund,
Bruce C. Bone
Chairman and Chief Executive Officer
August 9, 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.
Both production and sales at IOC were negatively affected by the labour strike which closed down its production facilities from March 9 to April 25, 2007. A new five year collective agreement is now in place and a ramp up to full production was achieved in early May. 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. Sales for the period were restricted by the availability of product. The rise in the value of the Canadian dollar against its U.S. counterpart negatively affected earnings and tended to offset the price increases of 5.8% for pellets and 10.4% for concentrates. Equity earnings from IOC, which were affected by the work stoppage, amounted to $5.7 million ($0.18 per unit) as compared to $10.6 million ($0.33 per unit) in 2006.
The lower earnings for the quarter were principally accounted for by decreased net royalty revenue of $2.8 million ($0.09 per unit) due to shortage of inventory for sale, reduction in IOC earnings of $4.9 million ($0.15 per unit) and the difference in future income tax provision reductions relating to enacted decreases in future taxes recorded in 2007 as compared to 2006 of $8.9 million ($0.28 per unit). In June 2007 the Canadian Government enacted, through Bill C-52 "Budget Implementation Act 2007", legislation which will result in a 0.5% reduction in the corporate income tax rate in 2011. This change resulted in a reduction of $1.7 million to the provision for future income taxes in the quarter. The 2006 quarter included a $10.6 million reduction relating to the reduction in future income taxes enacted during that quarter. These changes resulted in increased earnings during the quarter of $0.05 per unit in 2007 and $0.33 per unit in 2006. Revenue for the six months was $28.8 million or 14% lower than the first six months of last year. Net earnings for the year to date totaled $25.9 million, including a $1.7 million reduction in the future income tax provision, compared to $45.4 million in the prior year, which included a $10.6 million reduction in the future income tax provision.
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.
Cash flow from operating activities after adjustments for changes in amounts receivable, accounts payable and income taxes payable/recoverable (adjusted cash flow) for the quarter was $9.46 million or $0.30 per unit as compared to $25.28 million or $0.79 per unit for the same period in 2006. The reduction in cash flow was mainly the result of the reduced net royalty revenue of $2.8 million ($0.09 per unit) and the inclusion in the 2006 quarter of a $12.5 million ($0.39 per unit) dividend from IOC.
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
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(2) $ 0.79 $ 0.65
Third Quarter $ 20.2 $ 20.3 $ 0.63 $20.6(3) $ 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(4) $ 1.26 $ 1.20
Notes: (1) "Adjusted cash flow" (see below)
(2) Includes a $12.5 million IOC dividend
(3) Includes a $8.5 million IOC dividend
(4) 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 6 Months 6 Months
Ended Ended Ended Ended
June 30, June 30, June 30, June 30,
2007 2006 2007 2006
---------------------------------------------------
Cash flow from
operating activities $ 5,951,679 $20,489,288 $24,725,022 $26,424,517
Excluding: changes in
amounts receivable,
accounts payable and
income taxes
payable/recoverable 3,506,218 4,795,337 (6,559,657) 8,267,357
---------------------------------------------------
Adjusted cash flow $ 9,457,897 $25,284,625 $18,165,365 $34,691,874
---------------------------------------------------
Adjusted cash flow
per unit $ 0.30 $ 0.79 $ 0.57 $ 1.08
---------------------------------------------------
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 $10.9 million ($10.3 million at June 30, 2007) leaving $39.1 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 of 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 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 will be a negative but that should be more than offset by increased production and firm pricing.
Bruce C. Bone
Chairman and Chief Executive Officer
Toronto, Ontario
August 9, 2007
LABRADOR IRON ORE ROYALTY INCOME FUND
CONSOLIDATED BALANCE SHEETS
-------------------------------------------------------------------------
As at
------------------------------
June 30 December 31
2007 2006
------------------------------
(Unaudited)
Assets
Current
Cash $ 238,650 $ 141,937
Amounts receivable 16,114,254 28,995,350
Income taxes recoverable 3,064,665 -
-------------- --------------
19,417,569 29,137,287
Deferred charges 281,227 343,729
Iron Ore Company of Canada ("IOC"),
royalty and commission interests 309,880,940 311,577,494
Investment in IOC 177,868,850 169,050,037
-------------- --------------
$ 507,448,586 $ 510,108,547
-------------- --------------
-------------- --------------
Liabilities and Unitholders' Equity
Current
Accounts payable $ 4,340,217 $ 6,269,559
Income taxes payable - 1,327,432
Distributions payable to unitholders 11,200,000 17,600,000
-------------- --------------
15,540,217 25,196,991
Long-term debt 10,294,779 6,123,088
Future income tax liability 115,880,000 116,550,000
-------------- --------------
141,714,996 147,870,079
Unitholders' equity
Trust units 317,708,147 317,708,147
Undistributed income 48,025,443 44,530,321
-------------- --------------
$ 507,448,586 $ 510,108,547
-------------- --------------
-------------- --------------
LABRADOR IRON ORE ROYALTY INCOME FUND
CONSOLIDATED STATEMENTS OF INCOME
-------------------------------------------------------------------------
For the Three Months
Ended June 30,
2007 2006
------------------------------
(Unaudited)
Revenue
IOC royalties $ 15,297,488 $ 18,778,718
IOC commissions 297,689 377,285
Interest and other income 81,588 11,535
-------------- --------------
15,676,765 19,167,538
-------------- --------------
Expenses
Newfoundland royalty taxes 3,059,497 3,755,744
Amortization of royalty and commission
interests 975,738 1,230,661
Administrative expenses (note 2) 1,224,742 (277,871)
Interest expense 254,151 276,445
-------------- --------------
5,514,128 4,984,979
-------------- --------------
Income before equity earnings and income
taxes 10,162,637 14,182,559
Equity earnings in IOC 5,688,732 10,627,658
-------------- --------------
Income before income taxes 15,851,369 24,810,217
-------------- --------------
Provision for (recovery of) income taxes
(note 3)
Current 1,711,729 2,620,821
Future (1,020,000) (11,260,000)
-------------- --------------
691,729 (8,639,179)
-------------- --------------
Net income for the period 15,159,640 33,449,396
Undistributed income, beginning of period 44,065,803 19,631,904
Distributions to unitholders (11,200,000) (20,800,000)
-------------- --------------
Undistributed income, end of period $ 48,025,443 $ 32,281,300
-------------- --------------
-------------- --------------
Net income per unit $ 0.47 $ 1.05
-------------- --------------
-------------- --------------
LABRADOR IRON ORE ROYALTY INCOME FUND
CONSOLIDATED STATEMENTS OF INCOME
-------------------------------------------------------------------------
For the Six Months
Ended June 30
2007 2006
------------------------------
(Unaudited)
Revenue
IOC royalties $ 28,225,802 $ 32,826,798
IOC commissions 516,740 620,135
Interest and other income 85,501 79,644
-------------- --------------
28,828,043 33,526,577
-------------- --------------
Expenses
Newfoundland royalty taxes 5,645,160 6,565,360
Amortization of royalty and commission
interests 1,696,554 2,039,381
Administrative expenses (note 2) 1,825,124 363,504
Interest expense 512,574 475,818
-------------- --------------
9,679,412 9,444,063
-------------- --------------
Income before equity earnings and
income taxes 19,148,631 24,082,514
Equity earnings in IOC 8,818,813 14,470,433
-------------- --------------
Income before income taxes 27,967,444 38,552,947
-------------- --------------
Provision for (recovery of) income taxes
(note 3)
Current 2,742,322 3,953,498
Future (670,000) (10,770,000)
-------------- --------------
2,072,322 (6,816,502)
-------------- --------------
Net income for the period 25,895,122 45,369,449
Undistributed income, beginning of period 44,530,321 18,911,851
Distributions to unitholders (22,400,000) (32,000,000)
-------------- --------------
Undistributed income, end of period $ 48,025,443 $ 32,281,300
-------------- --------------
-------------- --------------
Net income per unit $ 0.81 $ 1.42
-------------- --------------
-------------- --------------
LABRADOR IRON ORE ROYALTY INCOME FUND
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------------------------------------------
For the Three Months
Ended June 30,
2007 2006
------------------------------
(Unaudited)
Net inflow (outflow) of cash related
to the following activities
Operating
Net income for the period $ 15,159,640 $ 33,449,396
Items not affecting cash:
Equity earnings in IOC (5,688,732) (10,627,658)
Future income taxes (1,020,000) (11,260,000)
Amortization of royalty and commission
interests 975,738 1,230,661
Amortization of deferred charges 31,251 31,251
Common share dividend received from IOC - 12,460,975
Change in amounts receivable, accounts
and income taxes payable/recoverable (3,506,218) (4,795,337)
-------------- --------------
Cash flow from operating activities 5,951,679 20,489,288
-------------- --------------
Financing
Distributions paid to unitholders (11,200,000) (11,200,000)
Proceeds from (repayment of) long-term
debt 5,404,215 (9,225,063)
-------------- --------------
(5,795,785) (20,425,063)
-------------- --------------
Increase in cash during the period 155,894 64,225
Cash, beginning of period 82,756 360,766
-------------- --------------
-------------- --------------
Cash, end of period $ 238,650 $ 424,991
-------------- --------------
-------------- --------------
Cash income taxes paid $ 3,150,432 $ 13,934,012
-------------- --------------
-------------- --------------
Cash interest paid $ 190,949 $ 283,478
-------------- --------------
-------------- --------------
LABRADOR IRON ORE ROYALTY INCOME FUND
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------------------------------------------
For the Six Months
Ended June 30,
2007 2006
------------------------------
(Unaudited)
Net inflow (outflow) of cash related
to the following activities
Operating
Net income for the period $ 25,895,122 $ 45,369,449
Items not affecting cash:
Equity earnings in IOC (8,818,813) (14,470,433)
Future income taxes (670,000) (10,770,000)
Amortization of royalty and commission
interests 1,696,554 2,039,381
Amortization of deferred charges 62,502 62,502
Common share dividend received from IOC - 12,460,975
Change in amounts receivable, accounts
payable and income taxes
payable/recoverable 6,559,657 (8,267,357)
-------------- --------------
Cash flow from operating activities 24,725,022 26,424,517
-------------- --------------
Financing
Distributions paid to unitholders (28,800,000) (49,600,000)
Proceeds from long-term debt 4,171,691 -
-------------- --------------
(24,628,309) (49,600,000)
-------------- --------------
Increase (decrease) in cash and cash
equivalents during the period 96,713 (23,175,483)
Cash and cash equivalents, beginning
of period 141,937 23,600,474
-------------- --------------
-------------- --------------
Cash, end of period $ 238,650 $ 424,991
-------------- --------------
-------------- --------------
Cash income taxes paid $ 7,134,419 $ 16,771,772
-------------- --------------
-------------- --------------
Cash interest paid $ 400,358 $ 408,192
-------------- --------------
-------------- --------------
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,
150,000 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 $444,000
(2006 - ($600,000)) for the three months and $735,000 (2006 -
($202,000)) for the six months ended June 30, 2007 have been accrued
in connection with the unit appreciation rights.
In June 2007, the Trustees exercised unit appreciation rights in
respect of 36,750 units in total at a weighted average market value
of $35.02 resulting in a total payment of $441,773 (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. This change resulted in a
reduction of $1.7 million to the provision for future income taxes
for the three and six months ended June 30, 2007.
%SEDAR: 00002722E