Labrador Iron Ore Royalty Income Fund - Results for the first quarter ended March 31, 2007
TORONTO, May 3 /CNW/ - Labrador Iron Ore Royalty Income Fund (TSX: LIF.UN) announced its results for the first quarter ended March 31, 2007.
Royalty income for the first quarter of 2007 amounted to $12.93 million as compared to $14.05 million for the first quarter of 2006, a decrease of 8% 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 first quarter was $8.71 million or $0.27 per unit as compared to $9.41 million or $0.29 per unit for the same period in 2006. Net income was $10.74 million or $0.34 per unit compared to $11.92 million or $0.37 per unit for the same period in 2006.
Negotiations for new labour agreements to replace the Iron Ore Company of Canada (IOC) agreements, which expired on February 28, 2007, broke down and a strike commenced on March 9, 2007 closing down IOC's production facilities. A new five year agreement was ratified on April 25, 2007, and production has resumed with a ramp up to normal production expected in early May. Sales have continued to be made from stockpiles but the loss of production during the strike will negatively affect second quarter sales. The timing of cargo shipments was the cause of reduced sales compared to the 2006 first quarter. Prices for 2007 were settled during the quarter with increases of 5.8% for pellets and 10.4% for concentrates retroactive to January 1 for most contracts. Equity earnings from IOC, which were affected by the strike, amounted to $3.1 million ($0.10 per unit) as compared to $3.8 million ($0.12 per Unit) in 2006.
Results for the three months ended March 31 are summarized below:
2007 2006
------------------------
(Unaudited)
Revenue (in millions) $ 13.15 $ 14.36
---------- ----------
Adjusted cash flow (in millions) $ 8.71 $ 9.41
---------- ----------
Adjusted cash flow per unit $ 0.27 $ 0.29
---------- ----------
Net income (in millions) $ 10.74 $ 11.92
---------- ----------
Net income per unit $ 0.34 $ 0.37
---------- ----------
"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:
3 Months Ended 3 Months Ended Year Ended
Mar. 31, Mar. 31, Dec. 31,
2007 2006 2006
-------------- -------------- --------------
Pellets 1.79 2.16 12.94
Concentrates 0.43 0.31 2.91
-------------- -------------- --------------
Total 2.22 2.47 15.85
-------------- -------------- --------------
Respectfully submitted on behalf of the Trustees of Labrador Iron Ore Royalty Income Fund,
Bruce C. Bone
Chairman and Chief Executive Officer
May 3, 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 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.
Negotiations for new labour agreements to replace the Iron Ore Company of Canada (IOC) agreements, which expired on February 28, 2007, broke down and a strike commenced on March 9, 2007 closing down IOC's production facilities. A new five year agreement was ratified on April 25, 2007 and production has resumed with a ramp-up to normal production expected in early May. Sales have continued to be made from stockpiles but the loss of production during the strike will negatively affect second quarter sales.
Prices for 2007 were settled during the quarter with increases of 5.8% for pellets and 10.4% for concentrates retroactive to January 1 for most contracts. Equity earnings from IOC, which were affected by the strike, amounted to $3.1 million ($0.10 per unit) as compared to $3.8 million ($0.12 per Unit) in 2006.
Net income for the first quarter was $10.73 million or $0.34 per unit as compared to $11.92 million or $0.37 per unit in 2006. The decrease mainly resulted from lower equity earnings in IOC of $3.1 million compared to $3.8 million or $0.37 per unit last year and slightly reduced sales. The timing of cargo shipments was the cause of reduced sales compared to the 2006 first quarter.
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 $8.71 million or $0.27 per unit as compared to $9.41 million or $0.29 per unit for the same period in 2006.
The following table sets out quarterly revenue, net income and cash flow
data for 2007, 2006 and 2005.
Distrib-
Adjusted Adjusted utions
Net Net Income Cash Cash Flow Declared
Revenue Income per Unit Flow(1) per Unit(1) per Unit
------- ------- ---------- -------- ---------- --------
(million except per Unit information)
2007
----
First
Quarter $13.1 $10.7 $0.34 $8.7 $0.27 $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 Ended 3 Months Ended
Mar. 31, 2007 Mar. 31, 2006
-------------- --------------
Cash flow from operating activities(x) $ 18,773,343 $ 5,935,229
Excluding: changes in amounts receivable,
accounts payable and income taxes
payable/recoverable(x) (10,065,875) 3,472,020
-------------- --------------
Adjusted cash flow $ 8,707,468 $ 9,407,249
-------------- --------------
Adjusted cash flow per unit $ 0.27 $ 0.29
-------------- --------------
(x) The major reason for the change quarter over quarter was that the
2006 quarter included a payment of $11.1 million of income taxes
relating to 2005 earnings.
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 $7.7 million ($4.9 million at March 31, 2007) leaving $42.3 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 concentrates and pellets it can produce. Prices for 2007 have been settled with increases of 5.8% for pellets and 10.4% for concentrates retroactive to January 1 for most contracts. 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. This will result in lower sales than expected for the balance of the year but, with a five year labour agreement in place, IOC's program to expand production to 17.5 million tonnes largely completed in 2006 and plans for further increases under consideration, and price increases settled for 2007, the future looks positive for IOC and thus for the Fund. Going forward, continued strength of the Canadian dollar against its US counterpart would be a negative but that should be more than offset by increased production and firm pricing.
Bruce C. Bone
Chairman and Chief Financial Officer
Toronto, Ontario
May 3, 2007
LABRADOR IRON ORE ROYALTY INCOME FUND
CONSOLIDATED BALANCE SHEETS
-------------------------------------------------------------------------
As at
------------------------------
March 31 December 31
2007 2006
-------------- --------------
(Unaudited)
Assets
Current
Cash $ 82,756 $ 141,937
Amounts receivable 12,956,700 28,995,350
Income taxes recoverable 1,625,962 -
-------------- --------------
14,665,418 29,137,287
Deferred charges 312,478 343,729
Iron Ore Company of Canada ("IOC"),
royalty and commission interests 310,856,678 311,577,494
Investment in IOC 172,180,118 169,050,037
-------------- --------------
$ 498,014,692 $ 510,108,547
-------------- --------------
-------------- --------------
Liabilities and Unitholders' Equity
Current
Accounts payable $ 3,250,178 $ 6,269,559
Income taxes payable - 1,327,432
Distributions payable to unitholders 11,200,000 17,600,000
-------------- --------------
14,450,178 25,196,991
Long-term debt 4,890,564 6,123,088
Future income tax liability 116,900,000 116,550,000
-------------- --------------
136,240,742 147,870,079
Unitholders' equity
Trust units 317,708,147 317,708,147
Undistributed income 44,065,803 44,530,321
-------------- --------------
$ 498,014,692 $ 510,108,547
-------------- --------------
-------------- --------------
LABRADOR IRON ORE ROYALTY INCOME FUND
CONSOLIDATED STATEMENTS OF INCOME
-------------------------------------------------------------------------
For the Three Months
Ended March 31,
2007 2006
------------------------------
(Unaudited)
Revenue
IOC royalties $ 12,928,314 $ 14,048,080
IOC commissions 219,051 242,850
Interest and other income 3,913 68,109
-------------- --------------
13,151,278 14,359,039
-------------- --------------
Expenses
Newfoundland royalty taxes 2,585,663 2,809,616
Amortization of royalty and commission
interests 720,816 808,720
Administrative expenses (note 2) 600,382 641,375
Interest expense 258,423 199,373
-------------- --------------
4,165,284 4,459,084
-------------- --------------
Income before equity earnings and income
taxes 8,985,994 9,899,955
Equity earnings in IOC 3,130,081 3,842,775
-------------- --------------
Income before income taxes 12,116,075 13,742,730
-------------- --------------
Provision for income taxes
Current 1,030,593 1,332,677
Future 350,000 490,000
-------------- --------------
1,380,593 1,822,677
-------------- --------------
Net income for the period 10,735,482 11,920,053
Undistributed income, beginning of period 44,530,321 18,911,851
Distributions to unitholders (11,200,000) (11,200,000)
-------------- --------------
Undistributed income, end of period $ 44,065,803 $ 19,631,904
-------------- --------------
-------------- --------------
Net income per unit $ 0.34 $ 0.37
-------------- --------------
-------------- --------------
LABRADOR IRON ORE ROYALTY INCOME FUND
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------------------------------------------
For the Three Months
Ended March 31,
2007 2006
------------------------------
(Unaudited)
Net inflow (outflow) of cash related
to the following activities
Operating
Net income for the period $ 10,735,482 $ 11,920,053
Items not affecting cash:
Equity earnings in IOC (3,130,081) (3,842,775)
Future income taxes 350,000 490,000
Amortization of royalty and
commission interests 720,816 808,720
Amortization of deferred charges 31,251 31,251
Change in amounts receivable, accounts
and income taxes payable/recoverable 10,065,875 (3,472,020)
-------------- --------------
Cash flow from operating activities 18,773,343 5,935,229
-------------- --------------
Financing
Distributions paid to unitholders (17,600,000) (38,400,000)
Proceeds from (repayment of) long-term
debt (1,232,524) 9,225,063
-------------- --------------
(18,832,524) (29,174,937)
-------------- --------------
Decrease in cash and cash equivalents
during the period (59,181) (23,239,708)
Cash and cash equivalents, beginning of
period 141,937 23,600,474
-------------- --------------
Cash and cash equivalents, end of period $ 82,756 $ 360,766
-------------- --------------
-------------- --------------
Cash income taxes paid $ 3,983,987 $ 2,837,760
-------------- --------------
-------------- --------------
Cash interest paid $ 209,409 $ 124,714
-------------- --------------
-------------- --------------
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. For the three months ended March 31, 2007,
compensation expense of $291,000 (2006 - $398,000) has been recorded
in administrative expenses in connection with the unit appreciation
rights.
%SEDAR: 00002722E