Labrador Iron Ore Royalty Income Fund - Results for the third quarter ended September 30, 2006
November 2, 2006
TORONTO, Nov. 1 /CNW/ - Labrador Iron Ore Royalty Income Fund (TSX:
LIF.UN) announced its results for the third quarter ended September 30, 2006.
Royalty income for the third quarter of 2006 amounted to $19.86 million
as compared to $16.88 million for the third quarter of 2005, an increase of
18% 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
third quarter was $20.58 million or $0.64 per unit as compared to
$10.97 million or $0.34 per unit for the same period in 2005. Net income was
$20.31 million or $0.63 per unit compared to $17.87 million or $0.56 per unit
for the same period in 2005.
Royalty revenue for the quarter was above last year due to increased
volume, which was partially offset by the higher value of the Canadian dollar
against its U.S. counterpart. For the nine months, royalty revenue
approximated last year's level with a slightly higher volume offsetting the
Canadian dollar appreciation. Prices received were approximately neutral with
decreases in pellet prices offsetting increases in concentrate pricing.
Equity earnings from IOC during the quarter were approximately the same
as 2005 in spite of the appreciation of the Canadian dollar and higher fuel
costs. On August 31, 2006 IOC declared a dividend payable October 2, 2006. The
Fund's share of this dividend was US$7.6 million equating to CDN$8.5 million
or $0.26 per unit.
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Results for the three months ended September 30 are summarized below:
2006 2005
------------------------
(Unaudited)
Revenue (in millions) $ 20.25 $ 17.23
---------- ----------
Adjusted cash flow (in millions) $ 20.58 $ 10.97
---------- ----------
Adjusted cash flow per unit $ 0.64 $ 0.34
---------- ----------
Net income (in millions) $ 20.31 $ 17.87
---------- ----------
Net income per unit $ 0.63 $ 0.56
---------- ----------
"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 follows:
9 Months 9 Months Year Ended
Ended Sept. 30, Ended Sept. 30, Dec. 31,
2006 2005 2005
-------------- -------------- --------------
Pellets 8.63 8.63 12.87
Concentrates 1.52 1.37 2.12
-------------- -------------- --------------
Total 10.15 10.00 14.99
-------------- -------------- --------------
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During the quarter agreement was reached with IOC to include the
previously excluded Wabush 3 property in the Sublease Agreement between
Labrador Mining Company Limited, a subsidiary of the Fund, and IOC in
consideration of a 7% royalty on sales of iron ore products derived from the
property. Parts of the Knight deposit previously held exclusively by IOC are
also to be included in the Sublease Agreement and subject to the 7% royalty.
Arrangements under the Sublease Agreement have been simplified with Labrador
Mining granting IOC rights to mine 100% of the ore for the 7% royalty. IOC is
proceeding with a drilling program on the Wabush 3 deposit to evaluate it for
inclusion in IOC's ore reserves.
This is an important step in IOC's planning to increase production. An
increase in production and sales of iron ore products from properties covered
by the Sublease Agreement would increase the 7% royalty receivable by the
Fund.
Unitholders are invited to visit the Fund's website at
www.labradorironore.com.
Respectfully submitted on behalf of the Trustees of Labrador Iron Ore
Royalty Income Fund,
Bruce C. Bone
Chairman and Chief Executive Officer
November 1, 2006
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 2005 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 2005 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.
Royalty revenue for the quarter was above last year due to increased
volume, which was partially offset by the higher value of the Canadian dollar
against its U.S. counterpart. For the nine months, royalty revenue
approximated last year's level with a slightly higher volume offsetting the
Canadian dollar appreciation. Prices received were approximately neutral with
decreases in pellet prices offsetting increases in concentrate pricing.
Equity earnings from IOC during the quarter were approximately the same
as 2005 in spite of the appreciation of the Canadian dollar and higher fuel
costs.
Cash flow from operating activities after adjustments for changes in
amounts receivable, accounts payable and income taxes payable/recoverable
(adjusted cash flow) for the third quarter was $20.58 million or $0.64 per
unit as compared to $10.97 million or $0.34 for the same period in 2005.
The following table sets out quarterly revenue, net income and cash flow
data for 2006, 2005 and 2004.
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Distrib-
Adjusted Adjusted utions
Net Net Income Cash Cash Flow Declared
Revenue Income per Unit Flow(1) per Unit(1) per Unit
------- ------- ---------- -------- ---------- --------
(in millions except per Unit information)
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
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
2004
----
First
Quarter $8.3 $4.5 $0.15 $6.2 $0.21 $0.25
Second
Quarter $13.7 $8.3 $0.26 $11.2 $0.36 $0.25
Third
Quarter $6.9 $3.9 $0.12 $6.1 $0.19 $0.25
Fourth
Quarter $8.8 $3.2 $0.11 $7.1 $0.22 $0.25
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
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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 current quarter included a dividend
receivable from IOC of $8.5 million or $0.26 per unit. For the nine months,
the adjusted cash flow was $55.3 million or $1.73 per unit, including
dividends from IOC of $20.9 million or $0.65 per unit, as compared to
$34.4 million or $1.08 per unit in prior year. Excluding the dividend from
IOC, the nine months adjusted cash flow is almost identical to last year in
spite of the appreciation of the Canadian dollar.
The following reconciles cash flow from operating activities to adjusted
cash flow.
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3 Months 3 Months 9 Months 9 Months
Ended Ended Ended Ended
Sept. 30, Sept. 30, Sept. 30, Sept. 30,
2006 2005 2006 2005
------------ ------------ ------------ ------------
Cash flow from
operating activities $12,502,172 $15,812,009 $38,926,689 $35,434,522
Excluding: changes in
amounts receivable,
accounts payable and
income taxes
payable/recoverable 8,076,874 (4,846,188) 16,344,231 (1,028,175)
---------------------------------------------------
Adjusted cash flow $20,579,046 $10,965,821 $55,270,920 $34,406,347
---------------------------------------------------
Adjusted cash flow
per unit $0.64 $0.34 $1.73 $1.08
---------------------------------------------------
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Liquidity
---------
The Fund has a $75 million revolving credit facility reducing by
$25 million in each of 2007 and 2008 with the balance due in 2009. The amount
drawn under this facility is currently $3.6 million ($8.1 million at
September 30, 2006) leaving $71.4 million available to provide for any capital
required by IOC or other Fund requirements.
Outlook
-------
Steel markets remain firm and IOC expects to be able to sell all the
concentrates and pellets it can produce in 2006. Prices for iron ore for 2006
were settled by IOC during the second quarter retroactive to January 1 for
most contracts, with pellet prices decreasing by 3.5% and concentrate
increasing by 17.3%. The net effect on IOC revenues is approximately neutral.
IOC production, which encountered some problems due to severe winter
conditions in the first quarter, has subsequently improved and full year
production is expected to exceed 2005 production. IOC's cost cutting program
continues to make progress in spite of cost increases for fuel and supplies
which are beyond its control. With production and sales at levels that should
exceed 2005 levels, the year's results should be comparable to last year,
despite the increase in the value of the Canadian dollar, which during the
first nine months of 2006 averaged $0.8828 (2005 - $0.8169) against its U.S.
counterpart.
Bruce C. Bone
Chairman and Chief Executive Officer
Toronto, Ontario
November 1, 2006
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LABRADOR IRON ORE ROYALTY INCOME FUND
CONSOLIDATED BALANCE SHEETS
-------------------------------------------------------------------------
As at
------------------------------
September 30, December 31,
2006 2005
------------------------------
(Unaudited) (Audited)
Assets
Current
Cash and cash equivalents $ 274,147 $ 23,600,474
Amounts receivable 28,277,956 25,616,617
Income taxes recoverable 1,441,641 -
-------------- --------------
29,993,744 49,217,091
Deferred charges 374,980 468,733
Iron Ore Company of Canada ("IOC"),
royalty and commission interests 313,397,114 316,702,318
Investment in IOC 154,039,604 151,382,144
-------------- --------------
$ 497,805,442 $ 517,770,286
-------------- --------------
-------------- --------------
Liabilities and Unitholders' Equity
Current
Accounts payable 4,839,037 5,623,809
Income taxes payable - 11,456,479
Distributions payable to unitholders 19,200,000 38,400,000
-------------- --------------
24,039,037 55,480,288
Long-term debt 8,146,984 -
Future income tax liability 114,520,000 125,670,000
-------------- --------------
146,706,021 181,150,288
Unitholders' equity
Trust units 317,708,147 317,708,147
Undistributed income 33,391,274 18,911,851
-------------- --------------
$ 497,805,442 $ 517,770,286
-------------- --------------
-------------- --------------
LABRADOR IRON ORE ROYALTY INCOME FUND
CONSOLIDATED STATEMENTS OF INCOME
-------------------------------------------------------------------------
For the Three Months
Ended September 30,
2006 2005
------------------------------
(Unaudited)
Revenue
IOC royalties $ 19,863,703 $ 16,883,083
IOC commissions 378,883 345,059
Interest and other income 4,100 6,026
-------------- --------------
20,246,686 17,234,168
-------------- --------------
Expenses
Newfoundland royalty taxes 3,972,741 3,376,617
Amortization of royalty and
commission interests 1,265,823 1,142,757
Administrative expenses (note 2) 907,041 813,839
Interest expense 246,097 184,012
-------------- --------------
6,391,702 5,517,225
-------------- --------------
Income before equity earnings and
income taxes 13,854,984 11,716,943
Equity earnings in IOC 9,104,823 9,438,660
-------------- --------------
Income before income taxes 22,959,807 21,155,603
-------------- --------------
Provision for (recovery of) income taxes
Current 3,029,833 1,925,130
Future (380,000) 1,362,647
-------------- --------------
2,649,833 3,287,777
-------------- --------------
Net income for the period 20,309,974 17,867,826
Undistributed income, beginning of period 32,281,300 19,316,122
Distributions to unitholders (19,200,000) (11,200,000)
-------------- --------------
Undistributed income, end of period $ 33,391,274 $ 25,983,948
-------------- --------------
-------------- --------------
Net income per unit $ 0.63 $ 0.56
-------------- --------------
-------------- --------------
LABRADOR IRON ORE ROYALTY INCOME FUND
CONSOLIDATED STATEMENTS OF INCOME
-------------------------------------------------------------------------
For the Nine Months
Ended September 30,
2006 2005
------------------------------
(Unaudited)
Revenue
IOC royalties $ 52,690,502 $ 52,419,623
IOC commissions 999,018 984,259
Interest and other income 83,743 12,934
-------------- --------------
53,773,263 53,416,816
-------------- --------------
Expenses
Newfoundland royalty taxes 10,538,100 10,483,925
Amortization of royalty and
commission interests 3,305,204 3,252,462
Administrative expenses (note 2) 1,270,545 1,314,445
Interest expense 721,916 673,565
-------------- --------------
15,835,765 15,724,397
-------------- --------------
Income before equity earnings and
income taxes 37,937,498 37,692,419
Equity earnings in IOC 23,575,256 27,706,812
-------------- --------------
Income before income taxes 61,512,754 65,399,231
-------------- --------------
Provision for (recovery of)
income taxes (note 3)
Current 6,983,331 6,632,287
Future (11,150,000) 4,048,460
-------------- --------------
(4,166,669) 10,680,747
-------------- --------------
Net income for the period 65,679,423 54,718,484
Undistributed income, beginning of period 18,911,851 1,665,464
Distributions to unitholders (51,200,000) (30,400,000)
-------------- --------------
Undistributed income, end of period $ 33,391,274 $ 25,983,948
-------------- --------------
-------------- --------------
Net income per unit $ 2.05 $ 1.71
-------------- --------------
-------------- --------------
LABRADOR IRON ORE ROYALTY INCOME FUND
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------------------------------------------
For the Three Months
Ended September 30,
2006 2005
------------------------------
(Unaudited)
Net inflow (outflow) of cash related
to the following activities
Operating
Net income for the period $ 20,309,974 $ 17,867,826
Items not affecting cash:
Equity earnings in IOC (9,104,823) (9,438,660)
Future income taxes (380,000) 1,362,647
Amortization of royalty and
commission interests 1,265,823 1,142,757
Amortization of deferred charges 31,251 31,251
Common share dividend from IOC 8,456,821 -
Change in amounts receivable,
accounts payable and income taxes
payable/recoverable (8,076,874) 4,846,188
-------------- --------------
Cash flow from operating activities 12,502,172 15,812,009
-------------- --------------
Financing
Distributions paid to unitholders (20,800,000) (11,200,000)
Proceeds from (repayment of)
long-term debt 8,146,984 (5,431,719)
-------------- --------------
(12,653,016) (16,631,719)
-------------- --------------
Decrease in cash and cash equivalents
during the period (150,844) (819,710)
Cash and cash equivalents,
beginning of period 424,991 1,802,312
-------------- --------------
Cash and cash equivalents, end of period $ 274,147 $ 982,602
-------------- --------------
-------------- --------------
Cash income taxes paid $ 3,109,679 $ 373,359
-------------- --------------
-------------- --------------
Cash interest paid $ 127,334 $ 189,659
-------------- --------------
-------------- --------------
LABRADOR IRON ORE ROYALTY INCOME FUND
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------------------------------------------
For the Nine Months
Ended September 30,
2006 2005
------------------------------
(Unaudited)
Net inflow (outflow) of cash related
to the following activities
Operating
Net income for the period $ 65,679,423 $ 54,718,484
Items not affecting cash:
Equity earnings in IOC (23,575,256) (27,706,812)
Future income taxes (11,150,000) 4,048,460
Amortization of royalty and
commission interests 3,305,204 3,252,462
Amortization of deferred charges 93,753 93,753
Common share dividend from IOC 20,917,796 -
Change in amounts receivable,
accounts payable and income taxes
payable/recoverable (16,344,231) 1,028,175
-------------- --------------
Cash flow from operating activities 38,926,689 35,434,522
-------------- --------------
Financing
Distributions paid to unitholders (70,400,000) (27,200,000)
Proceeds from (repayment of)
long-term debt 8,146,984 (7,402,213)
-------------- --------------
(62,253,016) (34,602,213)
-------------- --------------
Increase (decrease) in cash and cash
equivalents during the period (23,326,327) 832,309
Cash and cash equivalents,
beginning of period 23,600,474 150,293
-------------- --------------
Cash and cash equivalents, end of period $ 274,147 $ 982,602
-------------- --------------
-------------- --------------
Cash income taxes paid $ 19,881,451 $ 500,751
-------------- --------------
-------------- --------------
Cash interest paid $ 535,526 $ 714,261
-------------- --------------
-------------- --------------
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, 2005.
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, 2005.
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
On May 18, 2005, the Fund adopted a unit appreciation rights plan for
the trustees of the Fund. The Fund granted to each of its six
trustees unit appreciation rights in respect of 50,000 units, for a
total of 300,000 units. One-fourth of the unit appreciation rights
vested at the time of issue, one-fourth vested on May 18, 2006,
one-fourth vest on May 18, 2007 and one-fourth vest on May 18, 2008.
Unit appreciation rights which have vested may be exercised at any
time. At the time of exercise, for each right exercised, the Fund
will pay the difference between the fair market value of a unit on
the date of exercise and $23.00, the fair market value of the units
at the time the rights were issued. The unit appreciation rights
expire on May 18, 2010 and become fully vested in the event of an
offer, as defined, for the units of the Fund. Since the grant date,
75,000 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 $521,000 for the
three months and $319,000 for the nine months ended September 30,
2006 have been accrued in connection with the unit appreciation
rights.
3. Income taxes
In the second quarter of 2006, the Federal Government enacted
legislation which will result in a 2% reduction in the federal
corporate income tax rate by 2010 and the elimination of surtax by
January 1, 2008. These changes resulted in a reduction of
$10.6 million to the provision for future income taxes in the second
quarter.
Corporate Information
Principal Office Registrar & Transfer Agent
40 King Street West Computershare Investor Services Inc.
Scotia Plaza, 26th Floor 100 University Avenue
Box 4085, Station "A" Toronto, Ontario
Toronto, Ontario M5W 2X6 M5J 2Y1
Telephone : (416) 863-7133
Facsimile : (416) 863-7425
Trustees Legal Counsel
Bruce C. Bone McCarthy TDetrault LLP
Chairman and Chief Executive Toronto, Ontario
Officer, Labrador Iron Ore
Royalty Income Fund
William J. Corcoran(x) Auditors
Vice-Chairman,
Jarislowsky Fraser Limited Deloitte & Touche LLP
Toronto, Ontario
James C. McCartney Stock Exchange Listing
Counsel and former Chairman, The Toronto Stock Exchange
McCarthy TDetrault LLP
Paul H. Palmer(x) Symbol
Company Director LIF.UN
Alan R. Thomas(x) Website
Company Director www.labradorironore.com
Donald J. Worth(x)
Company Director
Officers
Bruce C. Bone
Chairman and Chief Executive Officer
James C. McCartney
Secretary - Treasurer
(x)Member of Audit and Compensation Committees
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