Labrador Iron Ore Royalty Income Fund - Results for the second quarter ended June 30, 2006
August 1, 2006
TORONTO, July 31 /CNW/ - Labrador Iron Ore Royalty Income Fund
(TSX: LIF.UN) announced its results for the second quarter ended June 30,
2006.Royalty income for the second quarter of 2006 amounted to $18.78 million
as compared to $20.91 million for the second quarter of 2005, a decrease of
10% 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 $25.28 million or $0.79 per unit as compared to $13.48
million or $0.42 per unit for the same period in 2005. Net income was $33.45
million or $1.05 per unit compared to $21.34 million or $0.67 per unit for the
same period in 2005.
Royalty revenue for the quarter and year to date was below last year due
to the strength of the Canadian dollar against its U.S. counterpart. Had the
exchange rate remained at last year's levels royalty revenue would have been
marginally above the 2005 level. Iron ore prices for 2006 were settled by IOC
during the quarter with concentrate prices increasing by 17.3% and pellet
prices decreasing by 3.5%. The effect of these price changes will be
approximately neutral on the Fund's royalty revenue.
Equity earnings from IOC during the quarter were approximately the same
as 2005 in spite of the appreciation of the Canadian dollar. The previously
reported US$11.3 million dividend from IOC was received on May 31st and as a
result cash flow for the quarter was increased by $12.5 million or $0.39 per
unit.
During the quarter, 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 for the
period.
Results for the three months ended June 30 are summarized below:
<<
2006 2005
----------------------
(Unaudited)
Revenue (in millions) $ 19.17 $ 21.30
------- -------
Adjusted cash flow (in millions) $ 25.28 $ 13.48
------- -------
Adjusted cash flow per unit $ 0.79 $ 0.42
------- -------
Net income (in millions) $ 33.45 $ 21.34
------- -------
Net income per unit $ 1.05 $ 0.67
------- -------
>>
"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:
<<
6 Months 6 Months Year
Ended Ended Ended
June 30, June 30, Dec. 31,
2006 2005 2005
--------- --------- ---------
Pellets 5.43 5.68 12.87
Concentrates 0.87 0.82 2.12
--------- --------- ---------
Total 6.30 6.50 14.99
--------- --------- ---------
>>
Respectfully submitted on behalf of the Trustees of Labrador Iron Ore
Royalty Income Fund,
Bruce C. Bone
Chairman and Chief Executive Officer
July 31, 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 and year to date was below last year due
to the strength of the Canadian dollar against its U.S. counterpart. Had the
exchange rate remained at last year's levels royalty revenue would have been
marginally above the 2005 level. Iron ore prices for 2006 were settled by IOC
during the quarter with concentrate prices increasing by 17.3% and pellet
prices decreasing by 3.5%. The effect of these price changes will be
approximately neutral on the Fund's royalty revenue.
Equity earnings from IOC during the quarter were approximately the same
as 2005 in spite of the appreciation of the Canadian dollar.
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 $25.28 million or $0.79 per
unit as compared to $13.48 million or $0.42 for the same period in 2005. The
previously reported US$11.3 million dividend from IOC was received on May 31st
and as a result cash flow for the quarter was increased by $12.5 million or
$0.39 per unit.
During the quarter, 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 $10.6 million to the provision for future income taxes for the
three and six months ended June 30, 2006.
The following table sets out quarterly revenue, net income and cash flow
data for 2006, 2005 and 2004.
<<
Adjusted Adjusted
Net Net Income Cash Cash Flow
Revenue Income per Unit Flow(1) per Unit(1)
------- ------- ---------- -------- ----------
($ million except per Unit information)
2006
----
First Quarter 14.4 11.9 $0.37 9.4 $0.29
Second Quarter 19.2 33.5 $1.05 25.3(2) $0.79
2005
----
First Quarter 14.9 15.5 $0.48 10.0 $0.31
Second Quarter 21.3 21.3 $0.67 13.5 $0.42
Third Quarter 17.2 17.9 $0.56 11.0 $0.34
Fourth Quarter 26.2 31.4 $0.98 40.1(3) $1.26
2004
----
First Quarter 8.3 4.5 $0.15 6.2 $0.21
Second Quarter 13.7 8.3 $0.26 11.2 $0.36
Third Quarter 6.9 3.9 $0.12 6.1 $0.19
Fourth Quarter 8.8 3.2 $0.11 7.1 $0.22
Notes: (1) "Adjusted cash flow" (see below)
(2) Includes a $12.5 million IOC dividend
(3) 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
Jun. 30, Jun. 30, Jun. 30, Jun. 30,
2006 2005 2006 2005
------------ ------------ ------------ ------------
Cash flow from
operating activities $20,489,288 $12,951,845 $26,424,517 $19,622,513
Excluding: changes in
amounts receivable,
accounts payable and
income taxes
payable/recoverable 4,795,337 530,055 8,267,357 3,818,013
------------ ------------ ------------ ------------
Adjusted cash flow $25,284,625 $13,481,900 $34,691,874 $23,440,526
------------ ------------ ------------ ------------
Adjusted cash flow
per unit $0.79 $0.42 $1.08 $0.73
------------ ------------ ------------ ------------
>>
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 $6.4 million ($ nil at June 30, 2006)
leaving $68.6 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 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, improved during the second quarter 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 balance of the year's results should be at least at last
year's levels except for the increase in the value of the Canadian dollar,
which during the first six months of 2006 averaged $0.8785 (2005 - $0.8095)
against its U.S. counterpart.
Bruce C. Bone
Chairman and Chief Executive Officer
Toronto, Ontario
July 31, 2006
<<
LABRADOR IRON ORE ROYALTY INCOME FUND
CONSOLIDATED BALANCE SHEETS
-------------------------------------------------------------------------
As at
------------------------------
June 30, December 31,
2006 2005
------------------------------
(Unaudited) (Audited)
Assets
Current
Cash and cash equivalents $ 424,991 $ 23,600,474
Amounts receivable 19,584,414 25,616,617
Income taxes recoverable 1,361,795 -
-------------- --------------
21,371,200 49,217,091
Deferred charges 406,231 468,733
Iron Ore Company of Canada ("IOC"),
royalty and commission interests 314,662,937 316,702,318
Investment in IOC 153,391,602 151,382,144
-------------- --------------
$ 489,831,970 $ 517,770,286
-------------- --------------
-------------- --------------
Liabilities and Unitholders' Equity
Current
Accounts payable $ 4,142,523 $ 5,623,809
Income taxes payable - 11,456,479
Distributions payable to unitholders 20,800,000 38,400,000
-------------- --------------
24,942,523 55,480,288
Future income tax liability 114,900,000 125,670,000
-------------- --------------
139,842,523 181,150,288
Unitholders' equity
Trust units 317,708,147 317,708,147
Undistributed income 32,281,300 18,911,851
-------------- --------------
$ 489,831,970 $ 517,770,286
-------------- --------------
-------------- --------------
LABRADOR IRON ORE ROYALTY INCOME FUND
CONSOLIDATED STATEMENTS OF INCOME
-------------------------------------------------------------------------
For the Three Months
Ended June 30,
2006 2005
------------------------------
(Unaudited)
Revenue
IOC royalties $ 18,778,718 $ 20,907,757
IOC commissions 377,285 388,182
Interest and other income 11,535 5,756
-------------- --------------
19,167,538 21,301,695
-------------- --------------
Expenses
Newfoundland royalty taxes 3,755,744 4,181,551
Amortization of royalty and commission
interests 1,230,661 1,283,404
Administrative expenses (note 2) (277,871) 253,172
Interest expense 276,445 232,415
-------------- --------------
4,984,979 5,950,542
-------------- --------------
Income before equity earnings and
income taxes 14,182,559 15,351,153
Equity earnings in IOC 10,627,658 10,709,573
-------------- --------------
Income before income taxes 24,810,217 26,060,726
-------------- --------------
Provision for (recovery of)
income taxes (note 3)
Current 2,620,821 3,183,908
Future (11,260,000) 1,535,747
-------------- --------------
(8,639,179) 4,719,655
-------------- --------------
Net income for the period 33,449,396 21,341,071
Undistributed income, beginning of period 19,631,904 9,175,051
Distributions to unitholders (20,800,000) (11,200,000)
-------------- --------------
Undistributed income, end of period $ 32,281,300 $ 19,316,122
-------------- --------------
-------------- --------------
Net income per unit $ 1.05 $ 0.67
-------------- --------------
-------------- --------------
LABRADOR IRON ORE ROYALTY INCOME FUND
CONSOLIDATED STATEMENTS OF INCOME
-------------------------------------------------------------------------
For the Six Months
Ended June 30,
2006 2005
------------------------------
(Unaudited)
Revenue
IOC royalties $ 32,826,798 $ 35,536,540
IOC commissions 620,135 639,200
Interest and other income 79,644 6,908
-------------- --------------
33,526,577 36,182,648
-------------- --------------
Expenses
Newfoundland royalty taxes 6,565,360 7,107,308
Amortization of royalty and
commission interests 2,039,381 2,109,705
Administrative expenses (note 2) 363,504 500,606
Interest expense 475,818 489,553
-------------- --------------
9,444,063 10,207,172
-------------- --------------
Income before equity earnings and
income taxes 24,082,514 25,975,476
Equity earnings in IOC 14,470,433 18,268,152
-------------- --------------
Income before income taxes 38,552,947 44,243,628
-------------- --------------
Provision for (recovery of)
income taxes (note 3)
Current 3,953,498 4,707,157
Future (10,770,000) 2,685,813
-------------- --------------
(6,816,502) 7,392,970
-------------- --------------
Net income for the period 45,369,449 36,850,658
Undistributed income, beginning of period 18,911,851 1,665,464
Distributions to unitholders (32,000,000) (19,200,000)
-------------- --------------
Undistributed income, end of period $ 32,281,300 $ 19,316,122
-------------- --------------
-------------- --------------
Net income per unit $ 1.42 $ 1.15
-------------- --------------
-------------- --------------
LABRADOR IRON ORE ROYALTY INCOME FUND
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------------------------------------------
For the Three Months
Ended June 30,
2006 2005
------------------------------
(Unaudited)
Net inflow (outflow) of cash related
to the following activities
Operating
Net income for the period $ 33,449,396 $ 21,341,071
Items not affecting cash:
Equity earnings in IOC (10,627,658) (10,709,573)
Future income taxes (11,260,000) 1,535,747
Amortization of royalty
and commission interests 1,230,661 1,283,404
Amortization of deferred charges 31,251 31,251
Common share dividend received from IOC 12,460,975 -
Change in amounts receivable,
accounts payable and income taxes
payable/recoverable (4,795,337) (530,055)
-------------- --------------
Cash flow from operating activities 20,489,288 12,951,845
-------------- --------------
Financing
Distributions paid to unitholders (11,200,000 (8,000,000)
Repayment of long-term debt (9,225,063) (3,458,464)
-------------- --------------
(20,425,063) (11,458,464)
-------------- --------------
Increase in cash and cash equivalents
during the period 64,225 1,493,381
Cash and cash equivalents, beginning
of period 360,766 308,931
-------------- --------------
Cash and cash equivalents, end of period $ 424,991 $ 1,802,312
-------------- --------------
-------------- --------------
Cash income taxes paid $ 13,934,012 $ 127,392
-------------- --------------
-------------- --------------
Cash interest paid $ 283,478 $ 227,926
-------------- --------------
-------------- --------------
LABRADOR IRON ORE ROYALTY INCOME FUND
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------------------------------------------
For the Six Months
Ended June 30,
2006 2005
------------------------------
(Unaudited)
Net inflow (outflow) of cash related
to the following activities
Operating
Net income for the period $ 45,369,449 $ 36,850,658
Items not affecting cash:
Equity earnings in IOC (14,470,433) (18,268,152)
Future income taxes (10,770,000) 2,685,813
Amortization of royalty
and commission interests 2,039,381 2,109,705
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 (8,267,357) (3,818,013)
-------------- --------------
Cash flow from operating activities 26,424,517 19,622,513
-------------- --------------
Financing
Distributions paid to unitholders (49,600,000) (16,000,000)
Repayment of long-term debt - (1,970,494)
-------------- --------------
(49,600,000) (17,970,494)
-------------- --------------
Increase (decrease) in cash and
cash equivalents during the period (23,175,483) 1,652,019
Cash and cash equivalents, beginning
of period 23,600,474 150,293
-------------- --------------
Cash and cash equivalents, end of period $ 424,991 $ 1,802,312
-------------- --------------
-------------- --------------
Cash income taxes paid $ 16,771,772 $ 127,392
-------------- --------------
-------------- --------------
Cash interest paid $ 408,192 $ 524,602
-------------- --------------
-------------- --------------
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. To 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/(recovery) of
($600,000) for the three months and ($202,000) for the six months
ended June 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 for the three and
six months ended June 30, 2006.
Corporate Information
Principal Office Registrar & Transfer Agent
40 King Street West Computershare Trust Company of Canada
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)
Company Director
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
>>
%SEDAR: 00002722E