News Column

Labrador Iron Ore Royalty Corporation - Results for the first quarter ended March 31, 2014

May 6, 2014

TORONTO, May 6, 2014 /CNW/ - Royalty income for the first quarter of 2014 amounted to $26.9 million as compared to $26.1 million for the first quarter of 2013. The shareholders' adjusted cash flow (see below for definition) for the first quarter was $27.7 million or $0.43 per share as compared to $14.4 million or $0.22 per share for the same period in 2013. The higher cash flow for the quarter reflected an IOC dividend of which our share was $12.6 million or $0.20 per share. Net income was $27.1 million or $0.42 per share compared to $21.7 million or $0.34 per share for the same period in 2013. Equity earnings from Iron Ore Company of Canada ("IOC") amounted to $12.6 million or $0.20 per share as compared to $9.4 million or $0.15 per share in 2013.

IOC production in the first quarter is normally reduced due to the problems associated with winter weather conditions and production is usually 15-20% of annual production. The 2014 first quarter was subjected to disruptively cold weather associated with a "polar vortex" weather pattern, which caused an external power outage and unplanned equipment downtime. As a result, saleable production was 12% below last year's first quarter. Sales for the quarter, which were slightly below last year's quarter, were restricted by the availability of product and IOC had to declare a temporary force majeure. Despite the weather challenges, IOC established new records for February ex-pit mine production and Ore Delivery System crushed ore. Average U.S. dollar index prices for concentrate in the quarter were about 11% below 2013 fourth quarter and the average for the year. The lower price was largely offset by higher pellet premiums and the weakness of the Canadian dollar against its U.S counterpart.

Results for the three months ended March 31 are summarized below:

(in millions except per share information)   2014   2013
    (Unaudited)
         
Revenue   $27.2   $26.4
Adjusted cash flow   $27.7   $14.4
Adjusted cash flow per share   $0.43   $0.22
Net income   $27.1   $21.7
Net income per share   $0.42   $0.34



"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) is not a recognized measure under IFRS.  The Directors believe that adjusted cash flow is a useful analytical measure as it better reflects cash available for dividends to shareholders.

A summary of IOC's sales in millions of tonnes is as follows:

          3 Months

Ended

Mar. 31,

2014
  3 Months

Ended

Mar. 31,

2013
  Year

Ended

Dec. 31,

2013
                   
Pellets         1.88   1.72   8.60
Concentrates(1)         0.63   0.90   6.20
                   
Total         2.51   2.62       14.80
    (1)      Excludes third party ore sales



Outlook

The IOC expansion program should be completed during the second quarter of the year. On the assumption that production for the balance of the year gradually approaches the nominal annual capacity of 23.3 million tonnes, 2014 concentrate production could exceed 18 million tonnes, if weather and other factors do not intervene. Prices are currently lower than the 2013 average prices, but this is partially offset by the weaker Canadian dollar. IOC expects to be able to sell all the concentrate and pellets it can produce during the year. Increased production and sales should result in increased royalty revenue for Labrador Iron Ore Royalty Corporation and increased cash flow for IOC.

Respectfully submitted on behalf of the Directors of Labrador Iron Ore Royalty Corporation,

Bruce C. Bone

President and Chief Executive Officer

May 6, 2014

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 Labrador Iron Ore Royalty Corporation's ("LIORC" or the "Corporation") 2013 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 Corporation's 2013 Annual Report.

The Corporation'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 Corporation's royalty revenue is affected by the price of iron ore and the Canadian - U.S. dollar exchange rate.

The first quarter sales of IOC are traditionally adversely affected by the closing of the St. Lawrence Seaway and general winter operating conditions and are usually 15% - 20% of the annual volume, 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 first quarter of 2014 amounted to $26.9 million as compared to $26.1 million for the first quarter of 2013. The shareholders' adjusted cash flow (see below for definition and calculation) for the first quarter was $27.7 million or $0.43 per share as compared to $14.4 million or $0.22 per share for the same period in 2013. The higher cash flow for the quarter reflected an IOC dividend of which our share was $12.6 million or $0.20 per share. Net income was $27.1 million or $0.42 per share compared to $21.7 million or $0.34 per share for the same period in 2013. Equity earnings from IOC amounted to $12.6 million or $0.20 per share as compared to $9.4 million or $0.15 per share in 2013.

IOC production in the first quarter is normally reduced due to the problems associated with winter weather conditions and production is usually 15-20% of annual production. The 2014 first quarter was subjected to disruptively cold weather associated with a "polar vortex" weather pattern, which caused an external power outage and unplanned equipment downtime. As a result, saleable production was 12% below last year's first quarter. Sales for the quarter, which were slightly below last year's quarter, were restricted by the availability of product and IOC had to declare a temporary force majeure. Despite the weather challenges, IOC established new records for February ex-pit mine production and Ore Delivery System crushed ore. Average U.S. dollar index prices for concentrate in the quarter were about 11% below 2013 fourth quarter and the average for the year. The lower price was largely offset by higher pellet premiums and the weakness of the Canadian dollar against its U.S counterpart.

The following table sets out quarterly revenue, net income and cash flow data for 2014, 2013 and 2012.

  Revenue Net

Income
Net

Income

per Share/Unit
Adjusted Cash

Flow(1)
Adjusted Cash Flow

per Share/Unit (1)
Distributions

Declared

per Share/Unit
  (in millions except per Share/Unit information)  
2014            
First Quarter$27.2$27.1$0.42 $27.7(2)$0.43$0.400
             
2013

           
First Quarter $26.4$21.7$0.34$14.4$0.22$0.375
Second Quarter $42.2$39.2$0.61$23.4$0.37$0.375
Third Quarter $36.1$41.2$0.65$20.0$0.31$0.375
Fourth Quarter $34.6$46.7$0.73 $57.6(3)$0.90$0. 750
             
2012

           
First Quarter(4)$22.4$23.0$0.36$14.4$0.23$0.375
Second Quarter(4)$36.4$36.8$0.57$22.3$0.35$0.375
Third Quarter (4)$32.6$29.7$0.47$18.5$0.28$0.375
Fourth Quarter $32.8$33.0$0.51$19.9$0.31$0.375
             
  Notes: (1) "Adjusted cash flow" (see below) 
       
    (2) Includes a $12.6 million IOC dividend
       
    (3) Includes a $40.0 million IOC dividend
       
    (4) Prior to the fourth quarter of 2012, net income, adjusted cash flow, distributions and per unit figures

referred to in this table use the totals according to the consolidated financial statements plus (where

applicable) the $7,488,000 ($0.117 per unit) interest on the subordinated notes



Standardized Cash Flow and Adjusted Cash Flow

For the Corporation, standardized cash flow is the same as cash flow from operating activities as recorded in the Corporation's cash flow statements as the Corporation does not incur capital expenditures or have any restrictions on distributions.  Standardized cash flow per share was $0.40 for the quarter (2013 - $0.22). Cumulative standardized cash flow from inception of the Corporation is $19.24 per share and total cash distributions since inception are $18.69 per share, for a payout ratio of 97%.

"Adjusted cash flow" is 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.  It is not a recognized measure under IFRS.  The Directors believe that adjusted cash flow is a useful analytical measure as it better reflects cash available for dividends to shareholders.

The following reconciles cash flow from operating activities to adjusted cash flow.

    3 Months Ended

Mar. 31, 2014
    3 Months Ended

Mar. 31, 2013
Standardized cash flow from operating activities   $25,848,565     $14,106,869
Excluding: changes in amounts receivable, accounts payable and

income taxes payable
  1,834,869     243,144
Adjusted cash flow   $27,683,434      $14,350,013 
Adjusted cash flow per share   $0.43     $0.22



Liquidity and Capital Resources

The Corporation has $30.5 million in cash as at March 31, 2014 with total current assets of $57.7 million and working capital of $26.7 million. During the quarter, the Corporation earned operating cash flows of $25.8 million with the cash balance declining $22.1 million as a result of dividends paid.

Cash balances consist of deposits in Canadian dollars with Canadian chartered banks. Accounts receivable primarily consist of royalty payments from IOC. Royalty payments are received in U.S. dollars and converted to Canadian dollars on receipt, usually 25 days after the quarter end. The Corporation does not normally attempt to hedge this short term foreign currency exposure.

Operating cash flow of the Corporation is sourced entirely from IOC through the Corporation's 7% royalty, 10 cents commission per tonne and dividends from its 15.10% equity interest in IOC. The Corporation intends to pay cash dividends of the net income derived from IOC to the maximum extent possible, subject to the maintenance of appropriate levels of working capital and debt.

The Corporation has a $50 million revolving credit facility with a term ending September 18, 2016 with provision for annual one-year extensions.  No amount is currently drawn under this facility (2013 - nil) leaving $50.0 million available to provide for any capital required by IOC or requirements of the Corporation.

Outlook

The IOC expansion program should be completed during the second quarter of the year. On the assumption that production for the balance of the year gradually approaches the nominal annual capacity of 23.3 million tonnes, 2014 concentrate production could exceed 18 million tonnes, if weather and other factors do not intervene. Prices are currently lower than the 2013 average prices, but this is partially offset by the weaker Canadian dollar. IOC expects to be able to sell all the concentrate and pellets it can produce during the year. Increased production and sales should result in increased royalty revenue for LIORC and increased cash flow for IOC.

Bruce C. Bone

President and Chief Executive Officer

Toronto, Ontario

May 6, 2014

Notice:

The following unaudited interim condensed consolidated financial statements of the Corporation have been prepared by and are the responsibility of the Corporation's management. The Corporation's independent auditor has not reviewed these financial statements.

LABRADOR IRON ORE ROYALTY CORPORATION        
INTERIM CONDENSED CONSOLIDATED BALANCE SHEETS        
         
    As at
    March 31,   December 31,
Canadian $   2014   2013
    (Unaudited)
Assets            
Current Assets            
  Cash   $ 30,462,489   $ 52,613,924
  Amounts receivable     25,492,111     35,818,924
  Income taxes recoverable     1,714,447    
Total Current Assets     57,669,047     88,432,848
             
Non-Current Assets            
Iron Ore Company of Canada ("IOC"),            
  royalty and commission interests     278,794,443     279,576,792
Investment in IOC     407,064,512     407,622,445
Total Non-Current Assets     685,858,955     687,199,237
             
Total Assets   $ 743,528,002   $ 775,632,085
             
             
Liabilities and Shareholders' Equity            
Current Liabilities            
  Accounts payable   $ 5,378,722   $ 7,508,145
  Dividend payable     25,600,000     48,000,000
  Income taxes payable         8,317,812
Total Current Liabilities     30,978,722     63,825,957
             
Non-Current Liabilities            
  Deferred income taxes     128,180,000     128,478,000
Total Liabilities     159,158,722     192,303,957
             
Shareholders' Equity            
  Share capital     317,708,147     317,708,147
  Retained earnings     274,745,133     273,225,981
  Accumulated other comprehensive loss     (8,084,000)     (7,606,000)
      584,369,280     583,328,128
             
Total Liabilities and Shareholders' Equity   $ 743,528,002   $ 775,632,085
       




LABRADOR IRON ORE ROYALTY CORPORATION
INTERIM CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
           
    For the three months ended
    March 31,
Canadian $   2014   2013
    (Unaudited)
Revenue            
  IOC royalties   $ 26,852,444   $ 26,101,205
  IOC commissions     242,090     257,651
  Interest and other income     98,642     58,369
      27,193,176     26,417,225
Expenses            
  Newfoundland royalty taxes     5,370,489     5,216,405
  Amortization of royalty and commission interests     782,349     949,367
  Administrative expenses     431,754     865,053
  Interest expense:            
    Credit facility     101,835     92,466
      6,686,427     7,123,291
             
Income before equity earnings and income taxes     20,506,749     19,293,934
Equity earnings in IOC     12,567,402     9,364,275
             
Income before income taxes     33,074,151     28,658,209
             
Provision for income taxes            
  Current     6,171,999     5,893,288
  Deferred     (217,000)     1,091,000
      5,954,999     6,984,288
             
Net income for the period     27,119,152     21,673,921
             
Other comprehensive loss            
  Share of other comprehensive loss of IOC that will not be            
  reclassified subsequently to profit or loss (net of taxes)     (478,000)     (537,000)
             
Comprehensive income for the period   $ 26,641,152   $ 21,136,921
             
Net income per share   $ 0.42   $ 0.34
       



LABRADOR IRON ORE ROYALTY CORPORATION
INTERIM CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 
    For the three months ended
    March 31,
Canadian $   2014   2013
    (Unaudited)
Net inflow (outflow) of cash related            
  to the following activities            
             
Operating            
  Net income for the period   $ 27,119,152   $ 21,673,921
  Items not affecting cash:            
    Equity earnings in IOC     (12,567,402)     (9,364,275)
    Current income taxes     6,171,999     5,893,288
    Deferred income taxes     (217,000)     1,091,000
    Amortization of royalty and commission interests     782,349     949,367
    Interest expense     101,835     92,466
  Common share dividend from IOC     12,566,335    
  Change in amounts receivable and accounts payable     8,197,390     (136,432)
  Interest paid     (101,835)     (92,466)
  Income taxes paid     (16,204,258)     (6,000,000)
  Cash flow from operating activities     25,848,565     14,106,869
             
Financing            
  Dividends paid to shareholders     (48,000,000)     (24,000,000)
  Cash flow used in financing activities     (48,000,000)     (24,000,000)
             
Decrease in cash, during the period     (22,151,435)     (9,893,131)
             
Cash, beginning of period     52,613,924     26,923,421
             
Cash, end of period   $ 30,462,489   $ 17,030,290
       



LABRADOR IRON ORE ROYALTY CORPORATION
INTERIM CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY        
 
 

Canadian $
 

Share

capital
 

Retained

earnings
  Accumulated

other

comprehensive

loss
 

Total
    (Unaudited)
                         
Balance as at December 31, 2012   $ 317,708,147   $ 244,395,841   $ (17,598,000)   $ 544,505,988
Net income for the period         21,673,921           21,673,921
Dividends declared to shareholders         (24,000,000)           (24,000,000)
Share of other comprehensive loss from investment in IOC (net of taxes)             (537,000)     (537,000)
Balance as at March 31, 2013   $ 317,708,147   $ 242,069,762   $ (18,135,000)   $ 541,642,909
                         
Balance as at December 31, 2013     317,708,147     273,225,981     (7,606,000)     583,328,128
Net income for the period         27,119,152         27,119,152
Dividends declared to shareholders         (25,600,000)         (25,600,000)
Share of other comprehensive loss from investment in IOC (net of taxes)             (478,000)     (478,000) 
Balance as at March 31, 2014   $ 317,708,147   $ 274,745,133 $   (8,084,000)   $ 584,369,280



The complete consolidated financial statements for the first quarter ended March 31, 2014, including the notes thereto, are posted on sedar.com and labradorironore.com.

 

SOURCE Labrador Iron Ore Royalty Corporation


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