Labrador Iron Ore Royalty Corporation - 2017 Results of Operations
Labrador Iron Ore Royalty Corporation - 2017 Results of
Operations
TORONTO
,
March 8, 2018
/CNW/ - Labrador Iron Ore Royalty Corporation ("LIORC") (TSX: LIF) announced the results of its operations for
the year ended
December 31, 2017
.
To the Holders of Common Shares of Labrador Iron Ore Royalty Corporation
80 Years in Labrador West
Labrador Iron Ore Royalty Corporation has been involved in Labrador West for 80 years. Under a Statutory Agreement with
Newfoundland
made in 1938, a predecessor company, Labrador Mining and Exploration Limited, was granted extensive exploration and mining rights in
Labrador West. LM&E found the iron ore bodies that now constitute the mine operated by Iron Ore Company of
Canada
. LM&E received
grants of leases and licences under the Statutory Agreement. It also received a grant of surface rights to establish the town site that became
Labrador City
. LM&E sublet the leases to IOC and IOC, with major steel companies as original shareholders, built the infrastructure, mine,
railway and port. Under the sublease, LIORC receives a 7% gross overriding royalty on iron ore products produced and sold by IOC.
Financial Performance
The Shareholders' cash flow from operations for the year ended
December 31, 2017
was
$167.0 million
or
$2.61
per share as compared to
$63.5 million
or
$0.99
per share for 2016.
The Shareholders' consolidated net income for the year ended
December 31, 2017
was
$157.3 million
or
$2.46
per share compared to
$78.2
million
or
$1.22
per share in 2016. Equity earnings from Iron Ore Company of
Canada
("IOC") amounted to
$74.3 million
compared to
$24.7
million
in 2016. LIORC received an IOC dividend in the fourth quarter of 2017 in the amount of
$19.3 million
or
$0.30
per share compared to
$15.1 million
or
$0.23
per share in the fourth quarter of 2016. IOC's 2017 iron ore sales for calculating the royalty to LIORC totaled 19.2 million
tonnes compared to 18.2 million tonnes in 2016. Royalty revenue increased to
$156.4 million
as compared to
$113.1 million
in 2016.
The cash flow from operations, equity earnings and net income for the year were higher than last year mainly due to improved prices for
concentrate, particularly in the first quarter of 2017, high premiums for concentrate and pellets, plus higher concentrate and pellet sales tonnages.
Prices and premiums in 2017 were higher than most forecasts with the Chinese governments enacting and enforcing measures to reduce pollution;
these measures favoured higher quality products such as the concentrate for sale ("CFS") and pellets produced by IOC.
The average index price for 62% fines increased 22% year-on-year to
US$71
per tonne CFR China in 2017. The pellet premiums also increased
year-on-year, particularly in the last few months of 2017, approaching approximately
US$60
per tonne in October and November. The average
price realized by IOC for CFS and pellets, FOB Sept-Îles, was approximately
C$108
per tonne in 2017 compared to
C$80
per tonne in 2016,
an increase of 35%. The higher premiums for 65% Fe concentrate and pellets were driven by the changes in environmental policy by the Chinese
governments, which caused Chinese steel producers to increase the usage of higher value-in-use iron ore, such as the concentrate and pellets
produced by IOC. With improving pellet premiums in 2017, IOC again focused on maximizing pellet production to the extent possible, given that
two pellet lines were refurbished in 2017 with none in 2016. The sales tonnage of pellets in 2017, for calculating the royalty to LIORC, was 4%
higher than in 2016. The CFS tonnages in 2017 were higher than in 2016 by 6%.
Iron Ore Company of Canada Operations
Production
Total concentrate production of 20.2 million tonnes in 2017 was 5% higher as compared to 2016 of 19.2 million tonnes, but below the 22 million
tonnes objective for 2017. In the fourth quarter of 2017, IOC experienced two site-wide power outages, weather conditions required the
suspension of pit mining activities due to poor visibility, and the conveyor belt of the parallel ore delivery system split along several kilometers. The
parallel ore delivery system ("PODS") was not operational for 21 days in December while repairs to the conveyor were undertaken. Quarterly
concentrate production records were set in the first and third quarters of 2017 which drove the 5% improvement in concentrate production in
2017. Pellet production was 7% higher in 2017 as compared to 2016. While two pellet lines were down for several weeks for refurbishment, the
annual pellet production improved with increased throughput being achieved in both lines once they returned to service.
The cost per tonne of concentrate produced declined by 5% in 2017 as compared to 2016. The total cash cost in Canadian dollars was well
controlled and increased by only 2.4%. The overall IOC employee productivity improved by 3% in 2017.
Sales as Reported for the LIORC Royalty
Total iron ore tonnage sold by IOC (CFS plus pellets) of 19.2 million tonnes was 5% above the total sales tonnage in 2016. The pellet sales
tonnage was 4% higher and CFS sales tonnage was 6% higher than in 2016. The increase in the sales of both pellets and CFS was achieved
despite the repair over a 34-day period in July and August on the dumper for the rail wagons that transport the iron ore products to the port at
Sept Isles. IOC crews are to be commended for the dumper repair work and the reduction of the high concentrate inventories at Carol Lake at the
end of the third quarter to normal levels by year end.
As noted above, pellet premiums were strong in 2017 and IOC maximized pellet production, while still meeting CFS sales commitments.
Capital Expenditures
Capital expenditure for IOC in 2017 was
$265 million
in total as compared to
$99 million
in 2016. The capital program for 2016 was set when
the price outlook was poor and the expansion program had been largely completed. Therefore the capital budget was set for minimal sustaining
capital. For 2017, the total capital budget was increased to
$245 million
as the price outlook in
December 2016
was much improved. The 2017
budget included some
$40 million
as development capital for the
Wabush
3 pit (total budget
$79 million
in 2017 and 2018). The sustaining capital
included the refurbishment of the No. 2 and 5 pellet lines, capital to improve air emissions from the pellet plant, the refurbishment of track and the
remediation of high wall rock cuts along the route of the Quebec North Shore and Labrador Railway. The planned capital programs were
executed largely on budget. In late 2017 IOC purchased some
$20 million
of leased equipment to reduce future operating costs which added to
the budget.
Outlook
Many forecasts for seaborne iron ore, 62% Fe, CFR China, are for the price to decline and average below
US$60
per tonne in 2018. Reportedly,
the Office of the Chief Economist of
Australia
predicted in
January 2018
that iron ore prices will average
$53
per tonne (FOB Australia) in 2018,
and
$49
in 2019. Most forecasts note the anticipated increased supply, particularly from
Vale's
S11D mine in
Brazil
. It is also increasing likely that
the Samarco operation in
Brazil
could re-open in late 2018 or in 2019, which would likely adversely affect pellet premiums. However, some
forecasts note the Chinese policies on pollution and the strong steel margins for Chinese producers as being supportive of iron ore prices and
premiums for higher grade iron ore.
Rio Tinto has released guidance for 2018 of between 11.5 million to 12.5 million tonnes for their 58.7% share of IOC's saleable production
(pellets and CFS tonnage). This would result in 19.6 million to 21.3 million tonnes of saleable production on a 100% basis. With the strong pellet
premiums, IOC will continue to prioritize pellet production in 2018. The IOC objective is 22.2 million tonnes of concentrate production with sales
of approximately 12.5 million tonnes of pellets and 8.4 million tonnes of CFS in 2018.
The capital expenditures for 2018 are expected to be
$220 million
, lower than the
$265 million
in 2017. The refurbishment of one induration
machine in the pellet plant is planned for 2018. Production of ore from the
Wabush
3 pit is on track as planned for
July 2018
. The six-year
collective agreements with the United Steelworkers of America union employees expired on
February 28, 2018
. IOC expects to earn revenue
from hauling product from the Bloom Lake mine of Quebec Iron Ore Inc., with mine production planned to start
March 2018
.
The price of iron ore early in 2018 has again exceeded forecasts. If the improved prices and premiums continue in 2018, IOC achieves the
production guidance, and the Canadian dollar does not appreciate materially against the US dollar, the 2018 outlook for LIORC will be continued
strong cash flows.
I would like to take this opportunity to thank our Shareholders for their interest and loyalty and my fellow Directors for their wisdom and support.
Respectfully submitted on behalf of the Directors of the Corporation,
William H. McNeil
President and Chief Executive Officer
March 8, 2018
Corporate Structure
LIORC is a Canadian corporation resulting from the conversion of the Labrador Iron Ore Royalty Income Fund (the "Fund") under an
Arrangement effective on
July 1, 2010
. LIORC is also the successor by amalgamation under the Arrangement of Labrador Mining Company
Limited, formerly a wholly-owned subsidiary of the Fund.
LIORC, directly and through its wholly-owned subsidiary Hollinger-Hanna Limited, holds a 15.10% equity interest in IOC and receives a 7%
gross overriding royalty and a
10 cent
per tonne commission on all iron ore products produced, sold and shipped by IOC. Generally, LIORC
pays cash dividends from its net income to the maximum extent possible, subject to the maintenance of appropriate levels of working capital. The
common shareholders receive quarterly dividends on the common shares on the 25th day of the month following the end of each quarter.
Eight Directors are responsible for the governance of the Corporation and also serve as directors of Hollinger-Hanna. The Directors, in addition to
managing the affairs of the Corporation and Hollinger-Hanna, oversee the Corporation's interests in IOC. Two of the eight Directors sit on the
board of IOC and the five independent Directors serve as members of the Audit, Nominating and Compensation Committees. Scotia Managed
Companies Administration Inc., pursuant to an administration agreement, acts as the administrator of the Corporation and Hollinger-Hanna.
Taxation
The Corporation is a taxable corporation. Dividend income received from IOC and Hollinger-Hanna is received tax free while royalty income is
subject to income tax and
Newfoundland
royalty tax. Expenses of the Corporation include administrative expenses. Hollinger-Hanna is a taxable
corporation.
Income Taxes
Dividends to a shareholder that are paid within a particular year are to be included in the calculation of the shareholder's taxable income for that
year. All dividends paid in 2017 were "eligible dividends" under the Income Tax Act.
Review of Operations
Iron Ore Company of
Canada
The income of the Corporation is entirely dependent on IOC as the only assets of the Corporation and its subsidiary are related to IOC and its
operations. IOC is one of
Canada's
largest iron ore producers, operating a mine, concentrator and pellet plant at
Labrador City, Newfoundland
and
Labrador
, and is among the top five producers of seaborne iron ore pellets in the world. It has been producing and processing iron ore
concentrate and pellets since 1954. IOC is strategically situated to serve markets throughout the world from its year-round port facilities at
Sept-
Iles, Quebec
.
IOC has ore reserves sufficient for approximately 25 years at current production rates with additional resources of a greater magnitude. It
currently has the nominal capacity to extract around 55 million tonnes of crude ore annually. The crude ore is processed into iron ore concentrate
and then either sold or converted into many different qualities of iron ore pellets to meet its customers' needs. The iron ore concentrate and pellets
are transported to IOC's port facilities at Sept-Îles,
Quebec
via its wholly-owned Quebec North Shore and Labrador Railway, a 418 kilometer
rail line which links the mine and the port. From there, the products are shipped to markets throughout
North America
,
Europe
, the
Middle East
and the
Asia-Pacific
region.
IOC's 2017 sales totaled 19.0 million tonnes, comprised of 10.4 million tonnes of iron ore pellets and 8.6 million tonnes of iron ore concentrate.
Production in 2017 was 10.5 million tonnes of pellets and 8.5 million tonnes of CFS. IOC generated ore sales revenues (excluding third party ore
sales) of
$2,249 million
in 2017 (2016 -
$1,620 million
).
Selected IOC Financial Information
2017
2016
2015
2014
2013
($ in millions)
Operating Revenues
2,315
1,676
1,495
1,794
2,194
Cash Flow from Operating Activities
923
456
267
455
781
Net Income
499
170
21
273
549
Capital Expenditures
256
99
143
187
275
IOC Royalty
The Corporation holds certain leases and licenses covering approximately 18,200 hectares of land near
Labrador City
. IOC has leased certain
portions of these lands from which it currently mines iron ore. In return, IOC pays the Corporation a 7% gross overriding royalty on all sales of
iron ore products produced from these lands. A 20% tax on the royalty is payable to the Government of
Newfoundland
and
Labrador
. For the
five years prior to 2017, the average royalty net of the 20% tax had been
$94.2 million
per year and in 2017 the net royalty was
$125.1 million
(2016 -
$90.5 million
).
Because the royalty is "off-the-top", it is not dependent on the profitability of IOC. However, it is affected by changes in sales volumes, iron ore
prices and, because iron ore prices are denominated in US dollars,
the United States
- Canadian dollar exchange rate.
IOC Equity
In addition to the royalty interest, the Corporation directly and through its wholly owned subsidiary, Hollinger-Hanna, owns a 15.10% equity
interest in IOC. The other shareholders of IOC are Rio Tinto Limited with 58.72% and Mitsubishi Corporation with 26.18%.
IOC Commissions
Hollinger-Hanna has the right to receive a payment of
10 cents
per tonne on the products produced and sold by IOC. Pursuant to an agreement,
IOC is obligated to make the payment to Hollinger-Hanna so long as Hollinger-Hanna is in existence and solvent. In 2017, Hollinger-Hanna
received a total of
$1.9 million
in commissions from IOC (2016 -
$1.8 million
).
Quarterly Dividends
Dividends of
$2.65
per share including special dividends of
$1.65
per share were declared in 2017 (2016 – dividends of
$1.00
per share). These
dividends were allocated as follows:
Period
Ended
Payment
Date
Dividend
Income
per Share
Total
Dividend
($ Million)
Mar. 31, 2017
Apr. 25, 2017
$0.25
$ 16.0
Special Dividend
Apr. 25, 2017
0.25
16.0
Jun. 30, 2017
Jul. 25, 2017
0.25
16.0
Special Dividend
Jul. 25, 2017
0.35
22.4
Sep. 30, 2017
Oct. 25, 2017
0.25
16.0
Special Dividend
Oct. 25, 2017
0.75
48.0
Dec. 31, 2017
Jan. 25, 2018
0.25
16.0
Special Dividend
Jan. 25, 2018
0.30
19.2
Dividend to Shareholders - 2017
$2.65
$169.6
Mar. 31, 2016
Apr. 25, 2016
$0.25
$16.0
Jun. 30, 2016
Jul. 25, 2016
0.25
16.0
Sep. 30, 2016
Oct. 25, 2016
0.25
16.0
Dec. 31, 2016
Jan. 25, 2017
0.25
16.0
Dividend to Shareholders - 2016
$ 1.00
$64.0
The quarterly dividends are payable to all shareholders of record on the last day of each calendar quarter and are paid on the 25th day of the
following month.
Management's Discussion and Analysis
The following is a discussion of the consolidated financial condition and results of operations of the Corporation for the years ended
December 31,
2017
and 2016. This discussion should be read in conjunction with the consolidated financial statements of the Corporation and notes thereto for
the years ended
December 31, 2017
and 2016. This information is prepared in accordance with International Financial Reporting Standards
("IFRS") as issued by the International Accounting Standards Board ("IASB") and all amounts are shown in Canadian dollars unless otherwise
indicated.
The Corporation is a Canadian corporation resulting from the conversion of the Fund under an Arrangement effective on
July 1, 2010
. LIORC is
also the successor by amalgamation under the Arrangement of Labrador Mining Company Limited, formerly a wholly-owned subsidiary of the
Fund.
General
The Corporation is dependent on the operations of IOC. IOC's earnings and cash flows are affected by the volume and mix of iron ore products
produced and sold, costs of production and the prices received. Iron ore demand and prices fluctuate and are affected by numerous factors which
include demand for steel and steel products, the relative exchange rate of the US dollar, global and regional demand and production, political and
economic conditions and production costs in major producing areas.
Liquidity and Capital Resources
The Corporation had
$40.5 million
(2016 -
$23.9 million
) in cash as at
December 31, 2017
with total current assets of
$82.6 million
(2016 -
$62.9 million
). The Corporation has working capital of
$33.1 million
(2016 -
$38.8 million
). The Corporation's cash flow from operations was
$167.0 million
(2016 -
$63.5 million
) and dividends paid during the year were
$150.4 million
, resulting in cash balances increasing by $16.6
million during 2017.
Cash balances consist of deposits in Canadian dollars and US 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 Company 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.
The Corporation has a
$50 million
revolving credit facility with a term ending
September 18, 2020
with provision for annual one-year extensions.
No amount is currently drawn under this facility leaving
$50.0 million
available to provide for any capital required by IOC or requirements of the
Corporation.
Operating Results
The following table summarizes the Corporation's 2017 operating results as compared to 2016 results (in '000's).
Revenue
2017
2016
IOC royalties
(net of 20% Newfoundland royalty tax)
$
125,094
$
90,465
IOC commissions
1,885
1,793
Other
374
233
127,353
92,491
Expenses
Administrative expenses
2,938
2,743
Income taxes expense – current
37,283
26,821
40,221
29,564
Net Income before undernoted items
87,132
62,927
Non cash revenue (expense)
Equity earnings in IOC
74,300
24,723
Deferred income taxes
2,204
(4,343)
Amortization
(6,352)
(5,134)
70,152
15,246
Net income for the year
157,284
78,173
Other comprehensive gain
2,060
699
Comprehensive income for the year
$
159,344
$
78,872
A summary of IOC's sales for calculating the royalty to LIORC in millions of tonnes is as follows:
First
Quarter
2017
Second
Quarter
2017
Third
Quarter
2017
Fourth
Quarter
2017
Total
Year
2017
Total
Year
2016
Pellets
2.48
2.44
2.78
2.78
10.48
10.06
Concentrates
(1)
2.19
1.60
2.23
2.66
8.67
8.17
Total
4.67
4.04
5.00
5.44
19.15
18.23
(1) Excludes third party ore sales.
(2) Totals may not add up due to rounding.
IOC's 2017 iron ore sales for calculating the royalty to LIORC, totaled 19.2 million tonnes compared to 18.2 million tonnes in 2016. Royalty
revenue increased to
$156.4 million
as compared to
$113.1 million
in 2016. Equity earnings from IOC amounted to
$74.3 million
compared to
$24.7 million
in 2016. The higher royalty revenue and equity earnings achieved in 2017 as compared to 2016 was mainly due to improved prices
for concentrate, particularly in the first quarter of 2017, high premiums for concentrate and pellets, plus higher concentrate and pellet sales
tonnages. Prices and premiums were higher than most forecasts with the Chinese governments enacting and enforcing measures to reduce
pollution, which favoured higher value-in-use products, such as the concentrates and pellets produced by IOC.
The average index price for 62% fines increased 22% year-on-year to
US$71
per tonne CFR China in 2017. The pellet premiums also increased
year-on- year, particularly in the last few months of 2017, approaching approximately
US$60
per tonne in October and November. The average
price realized by IOC for CFS and pellets, FOB Sept-Îles, was approximately
C$108
per tonne in 2017 compared to
C$80
per tonne in 2016,
an increase of 35%. The higher premiums for 65% Fe concentrate and pellets were driven by the changes in environmental policy by the Chinese
governments, which caused Chinese steel producers to increase the usage of higher value-in-use iron ore, such as the concentrate and pellets
produced by IOC. With improving pellet premiums in 2017, IOC again focused on maximizing pellet production to the extent possible, given that
two pellet lines were refurbished in 2017 with none in 2016. The sales tonnage of pellets in 2017, for calculating the royalty to LIORC, was 4%
higher than in 2016. The CFS tonnages in 2017 were higher than in 2016 by 6%.
Capital expenditure for IOC in 2017 was
$265 million
in total as compared to
$99 million
in 2016. The capital program for 2016 was set when
the price outlook was poor and the expansion program had been largely completed. Therefore the capital budget was set for minimal sustaining
capital. For 2017, the total capital budget was increased to
$245 million
as the price outlook in
December 2016
was much improved. The 2017
budget included some
$40 million
as development capital for the
Wabush
3 pit (total budget
$79 million
in 2017 and 2018). The sustaining capital
included the refurbishment of the No. 2 and 5 pellet lines, capital to improve air emissions from the pellet plant, the refurbishment of track and the
remediation of high wall rock cuts along the route of the Quebec North Shore and Labrador Railway. The planned capital programs were
executed largely on budget. In late 2017 IOC purchased some
$20 million
of leased equipment to reduce future operating costs which added to
the budget.
The Shareholders' consolidated net income for the year ended
December 31, 2017
was
$157.3 million
or
$2.46
per share compared to
$78.2
million
or
$1.22
per share in 2016. Equity earnings from IOC amounted to
$74.3 million
compared to
$24.7 million
in 2016. The main cause of
IOC's higher earnings for 2017 as compared to 2016 was the improved iron ore prices and premiums, and increased sales tonnages.
Administrative expenses for the year ended
December 31, 2017
include a non-cash foreign exchange loss of
$0.3 million
on the conversion of the
dividend received from IOC in
December 2016
. Amortization expense for royalty and commission interests increased
$1.2 million
for the year
ended
December 31, 2017
due to an increased amortization rate reflecting lower estimated total mineral resources over the prior year.
Fourth quarter 2017 CFS sales were much improved year-over-year, but pellet sales were lower as a result of the refurbishment of the No. 5
pellet line. However, the achieved sales prices of CFS and pellets were significantly improved, resulting in royalty income of
$40.0 million
for the
quarter as compared to
$38.0 million
for the same period in 2016. Fourth quarter 2017 cash flow from operations was
$39.6 million
or
$0.62
per
share compared to 2016 of
$28.3 million
or
$0.44
per share. LIORC received an IOC dividend in the fourth quarter of 2017 in the amount of
$19.3 million
or
$0.30
per share (2016 -
$15.1 million
or
$0.23
per share). Equity earnings from IOC amounted to
$16.6 million
in the fourth
quarter 2017 compared to
$18.0 million
for the same period in 2016 in part as a result of a decline in the gross margin owing to higher product unit
costs due to lower production overall for the quarter offset by higher iron ore prices and premiums achieved and increased sales tonnages.
Selected Consolidated Financial Information
The following table sets out financial data from a Shareholder's perspective for the three years ended
December 31, 2017
, 2016 and 2015.
Years Ended December 31
Description
2017
2016
2015
(in millions except per
share information)
Revenue
$158.6
$115.1
$101.7
Net Income
$157.3
$78.2
$54.7
Net Income per Share
$2.46
$1.22
$0.85
Cash Flow from Operations
$167.0
(
1)
$63.5
(
2)
$59.9
Cash Flow from Operations per Share
$2.61
(
1)
$0.99
(
2)
$0.94
Total Assets
$750.0
$737.0
$714.1
Dividends Declared per Share
$2.65
$1.00
$1.00
Number of Common Shares outstanding
64.0
64.0
64.0
(1) Includes IOC dividends totaling $76.7 million or $1.20 per Share.
(2) Includes IOC dividend totaling $15.1 million or $0.23 per Share.
The following table sets out quarterly revenue, net income, cash flow and dividend data for 2017 and 2016. Due to seasonal weather patterns the
first and fourth quarters generally have lower production and sales. Royalty revenues and equity earnings in IOC track iron ore spot prices, which
can be very volatile. Dividends, included in cash flow, are declared and paid by IOC irregularly according to the availability of cash.
Revenue
Net
Income
Net
Income
per Share
Cash Flow
Cash Flow
from
Operations
per Share
Adjusted
Cash Flow
per Share
(1)
Dividends
Declared per
Share
(in millions except per share information)
2017
First Quarter
$43.4
$42.9
$0.67
$28.2
(2)
$0.44
(2)
$0.53
(2)
$0.50
Second Quarter
$34.2
$32.3
$0.50
$45.6
(3)
$0.71
(3)
$0.53
(3)
$0.60
Third Quarter
$40.4
$43.8
$0.69
$53.6
(4)
$0.84
(4)
$0.85
(4)
$1.00
Fourth Quarter
$40.6
$38.3
$0.60
$39.6
(5)
$0.62
(5)
$0.65
(5)
$0.55
2016
First Quarter
$22.3
$11.0
$0.17
$12.5
$0.19
$0.19
$0.25
Second Quarter
$25.8
$8.3
$0.13
$7.5
$0.12
$0.22
$0.25
Third Quarter
$28.4
$21.2
$0.33
$15.2
$0.24
$0.24
$0.25
Fourth Quarter
$38.6
$37.7
$0.59
$28.3
(6)
$0.44
(6)
$0.57
(6)
$0.25
(1)
"Adjusted cash flow" (see below)
(2)
Includes $10.0 million IOC dividend.
(3)
Includes $15.2 million IOC dividend.
(4)
Includes $32.2 million IOC dividend.
(5)
Includes $19.3 million IOC dividend.
(6)
Includes $15.1 million IOC dividend.
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 dividends. Standardized cash flow per share was
$2.61
for 2017 (2016 -
$0.99
). Cumulative standardized cash flow from inception of the Corporation is
$25.15
per share and total cash
distributions since inception are
$24.59
per share, for a payout ratio of 98%.
The Corporation also reports "Adjusted cash flow" which is defined as cash flow from operating activities after adjustments for changes in amounts
receivable, accounts payable and income taxes recoverable and 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 distributions to Shareholders.
The following reconciles standardized cash flow from operating activities to adjusted cash flow (in '000's).
2017
2016
Standardized cash flow from operating activities
$166,960
$63,473
Changes in amounts receivable, accounts and interest payable and
income taxes recoverable and payable
(3,116)
14,570
Adjusted cash flow
$163,844
$78,044
Adjusted cash flow per share
$2.56
$1.22
Disclosure Controls and Internal Control over Financial Reporting
The President and CEO and the CFO are responsible for establishing and maintaining disclosure controls and procedures and internal control over
financial reporting for the Corporation. Two directors serve as directors of IOC and IOC provides monthly reports on its operations to them.
The Corporation also relies on financial information provided by IOC, including its audited financial statements, and other material information
provided to the President and CEO, the Executive Vice President and Secretary and the CFO by officers of IOC. IOC is a private corporation,
and its financial statements are not publicly available.
The Directors are informed of all material information relating to the Corporation and its subsidiary by the officers of the Corporation on a timely
basis and approve all core disclosure documents including the Management Information Circular, the annual and interim financial statements and
related Management's Discussion and Analyses, the Annual Information Form, any prospectuses and all press releases. An evaluation of the
design and operating effectiveness of the Corporation's disclosure controls and procedures was conducted under the supervision of the CEO and
CFO. Based on their evaluation, they concluded that the Corporation's disclosure controls and procedures were effective in ensuring that all
material information relating to the Corporation was accumulated and communicated for the year ended
December 31, 2017
.
The President and CEO and the CFO have designed internal control over financial reporting to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements for external purposes in accordance with IFRS. An evaluation of the
design and operating effectiveness of the Corporation's internal control over financial reporting was conducted under the supervision of the CEO
and CFO. Based on their evaluation, they concluded that the Corporation's internal control over financial reporting was effective and that there
were no material weaknesses therein for the year ended
December 31
, 2017.
The preparation of financial statements requires the Corporation's management to make estimates and assumptions that affect the reported
amounts of the assets, liabilities, revenue and expenses reported each period. Each of these estimates varies with respect to the level of judgment
involved and the potential impact on the Corporation's reported financial results. Estimates are deemed critical when the Corporation's financial
condition, change in financial condition or results of operations would be materially impacted by a different estimate or a change in estimate from
period to period. By their nature, these estimates are subject to measurement uncertainty, and changes in these estimates may affect the
consolidated financial statements of future periods.
No material change in the Corporation's internal control over financial reporting occurred during the year ended
December 31, 2017
.
Outlook
Many forecasts for seaborne iron ore, 62% Fe, CFR China, are for the price to decline and average below
US$60
per tonne in 2018. Reportedly,
the Office of the Chief Economist of
Australia
predicted in
January 2018
that iron ore prices will average
$53
per tonne (FOB Australia) in 2018,
and
$49
in 2019. Most forecasts note the anticipated increased supply, particularly from
Vale's
S11D mine in
Brazil
. It is also increasing likely that
the Samarco operation in
Brazil
could re-open in late 2018 or in 2019, which would likely adversely affect pellet premiums. However, some
forecasts note the Chinese policies on pollution and the strong steel margins for Chinese producers as being supportive of iron ore prices and
premiums for higher grade iron ore.
Rio Tinto has released guidance for 2018 of between 11.5 million to 12.5 million tonnes for their 58.7% share of IOC'saleable production (pellets
and CFS tonnage). This would result in 19.6 million to 21.3 million tonnes of saleable production on a 100% basis. With the strong pellet
premiums, IOC will continue to prioritize pellet production in 2018. The IOC objective is 22.2 million tonnes of concentrate production with sales
of approximately 12.5 million tonnes of pellets and 8.4 million tonnes of CFS in 2018.
The capital expenditures for 2018 are expected to be
$220 million
, lower than the
$265 million
in 2017. The refurbishment of one induration
machine in the pellet plant is planned for 2018. Production of ore from the
Wabush
3 pit is on track as planned for
July 2018
. The six-year
collective agreements with the United Steelworkers of America union employees expired on
February 28, 2018
. IOC expects to earn revenue
from hauling product from the Bloom Lake mine of Quebec Iron Ore Inc., with mine production planned to start
March 2018
.
The price of iron ore early in 2018 has again exceeded forecasts. If the improved prices and premiums continue in 2018, IOC achieves the
production guidance, and the Canadian dollar does not appreciate materially against the US dollar, the 2018 outlook for LIORC will be continued
strong cash flows.
Forward-Looking Statements
This report may contain "forward-looking" statements that involve risks, uncertainties and other factors that may cause the actual results,
performance or achievements to be materially different from any future results, performance or achievements expressed or implied by such
forward-looking statements. Words such as "may", "will", "expect", "believe", "plan", "intend", "should", "would", "anticipate" and other similar
terminology are intended to identify forward-looking statements. These statements reflect current assumptions and expectations regarding future
events and operating performance as of the date of this report. Forward-looking statements involve significant risks and uncertainties, should not
be read as guarantees of future performance or results, and will not necessarily be accurate indications of whether or not such results will be
achieved. A number of factors could cause actual results to vary significantly, including iron ore price and volume volatility, exchange rates, the
performance of IOC, market conditions in the steel industry, mining risks and insurance, relationships with aboriginal groups, changes affecting
IOC's customers, competition from other iron ore producers, estimates of reserves and resources and government regulation and taxation. A
discussion of these factors is contained in LIORC's annual information form dated
March 8, 2018
under the heading, "Risk Factors". Although the
forward-looking statements contained in this report are based upon what management of LIORC believes are reasonable assumptions, LIORC
cannot assure investors that actual results will be consistent with these forward-looking statements. These forward-looking statements are made as
of the date of this report and LIORC assumes no obligation, except as required by law, to update any forward-looking statements to reflect new
events or circumstances. This report should be viewed in conjunction with LIORC's other publicly available filings, copies of which can be
obtained electronically on SEDAR at
www.sedar.com
.
Additional information
Additional information relating to the Corporation, including the Annual Information Form, is on SEDAR at
www.sedar.com
. Additional
information is also available on the Corporation's website at
www.labradorironore.com
.
William H. McNeil
President and Chief Executive Officer
Toronto, Ontario
March 8, 2018
LABRADOR IRON ORE ROYALTY CORPORATION
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
As at
December 31,
(in thousands of Canadian dollars)
2017
2016
Assets
Current Assets
Cash
$
40,498
$
23,937
Amounts receivable
42,092
38,487
Income taxes recoverable
-
490
Total Current Assets
82,590
62,914
Non-Current Assets
Iron Ore Company of Canada ("IOC")
royalty and commission interests
259,032
265,384
Investment in IOC
408,691
408,680
Total Non-Current Assets
667,723
674,064
Total Assets
$
750,313
$
736,978
Liabilities and Shareholders' Equity
Current Liabilities
Accounts payable
$
8,601
$
8,073
Dividend payable
35,200
16,000
Taxes payable
5,703
-
Total Current Liabilities
49,504
24,073
Non-Current Liabilities
Deferred income taxes
127,220
129,060
Total Liabilities
176,724
153,133
Shareholders' Equity
Share capital
317,708
317,708
Retained earnings
264,272
276,588
Accumulated other comprehensive loss
(8,391)
(10,451)
573,589
583,845
Total Liabilities and Shareholders' Equity
$
750,313
$
736,978
Approved by the Directors,
(Singed)
(Signed)
William H. McNeil
Patricia M. Volker
Director
Director