Labrador Iron Ore Royalty Corporation - Results for the Second Quarter Ended June 30, 2011
TORONTO, Aug. 9, 2011 /CNW/ - Labrador Iron Ore Royalty Corporation ("LIORC") (TSX: LIF.UN) announced the results of its operations for the second quarter ended June 30, 2011.
On July 1, 2011 the 2-for-1 split of the stapled units approved by the unitholders on May 30, 2011, became effective. The stapled units started trading on a split basis on the Toronto Stock Exchange on June 28, 2011. Accordingly, all per unit figures in this report are based on 64 million units outstanding rather than the 32 million in previous statements, with all prior per unit figures being restated.
Royalty income for the second quarter of 2011 amounted to $37.8 million as compared to $52.1 million for the second quarter of 2010. The unitholder's cash flow from operating activities after adjustments for changes in amounts receivable, accounts payable and income taxes payable (adjusted cash flow) for the second quarter was $23.0 million or $0.36 per unit as compared to $30.5 million or $0.48 per unit for the same period in 2010. Net income was $48.2 million or $0.75 per unit compared to $69.3 million or $1.08 per unit for the same period in 2010. Equity earnings from IOC amounted to $30.4 million or $0.48 per unit as compared to $46.7 million or $0.73 per unit in 2010. Had the price adjustments which occurred in the second quarter of 2010 and related to the first quarter not been included, 2010 royalty income would have been reduced by $10.4 million or $0.33 per unit and equity earnings from IOC by $14.2 million or $0.44 per unit. Without the inclusion of these amounts, second quarter of 2010 net income would have been $0.84 per unit and adjusted cash flow $0.38 per unit.
Prior to the July 1, 2010 conversion of Labrador Iron Ore Royalty Corporation ("LIORC") from an income trust, the net income of the unitholders was the same as the trust's net income. Since the unitholders now own the $248 million LIORC subordinated notes directly, the net income of the unitholders consists of the net income of LIORC plus the interest paid on the LIORC subordinated notes. Thus all net income, adjusted cash flow and per unit figures referred to in this report use the totals according to the financial statements plus (where applicable) the $7,488,000 ($0.117 per stapled unit) and $14,976,000 ($0.234 per stapled unit) interest on the subordinated notes for the three months and six months period ended June 30, 2011, respectively.
Royalty income for the quarter was slightly below the adjusted second quarter of 2010 due to lower IOC sales and a higher Canadian dollar (against its U.S. counterpart) offset by higher iron ore prices in 2011. The lower IOC sales were the result of a shortage of products due to production shortfalls and timing of shipments.
Results for the three months and six months ended June 30 are summarized below:
3 Months Ended 3 Months Ended 6 Months Ended 6 Months Ended June 30, June 30, June 30, June 30, 2011 2010 2011 2010 (Unaudited)
| Revenue (in millions) | $38.1 | $52.5 | $68.8 | $69.2 |
| Adjusted cash flow (in millions) | $23.0 | $30.5 | $71.0 | $52.8 |
| Adjusted cash flow per unit | $ 0.36 | $ 0.48 | $ 1.11 | $ 0.83 |
| Net income (in millions) | $ 48.2 | $ 69.3 | $ 87.1 | $ 85.0 |
| Net income per unit | $ 0.75 | $ 1.08 | $ 1.36 | $ 1.33 |
"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 Canadian GAAP or IFRS. The Directors believe that adjusted cash flow is a useful analytical measure as it better reflects cash available for distributions to unitholders.
Iron Ore Company of Canada
Second quarter saleable iron ore production was 14 per cent lower than the same quarter of 2010 as a result of truck and labour availability issues, but 31 per cent higher than the first quarter of 2011 as progress was made to stabilize and improve production capability. Concentrate for sinter production was maximized in the quarter to respond to market demand, and this resulted in lower pellet production relative to the first quarter. While the overall pellet capacity was temporarily reduced, it enabled significant plant maintenance work to be undertaken.
The Concentrator Expansion Project Phase 1, increasing capacity to 22Mt/a, is on track for completion in late 2011 and Phase 2, improving the magnetite recovery circuit, which will increase capacity to 23Mt/a, is progressing as planned, with first production expected in late 2012.
A summary of IOC's sales in millions of tonnes is as follows:
3 Months Ended 3 Months Ended 6 Months Ended 6 Months Ended Year
| June 30, | June 30, | June 30, | June 30, | Ended | |||||
|---|---|---|---|---|---|---|---|---|---|
| 2011 | 2010 | 2011 | 2010 | Dec. 31, 2010 | |||||
| Pellets | 1.90 | 3.00 | 4.17 | 5.67 | 12.05 | ||||
| Concentrates | 1.05 | 1.08(1) | 1.33 | 1.39(1) | 3.02(1) | ||||
| Total | 2.95 | 4.08 | 5.50 | 7.06 | 15.07 |
Note: (1) Excludes third party ore sales
Proposed Tax Changes
On July 20, 2011, the Ministry of Finance announced proposed amendments to the Income Tax Act concerning stapled securities. Under the proposal, when debt and equity are stapled together and trade as a unit, the interest on the debt portion of the stapled security would not be deductible in computing income for tax purposes. The directors are studying the effect of this announcement on LIORC.
Outlook
Iron ore markets and pricing remain firm and IOC expects to be able to sell all the pellets and concentrate it can produce. IOC believes that the production problems faced in the first half of the year have been substantially remedied and production for the balance of the year will be at normal levels, with the first benefits from Phase 1 of the expansion occurring late in the year. The continued strength of the Canadian dollar against its U.S. counterpart is a negative but is more than offset by increased prices for iron ore.
Respectfully submitted on behalf of the Directors of Labrador Iron Ore Royalty Corporation,
Bruce C. Bone President and Chief Executive Officer August 9, 2011
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 Corporation's 2010 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 2010 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 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.
On July 1, 2011 the 2-for-1 split of the stapled units approved by the unitholders on May 30, 2011, became effective. The stapled units started trading on a split basis on the Toronto Stock Exchange on June 28, 2011. Accordingly, all per unit figures in this report (except distributions declared) are based on 64 million units outstanding rather than the 32 million in previous statements, with all prior per unit figures being restated.
Royalty income for the second quarter of 2011 amounted to $37.8 million as compared to $52.1 million for the second quarter of 2010. The unitholder's cash flow from operating activities after adjustments for changes in amounts receivable, accounts payable and income taxes payable (adjusted cash flow) for the second quarter was $23.0 million or $0.36 per unit as compared to $30.5 million or $0.48 per unit for the same period in 2010. Net income was $48.2 million or $0.75 per unit compared to $69.3 million or $1.08 per unit for the same period in 2010. Equity earnings from IOC amounted to $30.4 million or $0.48 per unit as compared to $46.7 million or $0.73 per unit in 2010. Had the price adjustments which occurred in the second quarter of 2010 and related to the first quarter not been included, 2010 royalty income would have been reduced by $10.4 million or $0.33 per unit and equity earnings from IOC by $14.2 million or $0.44 per unit. Without the inclusion of these amounts, second quarter of 2010 net income would have been $0.84 per unit and adjusted cash flow $0.38 per unit.
Prior to the July 1, 2010 conversion of Labrador Iron Ore Royalty Corporation ("LIORC") from an income trust, the net income of the unitholders was the same as the trust's net income. Since the unitholders now own the $248 million LIORC subordinated notes directly, the net income of the unitholders consists of the net income of LIORC plus the interest paid on the LIORC subordinated notes. Thus all net income, adjusted cash flow and per unit figures referred to in this report use the totals according to the financial statements plus (where applicable) the $7,488,000 ($0.117 per stapled unit) and $14,976,000 ($0.234 per stapled unit) interest on the subordinated notes for the three months and six months period ended June 30, 2011, respectively.
Royalty income for the quarter was slightly below the adjusted second quarter of 2010 due to lower IOC sales and a higher Canadian dollar (against its U.S. counterpart) offset by higher iron ore prices in 2011. The lower IOC sales were the result of a shortage of products due to production shortfalls and timing of shipments.
The six month results were affected by the same factors as the second quarter with the decreased sales volume and higher Canadian dollar being offset by higher prices for pellets and concentrates.
The following table sets out quarterly revenue, net income and cash flow data for 2011, 2010 and 2009.
Adjusted Distributions Net Income Adjusted Cash Cash Flow Net Declared Revenue Income per Unit(1) Flow(2) per Unit)(1)(2) per Unit (in millions except per Unit information)
2011
First Quarter(3) $30.7 $38.9 $0.61 $48.02(6) $0.75 $1.50 Second Quarter(3) $38.1 $48.2 $0.75 $23.0 $0.36 $0.75 2010(4)
| First Quarter(5) | $16.7 $15.7 | $0.25 | $22.3(7) | $0.35 | $0.75 |
| Second Quarter(5) | $52.5 $69.3 | $1.08 | $30.5 | $0.48 | $0.75 |
| Third Quarter(3) | $40.9 $64.4 | $1.01 | $85.9(8) | $1.34 | $1.00 |
| Fourth Quarter(3) | $54.3 $62.8 | $0.98 | $31.9 | $0.50 | $2.00 |
2009
| First Quarter | $16.6 $16.5 | $0.26 | $11.1 | $0.17 | $0.50 |
| Second Quarter | $19.7 $17.8 | $0.28 | $12.6 | $0.20 | $0.50 |
| Third Quarter | $15.8 $13.6 | $0.21 | $18.8(9) | $0.29 | $0.50 |
| Fourth Quarter | $24.9 $27.2 | $0.43 | $15.8 | $0.25 | $0.50 |
Notes: (1) Per unit amounts have been retroactively adjusted to reflect the two-for-one share subdivision completed on July 1, 2011
(2) "Adjusted cash flow" (see below)
(3) Commencing with third quarter 2010, net income, adjusted cash flow, distributions and per unit figures referred to in this table use the totals according to the financial statements plus (where applicable) the $7,488,000 ($0.117 per unit) interest on the subordinated notes
(4) Except as noted, the figures have not been restated to conform with IFRS
(5) Restated to conform with IFRS
(6) Includes a $29.0 million IOC dividend
(7) Includes a $11.5 million IOC dividend
(8) Includes a $62.5 million IOC dividend
(9) Includes a $8.2 million IOC dividend
Iron Ore Company of Canada
Second quarter saleable iron ore production was 14 per cent lower than the same quarter of 2010 as a result of truck and labour availability issues, but 31 per cent higher than the first quarter of 2011 as progress was made to stabilize and improve production capability. Concentrate for sinter production was maximized in the quarter to respond to market demand, and this resulted in lower pellet production relative to the first quarter. While the overall pellet capacity was temporarily reduced, it enabled significant plant maintenance work to be undertaken.
The Concentrator Expansion Project Phase 1, increasing capacity to 22Mt/a, is on track for completion in late 2011 and Phase 2, improving the magnetite recovery circuit, which will increase capacity to 23Mt/a, is progressing as planned, with first production expected in late 2012.
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 unit was $0.67(1) for the quarter (2010 - $0.16). Cumulative standardized cash flow from inception of the Corporation is $15.12 per unit and total cash distributions since inception are $14.37(1) per unit, for a payout ratio of 95%.
(1) Excludes interest on subordinated notes paid directly to unitholders of $0.234 and $0.468, respectively.
"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 Canadian GAAP or IFRS. The Directors 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 June 30, 2011 June 30, 2010 June 30, 2011 June 30, 2010 Standardized cash flow from operating activities $42,731,031 $10,042,659 $57,452,557 $37,901,972 Excluding: changes in amounts receivable, accounts payable
| and income taxes payable | (27,229,486) | 20,437,593 | (1,417,676) | 14,910,576 |
| Adjusted cash flow(1) | $15,501,545 | $30,480,252 | $56,034,881 | $52,812,548 |
| Adjusted cash flow per unit(1) | $0.24 | $0.95 | $0.88 | $0.83 |
(1) Three months and six months ended June 30, 2011 exclude interest on subordinated notes paid directly to unitholders of $7,488,000 ($0.117 per unit) and $14,976,000 ($0.234) respectively.
Liquidity
The Corporation has a $50 million revolving credit facility to September 18, 2013 with provision for annual one-year extensions. No amounts are currently drawn under this facility (2010 - nil) leaving $50 million available to provide for any capital required by IOC or other Corporation requirements.
International Financial Reporting Standards ("IFRS")
The Corporation adopted IFRS effective January 1, 2010 and has prepared the current interim financial statements using IFRS Accounting Policies. Prior to the adoption of IFRS, the financial statements were prepared in accordance with Canadian Generally Accepted Accounting Principles ("Canadian GAAP"). The Corporation's financial statements for the year ending December 31, 2011 will be the first annual financial statements that comply with IFRS.
IFRS are premised on a conceptual framework similar to Canadian GAAP. However, significant differences exist in certain matters of recognition, measurement and disclosure. The adoption had a small impact on the consolidated balance sheets and statements of comprehensive income. The overall impact was to reduce the carrying value of the Corporation's investment in IOC and its retained earnings and accumulated other comprehensive income by $11.8 million at January 1, 2010 and $13.7 million at December 31, 2010. For the six months ended June 30, 2011, the Corporation's share of net income and comprehensive income from IOC has not materially changed from what would have been reported under Canadian GAAP. The change to IFRS has no impact on the Corporation's royalty and commission income and no impact on cash flows for the quarter.
Proposed Tax Changes
On July 20, 2011, the Ministry of Finance announced proposed amendments to the Income Tax Act concerning stapled securities. Under the proposal, when debt and equity are stapled together and trade as a unit, the interest on the debt portion of the stapled security would not be deductible in computing income for tax purposes. The directors are studying the effect of this announcement on LIORC.
Outlook
Iron ore markets and pricing remain firm and IOC expects to be able to sell all the pellets and concentrate it can produce. IOC believes that the production problems faced in the first half of the year have been substantially remedied and production for the balance of the year will be at normal levels, with the first benefits from Phase 1 of the expansion occurring late in the year. The continued strength of the Canadian dollar against its U.S. counterpart is a negative but is more than offset by increased prices for iron ore.
Bruce C. Bone President and Chief Executive Officer Toronto, Ontario August 9, 2011
LABRADOR IRON ORE ROYALTY CORPORATION CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
For the Three Months Ended June 30, 2011 2010 Canadian $ (Unaudited)
Revenue
IOC royalties $ 37,754,213 $ 52,103,871 IOC commissions 290,334 401,261 104,172 44,392 Interest and other income 38,148,719 52,549,524
Expenses
| Newfoundland royalty taxes | 7,550,843 | 10,458,850 |
| Amortization of royalty and commission interests | 1,112,870 | 1,497,889 |
| Administrative expenses | 705,404 | 718,405 |
Interest expense:
Credit facility 93,494 93,491 Subordinated notes 7,488,000 - 16,950,611 12,768,635
| Income before equity earnings and income taxes | 21,198,108 | 39,780,889 |
| Equity earnings in IOC | 30,431,486 | 46,680,120 |
| Income before income taxes | 51,629,594 | 86,461,009 |
Provision for income taxes
Current 6,809,433 10,798,526 Deferred 4,102,000 6,322,000 10,911,433 17,120,526
Net income for the period 40,718,161 69,340,483
Other comprehensive income
Share of other comprehensive loss of IOC (371,000) (263,000)
Comprehensive income for the period $ 40,347,161 $ 69,077,483
Net income per common share/unit (1)
$ 0.64 $ 1.08
(1) Per share/unit amounts have been retroactively adjusted to reflect the two-for-one share subdivision completed on July 1, 2011.
LABRADOR IRON ORE ROYALTY CORPORATION CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
For the Six Months Ended June 30, Canadian $ 2011 2010 (Unaudited)
Revenue
| IOC royalties | $ 68,034,430 | $ 68,478,362 |
| IOC commissions | 541,303 | 694,986 |
| Interest and other income | 236,961 | 49,135 |
68,812,694 69,222,483
Expenses
| Newfoundland royalty taxes | 13,606,886 | 13,733,748 |
| Amortization of royalty and commission interests | 2,171,238 | 2,795,359 |
| Administrative expenses | 1,105,556 | 1,440,635 |
Interest expense:
Credit facility 185,959 185,953 Subordinated notes 14,976,000 - 32,045,639 18,155,695
| Income before equity earnings and income taxes | 36,767,055 | 51,066,788 |
| Equity earnings in IOC | 49,682,954 | 51,486,535 |
| Income before income taxes | 86,450,009 | 102,553,323 |
Provision for income taxes
Current 11,898,227 12,554,651 Deferred 2,406,000 4,974,000 14,304,227 17,528,651
Net income for the period 72,145,782 85,024,672
Other comprehensive income
Share of other comprehensive loss of IOC (743,000) (526,000)
$ 71,402,782 $ 84,498,672
Comprehensive income for the period
Net income per common share/unit (1)
$ 1.13 $ 1.33
(1) Per share/unit amounts have been retroactively adjusted to reflect the two-for-one share subdivision completed on July 1, 2011
LABRADOR IRON ORE ROYALTY CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Six Months Ended June 30, Canadian $ 2011 2010 (Unaudited)
Net inflow (outflow) of cash related to the following activities
Operating Net income for the period $ 72,145,782 $ 85,024,672 Items not affecting cash:
Equity earnings in IOC (49,682,954) (51,486,535) Deferred income taxes 2,406,000 4,974,000 Amortization of royalty and commission interests 2,171,238 2,795,359 Common share dividend from IOC 28,994,815 11,505,052 Change in amounts receivable, accounts and income taxes payable and interest payable on subordinated notes 1,417,676 (14,910,576) Cash flow from operating activities 57,452,557 37,901,972
Financing
| Distributions paid to unitholders | (97,024,000) | (40,000,000) |
| Cash flow used in financing activities | (97,024,000) | (40,000,000) |
| Decrease in cash and cash equivalents during the period | (39,571,443) | (2,098,028) |
| Cash and cash equivalents, beginning of period | 73,611,888 | 6,203,013 |
| Cash and cash equivalents, end of period | $ 34,040,445 | $ 4,104,985 |
Cash and cash equivalents are comprised of:
Cash in bank $ 34,040,445 $ 1,770,744 Term deposits - 2,334,241 $ 4,104,985 $ 34,040,445
Cash income taxes paid $ 20,680,545 $ 5,096,000
$ 15,161,959 $ 186,987
Cash interest paid
LABRADOR IRON ORE ROYALTY CORPORATION CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
Capital Trust Retained Accumulated Total stock Units earnings other comprehensive Canadian $ loss (Unaudited)
| Balance as at December 31, 2010 | $ - $ 317,708,147 $ 83,634,152 | $ - $ 401,342,299 | |||
| Net income for the period | - | - | 85,024,672 | - | 85,024,672 |
| Distributions to unitholders | - | - | (48,000,000) | - | (48,000,000) |
| Other comprehensive loss | - | - | - | (526,000) | (526,000) |
$ - $ 317,708,147 $ 120,658,824 $ (526,000) $ 437,840,971
Balance as at June 30, 2010
| Balance as at December 31, 2011 | $ 69,708,147 | - $ 153,724,994 | $ (4,278,000) $ 219,155,141 | |||
| Net income for the period | - | - | 72,145,782 | 72,145,782 | ||
| Dividends to shareholders | - | - | (57,024,000) | (57,024,000) | ||
| Other comprehensive loss | - | - | (743,000) | (743,000) | ||
| Balance as at June 30, 2011 | $ 69,708,147 | $ - $ 168,846,776 | $ (5,021,000) $ 233,533,923 |
%SEDAR: 00030172E
For further information:
Bruce C. Bone President & Chief Executive Officer (416) 863-7133 E-mail- [email protected]
CO: Labrador Iron Ore Royalty Corporation
CNW 20:00e 09-AUG-11