Labrador Iron Ore Royalty Corporation - 2013 Results of Operations

TORONTO, March 3, 2014 /CNW/ - Labrador Iron Ore Royalty Corp. ("LIORC") (TSX: LIF) announced the results of its operations for the year ended December 31, 2013.

To the Holders of Common Shares of Labrador Iron Ore Royalty Corporation

Financial Performance

The Shareholders' adjusted cash flow (see Management's Discussion & Analysis for definition and calculation) for the year ended December 31, 2013 was $115.4 million or $1.80 per share as compared to $75.1 million or $1.17 per share for 2012.

IOC's 2013 iron ore sales totaled 14.8 million tonnes compared to 14.1 million tonnes in 2012. The combination of the increased sales, a price that averaged approximately 5% higher than 2012 and the lower value of the Canadian dollar against its US counterpart resulted in LIORC's royalty revenue rising to $137.6 million, an increase of 12% compared to $122.5 million in 2012. While this is a satisfactory result, the severe weather that disrupted IOC's operations did not allow the true potential of the capacity expansion at IOC to be realized. The Canadian dollar which had been trading at par to its U.S. counterpart in 2012 averaged $0.97 in 2013.

The Shareholders' consolidated net income for the year ended December 31, 2013 was $148.8 million or $2.33 per share compared to $122.5 million or $1.91 per share in 2012. Equity earnings from IOC amounted to $82.3 million compared to $58.7 million in 2012.

IOC Developments

The expansion program to increase IOC's capacity from 18 million tonnes per annum to 23.3 million tonnes is almost complete with current capacity in excess of 22 million tonnes. The project should be completed in the first half of 2014 with the full benefit being realized in the second half of the year. We had expected concentrate production in 2013 to exceed 19 million tonnes. However, because of operating problems related to the expansion exacerbated by adverse weather conditions, this did not happen. In June and July wildfires in the area and power outage caused by severe weather resulted in substantial production losses. Operations gradually recovered and by November were approaching a 20 million tonne per annum operating rate. Unfortunately, the "polar vortex" brought extreme cold weather to the Labrador City and Sept Isles areas, resulting in temperatures at or below -30 degrees centigrade for a 25 day period commencing December 11, 2013. With sustained temperatures below -30, no amount of preparation can prevent a disruption of operations. As a result, losses of production and shipments occurred in December. IOC continued to make progress on its program of cost reduction in the year.

Press reports early in 2013 reported that Rio Tinto was seeking offers on its 58.72% equity interest in IOC. Recently the press is reporting that amounts offered by potential purchasers are inadequate and Rio Tinto is likely to take the shares off the market. An investment banker and special counsel were hired in order to assess the effect on LIORC if a sale were to occur and to advise what action, if any, should be taken by LIORC.

Outlook

With the completion of IOC's expansion program, we expect to see record production at IOC in 2014, even though production has been negatively affected by the adverse weather conditions in the early part of the year. Prices are currently slightly below 2013's average level and are expected to remain in the current range for the balance of the year. LIORC's royalty revenue is expected to be higher than 2013, due to the higher volume and the weaker Canadian dollar against its US dollar counterpart. The major risk to higher royalty revenue is a sharp decline in iron ore prices, which is not expected.

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 Labrador Iron Ore Royalty Corp.,

Bruce C. Bone
President and Chief Executive Officer
March 3, 2014

Corporate Structure

Labrador Iron Ore Royalty Corp. ("LIORC" or the "Corporation") 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. Under the Arrangement, the Fund distributed $248 million of subordinated notes to its unitholders and the unitholders exchanged their units of the Fund for common shares of LIORC. Effective October 3, 2012, the $248 million subordinated notes outstanding were exchanged for additional common shares and the common shares were consolidated, with the result that each holder of common shares ("Shareholder") ended up holding the same number of common shares as before the transactions, and LIORC had 64 million common shares outstanding. Interest on the subordinated notes ceased to accrue after September 30, 2012.

LIORC, directly and through its wholly-owned subsidiary Hollinger-Hanna Limited ("Hollinger-Hanna"), holds a 15.10% equity interest in Iron Ore Company of Canada ("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 (2012 includes interest payments on the $248 million of subordinated notes that were expensed up to July 20, 2012). Hollinger-Hanna is a taxable corporation.

Income Taxes

Distributions 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. 2013 quarterly distributions were comprised entirely of dividends (2012 - up to September 30, 2012 were comprised of interest and dividends). The dividends paid in 2013 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 Canada's largest iron ore producer, operating a mine, concentrator and pellet plant at Labrador City, Newfoundland, and is among the top five producers of 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 the markets of the Great Lakes and the balance of the world from its year-round port facilities at Sept-Îles, Quebec.

IOC has ore reserves sufficient for approximately 29 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 2013 sales totaled 14.8 million tonnes comprised of 6.2 million tonnes of iron ore concentrate and 8.6 million tonnes of iron ore pellets. Production in 2013 was 8.6 million tonnes of pellets and 6.8 million tonnes of concentrate. Production in 2013 was negatively affected by the severe weather that disrupted operations in the first quarter, the summer and again in December. IOC generated ore sales revenues (excluding third party ore sales) of $1,952 million in 2013 (2012 - $1,779 million). IOC sales traditionally have been approximately 35% in Europe, 35% in North America and 25% in Asia with minor amounts to other areas. The strong recovery in Europe and continuing strength in China offset the continued weakness in the North America market.

Selected IOC Financial Information

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 2013, the average royalty (net of the 20% tax) had been $109.3 million per year and in 2013 the net royalty was $110.1 million (2012 - $98.0 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 2013, Hollinger-Hanna received a total of $1.4 million in commissions from IOC (2012 - $1.4 million).

Quarterly Distributions

Distributions of $1.875 per share, including special distributions of $0.875 per share, were declared in 2013 (2012 - distributions of $1.50 per share including special distributions of $0.50 per share). These distributions were allocated as follows:

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 Labrador Iron Ore Royalty Corp. ("LIORC" or the "Corporation") for the years ended December 31, 2013 and 2012. This discussion should be read in conjunction with the consolidated financial statements of the Corporation and notes thereto for the years ended December 31, 2013 and 2012. 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 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. Under the Arrangement, the Fund distributed $248 million of subordinated notes to its unitholders and the unitholders exchanged their units of the Fund for common shares of LIORC. Effective October 3, 2012, the $248 million subordinated notes outstanding were exchanged for additional common shares and the common shares were consolidated, with the result that each holder of common shares ("Shareholder") ended up holding the same number of common shares as before the transactions, and LIORC had 64 million common shares outstanding. Interest on the subordinated notes ceased to accrue after September 30, 2012. For the purposes of the following discussion and analysis, all references to shareholders and per share figures may refer to holders of stapled units and per stapled units, respectively, as applicable.

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 sold 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 has $52.6 million in cash as at December 31, 2013 with total current assets of $88.4 million. The Corporation has a working capital of $24.6 million. The Corporation earned operating cash flows of $121.7 million and increased the cash balance by $25.7 million during 2013.

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 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 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 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 2013 operating results as compared to 2012 results.

IOC's 2013 iron ore sales totaled 14.8 million tonnes compared to 14.1 million tonnes in 2012. The combination of the increased sales, a price that averaged approximately 5% higher than 2012 and the lower value of the Canadian dollar against its US counterpart resulted in LIORC's royalty revenue rising to $137.6 million, an increase of 12% compared to $122.5 million in 2012. While this is a satisfactory result, the severe weather that disrupted IOC's operations did not allow the true potential of the capacity expansion at IOC to be realized. The Canadian dollar which had been trading at par to its U.S. counterpart in 2012 averaged $0.97 in 2013.

The Shareholders' consolidated net income for the year ended December 31, 2013 was $148.8 million or $2.33 per share compared to $122.5 million or $1.91 per share in 2012. Equity earnings from IOC amounted to $82.3 million compared to $58.7 million in 2012.

Fourth quarter 2013 sales of 3.6 million tonnes were slightly lower than last year, but the stronger Canadian dollar and improved sales price, resulted in royalty income of $34.2 million for the quarter as compared to $32.4 million for the same period in 2012. Adjusted cash flow from operations was $57.6 million ($0.90 per share) compared to 2012 of $19.9 million ($0.31 per share). 2013 cash flow includes an IOC dividend of $40.0 million or $0.63 per share. Production and thus sales in the fourth quarter were adversely affected by weather related operating problems.

Selected Consolidated Financial Information

The following table sets out financial data from a Shareholder's perspective for the three years ended December 31, 2013, 2012 and 2011. (See note 1 to the financial statements.)

The following table sets out quarterly revenue, net income and cash flow data for 2013 and 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 dividends. Standardized cash flow per share was $1.90 for 2013 (2012 - $0.80⁽¹⁾). Cumulative standardized cash flow from inception of the Corporation is $18.84 per share and total cash distributions since inception are $18.29 per share, for a payout ratio of 97%.

"Adjusted cash flow" is defined as cash flow from operating activities after adjustments for changes in amounts receivable, accounts and interest 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 distributions to Shareholders.

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

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 officers 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, 2013.

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, 2013.

No material change in the Corporation's internal control over financial reporting occurred during the year ended December 31, 2013.

Outlook

With the completion of IOC's expansion program, we expect to see record production at IOC in 2014, even though production has been negatively affected by the adverse weather conditions in the early part of the year. Prices are currently slightly below 2013's average level and are expected to remain in the current range for the balance of the year. LIORC's royalty revenue is expected to be higher than 2013, due to the higher volume and the weaker Canadian dollar against its US dollar counterpart. The major risk to higher royalty revenue is a sharp decline in iron ore prices, which is not expected.

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.

Bruce C. Bone, President and Chief Executive Officer
Toronto, Ontario
March 3, 2014

The complete consolidated financial statements for the year ended December 31, 2013, including the notes thereto, are posted on sedar.com and labradorironore.com.

SOURCE Labrador Iron Ore Royalty Corp.