Labrador Iron Ore Royalty Corporation Announces Results for the Second Quarter Ended June 30, 2018

TORONTO, Aug. 7, 2018 - Labrador Iron Ore Royalty Corp. ("LIORC", TSX: LIF) announced today its operation and cash flow results for the second quarter ended June 30, 2018.

Royalty revenue for the second quarter of 2018 amounted to $5.1 million as compared to $33.8 million for the second quarter of 2017. Equity (losses) earnings from the Iron Ore Company of Canada ("IOC") amounted to ($6.1) million or ($0.09) per share as compared to $14.3 million or $0.22 per share in 2017. Net (loss) income was ($3.3) million or ($0.05) per share compared to $32.3 million or $0.50 per share for the same period in 2017. The shareholders' cash flow from operations for the second quarter was $15.5 million or $0.24 per share as compared to $45.6 million or $0.71 per share for the same period in 2017.

The cash flow from operations, equity earnings and net income for the second quarter of 2018 were lower than the second quarter of 2017, due to the work stoppage at IOC during which operations were suspended until a new labour agreement was reached. The strike closed down the IOC production facilities on March 27, 2018. The workforce returned to work on May 28, 2018.  A new five-year collective agreement is now in place and the ramp up to normal production rates was achieved by the end of June.  IOC is making every effort to maximize production for the remainder of the year.  Sales for the second quarter of 2018 were restricted by the availability of product as port inventories had to be rebuilt. 

The average index price for 62% fines increased 3% to US$65 per tonne CFR China in the second quarter of 2018 compared to the average price in the second quarter of 2017 of US$63 per tonne. Total IOC sales for calculating the royalty to LIORC – pellets plus concentrate for sale ("CFS") – of 0.53 million tonnes was 87% lower in the second quarter of 2018 compared to the same period in 2017. In the second quarter of 2018 concentrate production continued to be preferentially directed to the pellet plant due to the strong pellet demand and premiums. LIORC received an IOC dividend in the second quarter of 2017 in the amount of $15.3 million or $0.24 per share, whereas LIORC received no dividend in the second quarter of 2018.

LIORC's results for the three months and six months ended June 30 are summarized below:

Iron Ore Company of Canada Operations

Production
Total concentrate production in the second quarter of 2018 of 1.5 million tonnes was 69% lower than the second quarter of 2017 and was 64% lower than the first quarter of 2018. Similarly, pellet production in the second quarter of 2018 was 78% lower than the second quarter of 2017 and 81% lower than the first quarter of 2017. As noted above, IOC production was negatively affected by the labour strike.

Sales as Reported for the LIORC Royalty
Second quarter 2018 total iron ore tonnage sold by IOC (pellets plus CFS) of 0.53 million tonnes was 87% below the total sales tonnage in the second quarter 2017. Again, sales of CFS and pellets were negatively impacted by the labour strike.

Largely as a result of the strike, the royalty revenue for LIORC in the second quarter of 2018 was 85% lower than the revenue in last year's second quarter. 

A summary of IOC sales for calculating the royalty to LIORC in millions of tonnes is as follows:

Outlook

IOC is expecting good production and sales tonnages in the third and fourth quarters of 2018. Rio Tinto has reduced the IOC production guidance for 2018 to 9.0 to 10.0 million tonnes of iron ore pellets and concentrates for its 58.72% interest in IOC, which is total saleable production of 15.3 to 17.0 million tonnes on a 100% basis. Achieving the low end of the guidance would result in approximately 2% less total saleable tonnes produced in the second half of 2018 over the saleable production of 10.06 million tonnes in the second half of 2017. Achieving the high end of the guidance would result in approximately 15% more total saleable tonnes produced in the second half of 2018 over the saleable production in the second half of 2017.

In the second quarter of 2018 the Platts 62% Fe CFR China benchmark iron ore price averaged US$65 per tonne, but was largely range bound with a high price of US$68 per tonne, and a low of US$63 per tonne.  IOC sells its CFS product based on the 65% Fe index, and the Platts index price for 65% Fe concentrate averaged US$86 per tonne in the second quarter of 2018, 13% higher than the price in the second quarter of 2017, but 5% lower than the average price in the first quarter of 2018. Atlantic Basin blast furnace pellet premiums, as reported by Platts, improved by 29% from US$45 per tonne in the second quarter of 2017 to US$58 per tonne against the comparable 2018 quarter.

In the second quarter of 2018, prices for iron ore products with higher value-in-use characteristics have remained firm, supported by the environmental policies of the Chinese governments, and by China's strong steel demand and margins. The differential between the Platts indexes for 65% Fe CFS and 62% Fe CFS has widened to US$27 per tonne at the time of writing, the highest spread in recent years. In the second quarter of 2018 the Canadian dollar weakened, reflecting concerns regarding international trade. Benchmark iron ore prices have also been somewhat negatively impacted by trade concerns but have been more resilient than other base metals, notably copper and zinc.

The IOC employees and management continue their efforts to increase production and reduce unit operating costs. Based on LIORC management's July site visit, they are optimistic regarding the production and unit costs in the third and fourth quarter of 2018. Consistent ore production from the Wabush 3 pit is expected in September. The No. 4 pellet line is scheduled to be refurbished over approximately nine weeks, starting in late September. The usual maintenance of the rail and port facilities is scheduled for the summer. Third-party rail haulage volumes are considerably improved over 2017. Capital expenditures are still forecast at C$220 million for 2018.

The LIORC cash balance at June 30, 2018 stood at $18.7 million with LIORC dividends payable on July 25, 2018 of $16.0 million. As at June 30, 2018 the current assets exceeded the current liabilities by $15.7 million. With our expectation of strong production, sales and premiums for the high value-in-use iron ore products from IOC over the balance of 2018, LIORC is in a good position to maintain the regular dividend. In order to maintain the dividend policy of a regular dividend of $0.25 per share per quarter, LIORC will plan to rebuild the cash balance back to approximately $30 million, the pre-strike level, as sales and prices permit.

Our shareholders will be aware from its June 18, 2018 press release that the LIORC Directors approved a special meeting of shareholders to seek approval of changes to the Articles. LIORC is working on the details for the special meeting, including the preparation of the management information circular and negotiating debt financing options. The Directors will determine the date of the special meeting, likely to be in the fall of 2018. The LIORC Directors are aware of an investment opportunity that they believe should result in the Corporation being stronger   by adding a third revenue stream to the royalty and equity investment in IOC. Shareholders are advised that the board will only proceed with the proposed acquisition if it is accretive to shareholder value and is consistent with our existing distribution and balance sheet objectives. Changes to the Articles are required to make the proposed investment. Upon the amendment of the Articles, shareholders will enjoy the rights and protections afforded to shareholders of a TSX-listed Canada Business Corporation Act (CBCA) corporation (including with respect to corporate law duties on directors and officers and the requirement to obtain shareholder approval of fundamental changes and certain dilutive share issuances), ensuring that their interests continue to be adequately protected. The Board of Directors believes these measures, which are consistent with those enjoyed by shareholders of other TSX-listed CBCA corporations, are appropriate to protect the interests of LIORC's shareholders. We understand shareholder concerns regarding dilution and maintaining its on-going dividends, and we plan to manage both in a manner consistent with the past. Some shareholders have expressed concern regarding the lack of diversification and growth. The Directors believe the most prudent plan forward is to balance all these objectives in a very conservative manner by periodically pursuing acquisitions only in circumstances where the acquisition will increase shareholder value and will be consistent with our existing distribution and balance sheet objectives. We do not expect such opportunities to present themselves often, but when they do – such as the one before us now – the Directors need the authority to fully consider it on the merits. It is not our intention to use the proposed amendments to materially change LIORC, as the Board expects to exercise its discretion in the same conservative manner as it has managed the Corporation since its inception.

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

William H. McNeil
President and Chief Executive Officer 
August 7, 2018

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 2017 Annual Report, the financial statements and notes contained therein and the June 30, 2018 interim condensed consolidated financial statements.  The Corporation's revenues are entirely dependent on the operations of 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 strike closed down the IOC production facilities on March 27, 2018. The workforce returned to work on May 28, 2018.  A new five-year collective agreement is now in place and the ramp up to normal production rates was achieved by the end of June.  IOC is making every effort to maximize production for the remainder of the year.  Sales for the second quarter of 2018 were restricted by the availability of product as port inventories had to be rebuilt. 

The first quarter sales of IOC are traditionally adversely affected by the 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 revenue for the second quarter of 2018 amounted to $5.1 million as compared to $33.8 million for the second quarter of 2017. Equity (losses) earnings from IOC amounted to ($6.1) million or ($0.09) per share as compared to $14.3 million or $0.22 per share in 2017. Net (loss) income was ($3.3 million or ($0.05) per share compared to $32.3 million or $0.50 per share for the same period in 2017. The shareholders' cash flow from operations for the second quarter was $15.5 million or $0.24 per share as compared to $45.6 million or $0.71 per share for the same period in 2017.

The cash flow from operations, equity earnings and net income for the second quarter of 2018 were lower than the second quarter of 2017, due to the work stoppage at IOC during which operations were suspended until a new labour agreement was reached.

The average index price for 62% fines increased 3% to US$65 per tonne CFR China in the second quarter of 2018 compared to the average price in the second quarter of 2017 of US$63 per tonne. Total IOC sales for calculating the royalty to LIORC – pellets plus CFS – of 0.53 million tonnes was 87% lower in the second quarter of 2018 compared to the same period in 2017. In the second quarter of 2018 concentrate production continued to be preferentially directed to the pellet plant due to the strong pellet demand and premiums. LIORC received an IOC dividend in the second quarter of 2017 in the amount of $15.3 million or $0.24 per share, whereas LIORC received no dividend in the second quarter of 2018.

Total concentrate production in the second quarter of 2018 of 1.5 million tonnes was 69% lower than the second quarter of 2017 and was 64% lower than the first quarter of 2018. Similarly, pellet production in the second quarter of 2018 was 78% lower than the second quarter of 2017 and 81% lower than the first quarter of 2017. As noted above, IOC production was negatively affected by the labour strike.

Second quarter 2018 total IOC sales for calculating the royalty to LIORC (pellets plus CFS) of 0.53 million tonnes was 87% below the total sales tonnage in the second quarter 2017. Again, sales of CFS and pellets were negatively impacted by the labour strike.

Largely as a result of the strike, the royalty revenue for LIORC in the second quarter of 2018 was 85% lower than the revenue in last year's second quarter. 

Results for the six months were affected by the same factors as affected the three month period. Royalty and commission interests amortization expense decreased by $1.2 million for the six months due to the decrease in production as a result of the labour strike.

The following table sets out quarterly revenue, net income, cash flow and dividend data for 2018, 2017 and 2016.

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 $0.24 for the quarter (2017 - $0.71). Cumulative standardized cash flow from inception of the Corporation is $25.71 per share and total cash distributions since inception is $25.19 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 are excluded.  It is not a recognized measure under International Financial Reporting Standards ('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 standardized cash flow from operating activities to adjusted cash flow (in '000's).

Liquidity and Capital Resources

The Corporation had $18.7 million in cash as at June 30, 2018 (December 31, 2017 - $40.5 million) with total current assets of $33.0 million (December 31, 2017 - $82.6 million). The Corporation had working capital of $15.7 million as at June 30, 2018 (December 31, 2017 - $33.1 million). The Corporation's operating cash flow for the quarter was $15.5 million and the dividend paid during the quarter was $22.4 million, resulting in cash balances decreasing by $6.9 million during the second quarter of 2018.

Cash balances consist of deposits in Canadian dollars with Canadian chartered banks. Amounts 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.

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 (2017 – nil) leaving $50.0 million available to provide for any capital required by IOC or requirements of the Corporation.

Outlook

IOC is expecting good production and sales tonnages in the third and fourth quarters of 2018. Rio Tinto has reduced the IOC production guidance for 2018 to 9.0 to 10.0 million tonnes of iron ore pellets and concentrates for its 58.72% interest in IOC, which is total saleable production of 15.3 to 17.0 million tonnes on a 100% basis. Achieving the low end of the guidance would result in approximately 2% less total saleable tonnes produced in the second half of 2018 over the saleable production of 10.06 million tonnes in the second half of 2017. Achieving the high end of the guidance would result in approximately 15% more total saleable tonnes produced in the second half of 2018 over the saleable production in the second half of 2017.

In the second quarter of 2018 the Platts 62% Fe CFR China benchmark iron ore price averaged US$65 per tonne, but was largely range bound with a high price of US$68 per tonne, and a low of US$63 per tonne.  IOC sells its CFS product based on the 65% Fe index, and the Platts index price for 65% Fe concentrate averaged US$86 per tonne in the second quarter of 2018, 13% higher than the price in the second quarter of 2017, but 5% lower than the average price in the first quarter of 2018.

Atlantic Basin blast furnace pellet premiums, as reported by Platts, improved by 29% from US$45 per tonne in the second quarter of 2017 to US$58 per tonne against the comparable 2018 quarter.

In the second quarter of 2018, prices for iron ore products with higher value-in-use characteristics have remained firm, supported by the environmental policies of the Chinese governments, and by China's strong steel demand and margins. The differential between the Platts indexes for 65% Fe CFS and 62% Fe CFS has widened to US$27 per tonne at the time of writing, the highest spread in recent years. In the second quarter of 2018 the Canadian dollar weakened, reflecting concerns regarding international trade. Benchmark iron ore prices have also been somewhat negatively impacted by trade concerns but have been more resilient than other base metals, notably copper and zinc.

The IOC employees and management continue their efforts to increase production and reduce unit operating costs. Based on LIORC management's July site visit, they are optimistic regarding the production and unit costs in the third and fourth quarter of 2018. Consistent ore production from the Wabush 3 pit is expected in September. The No. 4 pellet line is scheduled to be refurbished over approximately nine weeks, starting in late September. The usual maintenance of the rail and port facilities is scheduled for the summer. Third-party rail haulage volumes are considerably improved over 2017. Capital expenditures are still forecast at C$220 million for 2018.

The LIORC cash balance at June 30, 2018 stood at $18.7 million with LIORC dividends payable on July 25, 2018 of $16.0 million. As at June 30, 2018 the current assets exceeded the current liabilities by $15.7 million. With our expectation of strong production, sales and premiums for the high value-in-use iron ore products from IOC over the balance of 2018, LIORC is in a good position to maintain the regular dividend. In order to maintain the dividend policy of a regular dividend of $0.25 per share per quarter, LIORC will plan to rebuild the cash balance back to approximately $30 million, the pre-strike level, as sales and prices permit.

Our shareholders will be aware from its June 18, 2018 press release that the LIORC Directors approved a special meeting of shareholders to seek approval of changes to the Articles. LIORC is working on the details for the special meeting, including the preparation of the management information circular and negotiating debt financing options. The Directors will determine the date of the special meeting, likely to be in the fall of 2018. The LIORC Directors are aware of an investment opportunity that they believe should result in the Corporation being stronger by adding a third revenue stream to the royalty and equity investment in IOC. Shareholders are advised that the board will only proceed with the proposed acquisition if it is accretive to shareholder value and is consistent with our existing distribution and balance sheet objectives. Changes to the Articles are required to make the proposed investment. Upon the amendment of  the Articles, shareholders will enjoy the rights and protections afforded to shareholders of a TSX-listed CBCA corporation (including with respect to corporate law duties on directors and officers and the requirement to obtain shareholder approval of fundamental changes and certain dilutive share issuances), ensuring that their interests continue to be adequately protected. The Board of Directors believes these measures, which are consistent with those enjoyed by shareholders of other TSX-listed CBCA corporations, are appropriate to protect the interests of LIORC's shareholders. We understand shareholder concerns regarding dilution and maintaining its on-going dividends, and we plan to manage both in a manner consistent with the past. Some shareholders have expressed concern regarding the lack of diversification and growth. The Directors believe the most prudent plan forward is to balance all these objectives in a very conservative manner by periodically pursuing acquisitions only in circumstances where the acquisition will increase shareholder value and will be consistent with our existing distribution and balance sheet objectives. We do not expect such opportunities to present themselves often, but when they do – such as the one before us now – the Directors need the authority to fully consider it on the merits. It is not our intention to use the proposed amendments to materially change LIORC, as the Board expects to exercise its discretion in the same conservative manner as it has managed the Corporation since its inception.

William H. McNeil
President and Chief Executive Officer
Toronto, Ontario
August 7, 2018

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.

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 interim financial statements.

The complete consolidated financial statements for the second quarter ended June 30, 2018, including the notes thereto, are posted on sedar.com and labradorironore.com.  

SOURCE Labrador Iron Ore Royalty Corp.