Labrador Iron Ore Royalty Corporation Announces Results for the Third Quarter Ended September 30, 2018

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

Royalty revenue for the third quarter of 2018 amounted to $44.0 million as compared to $39.8 million for the third quarter of 2017. LIORC received a dividend from Iron Ore Company of Canada ("IOC") in the third quarter of 2018 in the amount of $58.6 million or $0.92 per share as compared to $32.2 million or $0.50 per share in the third quarter of 2017. Equity earnings from IOC amounted to $30.6 million or $0.48 per share as compared to $21.2 million or $0.33 per share in 2017. Net income was $58.1 million or $0.91 per share compared to $43.8 million or $0.69 per share for the same period in 2017. The shareholders' cash flow from operations for the third quarter was $59.7 million or $0.93 per share as compared to $53.6 million or $0.84 per share for the same period in 2017.

The cash flow from operations, equity earnings and net income for the third quarter of 2018 were higher than the third quarter of 2017, due to an overall 9% improvement in sales tonnages for concentrate for sale ("CFS") and pellets, and improved pellet premiums, offset by slightly lower prices for CFS. Recall that sales tonnages for the third quarter of 2017 were negatively affected by the maintenance on the dumper in Sept-Îles for the rail cars that transport the iron ore products from the concentrator at Labrador City to the port.

The Platts average index price for 62% fines decreased 6% to US$67 per tonne CFR China in the third quarter of 2018 compared to the average index price in the third quarter of 2017 of US$71 per tonne. However, IOC sells the CFS product based on the 65% Fe index, and the Platts average index price for 65% fines was 4% higher in the third quarter of 2018 compared to the average price in the comparable quarter of 2017.  Total IOC sales for calculating the royalty to LIORC – pellets plus CFS – of 5.43 million tonnes was 9% higher in the third quarter of 2018 compared to the same period in 2017. In the third quarter of 2018 concentrate production continued to be preferentially directed to the pellet plant due to the strong pellet demand and premiums.

LIORC's results for the three months and nine months ended September 30 are summarized below:

Iron Ore Company of Canada Operations

Production
Total concentrate production in the third quarter of 2018 of 5.0 million tonnes was 11% lower than the third quarter of 2017 and was 243% higher than the second quarter of 2018. CFS production was 22% lower in the third quarter of 2018 as compared to the third quarter of 2017. However, pellet production in the third quarter of 2018 was 2% higher than the third quarter of 2017, reflecting the preference for pellets due to the high premiums offered. As stated by Rio Tinto in its production report for the third quarter of 2018, production in the third quarter of 2018 was adversely affected by "maintenance and the commissioning of a productivity improvement project on the spiral plant, which temporarily restricted throughput." Recall that IOC production was negatively affected by the labour stoppage in the second quarter of 2018, making comparisons between the second and third quarters of 2018 not meaningful.

Sales as Reported for the LIORC Royalty
Third quarter 2018 total iron ore tonnage sold by IOC (pellets plus CFS) of 5.43 million tonnes was 9% above the total sales tonnage in the third quarter 2017. The pellet sales tonnage was maintained quarter over quarter reflecting maintenance improvements made over the past year by IOC personnel. All six pellet lines operated during the third quarter, but the No. 4 pellet line is scheduled for refurbishment in the fourth quarter of 2018. The CFS sales tonnage in the third quarter 2018 was an 18% improvement over the comparable 2017 quarter, which was affected by the required maintenance of the rail car dumper.

The royalty revenue for LIORC in the third quarter of 2018 was 10% higher than the revenue in last year's third quarter driven by the strong pellet premiums and the higher sales volumes.

Sales of CFS and pellets in the second quarter 2018 were negatively impacted by the labour stoppage, which is reflected in the year-to-date 2018 sales tonnages, as reported below.

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 fourth quarter of 2018, with anticipated benefits from the spiral improvement project noted above. IOC has also initiated trials with a reflux classifier to improve the weight yield in the concentrator. The Wabush 3 Pit was officially opened on September 25, 2018, and renamed the Moss Pit in recognition of the geologic and exploration contribution to IOC by Dr. A.E. Moss. The availability of the Moss Pit is expected to enhance the overall mine production, reduce overall mining costs due to a lower waste stripping ratio, improve IOC's ability to blend ores to meet client specifications, and extend the mine life. The dewatering of the Luce Pit has progressed well, and this initiative is also expected to result in improved performance at IOC.

Rio Tinto has maintained the IOC production guidance for 2018 at 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 – CFS plus pellets – of 15.3 to 17.0 million tonnes on a 100% basis.

The price outlook for higher value-in-use CFS and pellets remains positive for the balance 2018 and going into 2019. There is strong demand by steelmakers for IOC's high quality, low impurity (low phosphorus and alumina content) iron ore which helps to improve efficiency, reduce emissions and produce higher quality steel. The strong demand by Chinese steelmakers for high quality seaborne iron ore products is supported by strong steel margins, and the expected application of winter output cuts in China. The Chinese demand for pellets has caused the pellet premium CFR China to rapidly increase to average US$89 per tonne in September 2018 compared to US$46 per tonne in September 2017, as reported by Platts. While this premium has reduced somewhat to US$74 per tonne, at the time of writing, we expect the pellet premiums in 2019 will be strong given the likely restart of Samarco being delayed into 2020 according to Vale officials. The differential for 65% Fe CFR China compared to the 62% IODEX price has weakened somewhat recently as reported by Platts to US$24 per tonne, but this remains strong as compared to the differential of less than US$10 per tonne in 2016.

IOC has reduced the forecast capital for 2018 from $220 million to $203 million based on the second quarter work stoppage resulting in delays to ramp up the personnel and equipment necessary to execute the full plan in 2018. We do not expect any long-term impacts from this delay in capital spending.

Third party ore haulage tonnage and sales are well above plan year to date 2018. With a good price outlook for iron ore, it is expected that IOC will benefit from third party haulage contracts for the balance of 2018 and into 2019.

There are forecasts for the Canadian dollar to strengthen against the US dollar over the balance of 2018 and into 2020 with a reduction in uncertainty owing to the United States Mexico Canada Agreement, and a significant boost to growth in 2020 associated with the construction of the Kitimat LNG terminal.

In its press release dated June 18, 2018, the LIORC Board indicated its intention to call a special meeting of shareholders to approve amendments to the articles of incorporation to, among other things, allow the corporation to invest in other mining royalties. While the immediate opportunity referred to in the press release remains a possibility, the Board has decided to defer the calling of the meeting.  

On September 14, 2018, LIORC announced that it would receive a dividend from IOC on September 27, 2018 in the amount of approximately $59 million or $0.92 per share. On the same date, the LIORC Board declared regular and special dividends totaling $35.2 million or $0.55 per share to be paid to LIORC shareholders on October 25, 2018.  The balance was used to build our cash balance to provide the Corporation with additional financial flexibility. The LIORC cash balance at September 30, 2018 stood at $62.4 million and the current assets exceeded the current liabilities by $63.5 million.  The LIORC dividends payable on October 25, 2018 was largely covered by the royalty receivable from IOC.  We expect good production, sales and premiums for the high value-in-use iron ore products from IOC over the balance of 2018. As a result, for the balance of 2018 and going into 2019, LIORC is in a good position to maintain the regular dividend, continue to pay special dividends, and maintain a strong balance sheet.

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

William H. McNeil
President and Chief Executive Officer 
November 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 third quarter of 2018 amounted to $44.0 million as compared to $39.8 million for the third quarter of 2017. LIORC received a dividend from IOC in the third quarter of 2018 in the amount of $58.6 million or $0.92 per share as compared to $32.2 million or $0.50 per share in the third quarter of 2017. Equity earnings from IOC amounted to $30.6 million or $0.48 per share as compared to $21.2 million or $0.33 per share in 2017. Net income was $58.1 million or $0.91 per share compared to $43.8 million or $0.69 per share for the same period in 2017. The shareholders' cash flow from operations for the third quarter was $59.7 million or $0.93 per share as compared to $53.6 million or $0.84 per share for the same period in 2017.

The cash flow from operations, equity earnings and net income for the third quarter of 2018 were higher than the third quarter of 2017, due to an overall 9% improvement in sales tonnages for CFS and pellets, and improved pellet premiums, offset by slightly lower prices for CFS. Recall that sales tonnages for the third quarter of 2017 were negatively affected by the maintenance on the dumper in Sept-Îles for the rail cars that transport the iron ore products from the concentrator at Labrador City to the port.

The Platts average index price for 62% fines decreased 6% to US$67 per tonne CFR China in the third quarter of 2018 compared to the average price in the third quarter of 2017 of US$71 per tonne. However, IOC sells the CFS product based on the 65% Fe index, and the Platts average index price for 65% fines was 4% higher in the third quarter of 2018 compared to the average index price in the comparable quarter of 2017.  Total IOC sales for calculating the royalty to LIORC – pellets plus CFS – of 5.43 million tonnes was 9% higher in the third quarter of 2018 compared to the same period in 2017. In the third quarter of 2018 concentrate production continued to be preferentially directed to the pellet plant due to the strong pellet demand and premiums.

Total concentrate production in the third quarter of 2018 of 5.0 million tonnes was 11% lower than the third quarter of 2017 and was 243% higher than the second quarter of 2018. CFS production was 22% lower in the third quarter of 2018 as compared to the third quarter of 2017. However, pellet production in the third quarter of 2018 was 2% higher than the third quarter of 2017, reflecting the preference for pellets due to the high premiums offered. As stated by Rio Tinto in its production report for the third quarter of 2018, production in the third quarter of 2018 was adversely affected by "maintenance and the commissioning of a productivity improvement project on the spiral plant, which temporarily restricted throughput." Recall that IOC production was negatively affected by the labour stoppage in the second quarter of 2018, making comparisons between the second and third quarters of 2018 not meaningful.

Third quarter 2018 total iron ore tonnage sold by IOC (pellets plus CFS) of 5.43 million tonnes was 9% above the total sales tonnage in the third quarter 2017. The pellet sales tonnage was maintained quarter over quarter reflecting maintenance improvements made over the past year by IOC personnel. All six pellet lines operated during the third quarter, but the No. 4 pellet line is scheduled for refurbishment in the fourth quarter of 2018. The CFS sales tonnage in the third quarter 2018 was an 18% improvement over the comparable 2017 quarter, which was affected by the required maintenance of the rail car dumper.

The royalty revenue for LIORC in the third quarter of 2018 was 10% higher than the revenue in last year's third quarter driven by the strong pellet premiums and higher sales volumes. 

Sales of CFS and pellets in the second quarter 2018 were negatively impacted by the labour stoppage, which is reflected in the year-to-date 2018 sales tonnages.

Results for the nine months to September 30, 2018 were affected by the labour stoppage in the second quarter of 2018. The CFS sales tonnage in the nine months to September 2018 was 33% below the CFS sales tonnage in the comparable period in 2017. The pellet sales tonnage was 25% lower. CFS prices for IODEX 62% Fe CFR China were 6% lower but the Platts price index for 65% Fe CFR China was slightly positive by 2% in the nine months ended September 30, 2018 compared to the comparable 2017 period. Atlantic Basin pellet premiums as reported by Platts were 30% higher in the nine months ended September 30, 2018 compared to the comparable 2017 period.

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 $0.93 for the quarter (2017 - $0.84). Cumulative standardized cash flow from inception of the Corporation is $26.64 per share and total cash distributions since inception is $25.74 per share, for a payout ratio of 97%.

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 $62.4 million in cash as at September 30, 2018 (December 31, 2017 - $40.5 million) with total current assets of $107.9 million (December 31, 2017 - $82.6 million). The Corporation had working capital of $63.5 million as at September 30, 2018 (December 31, 2017 - $33.1 million). The Corporation's operating cash flow for the quarter was $59.8 million and the dividend paid during the quarter was $16.0 million, resulting in cash balances increasing by $43.7 million during the third 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 have historically been 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 normally pays cash dividends of the net income derived from IOC to the maximum extent possible, subject to the maintenance of appropriate levels of working capital. As noted above, the Corporation has built up its cash balances to provide the Corporation with additional financial flexibility.

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.

Outstanding Share Data

At November 7, 2018, there were 64 million common shares of the Corporation outstanding.

Outlook

IOC is expecting good production and sales tonnages in the fourth quarter of 2018, with anticipated benefits from the spiral improvement project noted above. IOC has also initiated trials with a reflux classifier to improve the weight yield in the concentrator. The Wabush 3 Pit was officially opened on September 25, 2018, and renamed the Moss Pit in recognition of the geologic and exploration contribution to IOC by Dr. A.E Moss. The availability of the Moss Pit is expected to enhance the overall mine production, reduce overall mining costs due to a lower waste stripping ratio, improve IOC's ability to blend ores to meet client specifications, and extend the mine life. The dewatering of the Luce Pit has progressed well, and this initiative is also expected to result in improved performance at IOC.

Rio Tinto has maintained the IOC production guidance for 2018 at 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 – CFS plus pellets – of 15.3 to 17.0 million tonnes on a 100% basis.

The price outlook for higher value-in-use CFS and pellets remains positive for the balance 2018 and going into 2019. There is strong demand by steelmakers for IOC's high quality, low impurity (low phosphorus and alumina content) iron ore which helps to improve efficiency, reduce emissions and produce higher quality steel. The strong demand by Chinese steelmakers for high quality seaborne iron ore products is supported by strong steel margins, and the expected application of winter output cuts in China. The Chinese demand for pellets has caused the pellet premium CFR China to rapidly increase to average US$89 per tonne in September 2018 compared to US$46 per tonne in September 2017, as reported by Platts. While this premium has reduced somewhat to US$74 per tonne, at the time of writing, we expect the pellet premiums in 2019 will be strong given the likely restart of Samarco being delayed into 2020 according to Vale officials. The differential for 65% Fe CFR China compared to the 62% IODEX price has weakened somewhat recently as reported by Platts to US$24 per tonne, but this remains strong as compared to the differential of less than US$10 per tonne in 2016.

IOC has reduced the forecast capital for 2018 from $220 million to $203 million based on the second quarter work stoppage resulting in delays to ramp up the personnel and equipment necessary to execute the full plan in 2018. We do not expect any long-term impacts from this delay in capital spending.

Third party ore haulage tonnage and sales are well above plan year to date 2018. With a good price outlook for iron ore, it is expected that IOC will benefit from third party haulage contracts for the balance of 2018 and into 2019.

There are forecasts for the Canadian dollar to strengthen against the US dollar over the balance of 2018 and into 2020 with a reduction in uncertainty owing to the United States Mexico Canada Agreement, and a significant boost to growth in 2020 associated with the construction of the Kitimat LNG terminal.

In its press release dated June 18, 2018, the LIORC Board indicated its intention to call a special meeting of shareholders to approve amendments to the articles of incorporation to, among other things, allow the corporation to invest in other mining royalties. While the immediate opportunity referred to in the press release remains a possibility, the Board has decided to defer the calling of the meeting.  

On September 14, 2018, LIORC announced that it would receive a dividend from IOC on September 27, 2018 in the amount of approximately $59 million or $0.92 per share. On the same date, the LIORC Board declared regular and special dividends totaling $35.2 million or $0.55 per share to be paid to LIORC shareholders on October 25, 2018.  The balance was used to build our cash balance to provide the Corporation with additional financial flexibility. The LIORC cash balance at September 30, 2018 stood at $62.4 million and the current assets exceeded the current liabilities by $63.5 million.  The LIORC dividends payable on October 25, 2018 was largely covered by the royalty receivable from IOC.  We expect good production, sales and premiums for the high value-in-use iron ore products from IOC over the balance of 2018. As a result, for the balance of 2018 and going into 2019, LIORC is in a good position to maintain the regular dividend, continue to pay special dividends, and maintain a strong balance sheet.

Additional Information

Additional information relating to the Corporation, including its most recently filed unaudited interim and audited consolidated financial statements, Annual Information Form and Management Information Circular 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
November 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 third quarter ended September 30, 2018, including the notes thereto, are posted on sedar.com and labradorironore.com.  

SOURCE Labrador Iron Ore Royalty Corp.