Labrador Iron Ore Royalty Corporation - Results for the third quarter ended September 30, 2014
TORONTO, Nov. 6, 2014 /CNW/ - Labrador Iron Ore Royalty Corp. ("LIORC", TSX: LIF) announced today its operation and cash flow results for the third quarter ended September 30, 2014.
Royalty income for the third quarter of 2014 amounted to $30.3 million as compared to $35.6 million for the third quarter of 2013. The shareholders' adjusted cash flow (see below for definition) for the third quarter was $37.8 million or $0.59 per share as compared to $20.0 million or $0.31 per share for the same period in 2013. The higher cash flow for the quarter reflected an IOC dividend, of which LIORC's share was $20.7 million or $0.32 per share. Net income was $29.0 million or $0.46 per share compared to $41.2 million or $0.65 per share for the same period in 2013. Equity earnings from Iron Ore Company of Canada ("IOC") amounted to $11.1 million or $0.17 per share as compared to $25.8 million or $0.40 per share in 2013.
Frozen material not moved in previous quarters was shipped in this quarter and as a result concentrate sales were 20% higher than the previous quarter and 54% higher than the corresponding quarter in 2013. Pellet sales, although 3% higher than the previous quarter, were 13% lower than the third quarter of 2013 due to higher than expected utility grade pellet inventories, which are planned to be shipped by year end. Saleable production was 3% lower than the second quarter of 2014 and 2% lower than the third quarter of 2013 as a result of lower material movement from the mine, tailings flume sanding events due to ore quality and unfavourable weight yield. Pellet production was 10% higher than the previous quarter due to higher asset availability following machine rebuilds and planned annual shutdowns. When compared with the same quarter of the previous year, pellet production was 5% higher due to increased throughput rates. As a result of increased feed requirement for pellet production, concentrate for sale production was 17% lower than the second quarter of 2014 and 11% lower than the third quarter of 2013. The lower royalty revenue for the quarter reflected the continuation of the decline in the iron ore index price that started early in the year, with the price for the quarter being about 34% below the 2013 year end level, and 11% below the previous quarter. The lower equity earnings from IOC also reflected the lower iron ore price.
Results for the three months and nine months ended September 30 are summarized below:
| (in millions except per share information) | 3 Months Ended Sept. 30, 2014 | 3 Months Ended Sept. 30, 2013 | 9 Months Ended Sept. 30, 2014 | 9 Months Ended Sept. 30, 2013 | ||||||
| (Unaudited) | ||||||||||
| Revenue | $30.8 | $36.1 | $91.8 | $104.7 | ||||||
| Adjusted cash flow | $37.8 | $20.0 | $99.2 | $57.8 | ||||||
| Adjusted cash flow per share | $0.59 | $0.31 | $1.55 | $0.90 | ||||||
| Net income | $29.0 | $41.2 | $92.0 | $102.1 | ||||||
| Net income per share | $0.46 | $0.65 | $1.44 | $1.60 | ||||||
"Adjusted cash flow" (defined as cash flow from operating activities as shown on the attached interim financial statements adjusted for changes in amounts receivable, accounts payable and income taxes payable) 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 dividends to shareholders.
A summary of IOC's sales in millions of tonnes is as follows:
| 3 Months | 3 Months | 9 Months | 9 Months | Year | |||
| Pellets | 2.00 | 2.29 | 5.80 | 6.57 | 8.60 | ||
| Concentrates(1) | 2.28 | 1.48 | 4.83 | 4.65 | 6.20 | ||
| Total | 4.28 | 3.77 | 10.63 | 11.22 | 14.80 |
| (1) | Excludes third party ore sales. |
Outlook
Although the iron ore price decline has been severe, other positive factors are in place to mitigate a large portion of the effect on LIORC's revenue. While production results to date this year have been disappointing due to the encountering of production problems at IOC, we understand that they have been largely rectified and production volumes in October are progressing towards the levels that are expected with the IOC expansion program now complete. Also, the price for pellets has not fallen as far as the concentrate price, because strong demand for pellets has kept the pellet premium at the high end of its traditional range. IOC is currently making efforts to maximize pellet production and thus maximize revenue and is also continuing with its program to reduce costs. If the increased production volume can be realized, this would offset most of the reduction in our royalty revenue due to current lower pricing. It would also result in lower unit cost of production at IOC, offsetting at least part of the effect of the lower prices on its net profit. The decline in the value of the Canadian dollar against its US counterpart also partially offsets the iron ore price decline. Barring a substantial further decline in the price of iron ore, and if IOC can obtain the expected increased production, LIORC should have satisfactory results going forward.
Respectfully submitted on behalf of the Directors of Labrador Iron Ore Royalty Corp..
Bruce C. Bone
President and Chief Executive Officer
November 6, 2014
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 Labrador Iron Ore Royalty Corp.'s ("LIORC" or the "Corporation") 2013 Annual Report and the interim financial statements and notes contained there to. 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 2013 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 first quarter sales of IOC are traditionally adversely affected by the closing of the St. Lawrence Seaway and 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 income for the third quarter of 2014 amounted to $30.3 million as compared to $35.6 million for the third quarter of 2013. The shareholders' adjusted cash flow (see next page for definition and calculation) for the third quarter was $37.8 million or $0.59 per share as compared to $20.0 million or $0.31 per share for the same period in 2013. The higher cash flow for the quarter reflected an IOC dividend, of which LIORC's share was $20.7 million or $0.32 per share. Net income was $29.0 million or $0.46 per share compared to $41.2 million or $0.65 per share for the same period in 2013. Equity earnings from Iron Ore Company of Canada ("IOC") amounted to $11.1 million or $0.17 per share as compared to $25.8 million or $0.40 per share in 2013.
Frozen material not moved in previous quarters was shipped in this quarter and as a result concentrate sales were 20% higher than the previous quarter and 54% higher than the corresponding quarter in 2013. Pellet sales, although 3% higher than the previous quarter, were 13% lower than the third quarter of 2013 due to higher than expected utility grade pellet inventories, which are planned to be shipped by year end. Saleable production was 3% lower than the second quarter of 2014 and 2% lower than the third quarter of 2013 as a result of lower material movement from the mine, tailings flume sanding events due to ore quality and unfavourable weight yield. Pellet production was 10% higher than the previous quarter due to higher asset availability following machine rebuilds and planned annual shutdowns. When compared with the same quarter of the previous year, pellet production was 5% higher due to increased throughput rates. As a result of increased feed requirement for pellet production, concentrate for sale production was 17% lower than the second quarter of 2014 and 11% lower than the third quarter of 2013. The lower royalty revenue for the quarter reflected the continuation of the decline in the iron ore index price that started early in the year, with the price for the quarter being about 34% below the 2013 year end level and 11% below the previous quarter. The lower equity earnings from IOC also reflected the lower iron ore price.
Results for the nine months were affected by the same factors as the 3 months period, mainly the declining iron ore price and the effect of the "polar vortex" during the winter months. Administrative expenses were substantially lower in 2014 due to the legal and consultant fees incurred in 2013 in connection with the board of directors' examination of the effect on LIORC of the possibility of a sale by Rio Tinto of its equity in IOC. IOC did not pay a dividend during the nine months of 2013 but did pay in 2014, of which LIORC's share was $48.1 million or $0.75 per share. Without the dividend, cash flow during the nine months of 2014 would have been lower than in year 2013.
The following table sets out quarterly revenue, net income and cash flow data for 2014, 2013 and 2012.
|
|
| Net |
Flow(1) |
| Dividends Declared | |||
| (in millions except per Share/Unit information) | ||||||||
| 2014 | ||||||||
| First Quarter | $27.2 | $27.1 | $0.42 | $27.7(2) | $0.43 | $0.400 | ||
| Second Quarter | $33.8 | $35.9 | $0.56 | $33.7(3) | $0.53 | $0.400 | ||
| Third Quarter | $30.8 | $29.0 | $0.46 | $37.8(4) | $0.59 | $0.500 | ||
|
2013 First Quarter |
$26.4 |
$21.7 |
$0.34 |
$14.4 |
$0.22 | $0.375 | ||
| Second Quarter | $42.2 | $39.2 | $0.61 | $23.4 | $0.37 | $0.375 | ||
| Third Quarter | $36.1 | $41.2 | $0.65 | $20.0 | $0.31 | $0.375 | ||
| Fourth Quarter | $34.6 | $46.7 | $0.73 | $57.6(5) | $0.90 | $0.750 | ||
|
2012 First Quarter(6) |
$22.4 |
$23.0 |
$0.36 |
$14.4 |
$0.23 | $0.375 | ||
| Second Quarter(6) | $36.4 | $36.8 | $0.57 | $22.3 | $0.35 | $0.375 | ||
| Third Quarter (6) | $32.6 | $29.7 | $0.47 | $18.5 | $0.28 | $0.375 | ||
| Fourth Quarter | $32.8 | $33.0 | $0.51 | $19.9 | $0.31 | $0.375 | ||
| Notes: | (1) | "Adjusted cash flow" (see below). | |||||
| (2) | Includes a $12.6 million IOC dividend. | ||||||
| (3) | Includes a $14.8 million IOC dividend. | ||||||
| (4) | Includes a $20.7 million IOC dividend. | ||||||
| (5) | Includes a $40.0 million IOC dividend. | ||||||
| (6) | Prior to the fourth quarter of 2012, net income, adjusted cash flow, dividends and per unit figures referred to in this table use the totals according to the consolidated financial statements plus (where applicable) the $7,488,000 ($0.117 per unit) interest on the subordinated notes. | ||||||
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 share was $0.63 for the quarter (2013 - $0.47). Cumulative standardized cash flow from inception of the Corporation is $20.33 per share and total cash distributions since inception are $19.59 per share, for a payout ratio of 96%.
"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 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 cash flow from operating activities to adjusted cash flow.
| 3 Months Ended Sept. 30, 2014 | 3 Months Ended Sept. 30, 2013 | 9 Months Ended Sept. 30, 2014 | 9 Months Ended Sept. 30, 2013 | |
| Standardized cash flow from operating activities | $40,539,684 | $30,326,112 | $95,617,406 | $59,566,734 |
| Excluding: changes in amounts receivable, accounts payable and income taxes payable |
(2,711,132) |
(10,340,712) |
3,563,648 |
(1,805,797) |
| Adjusted cash flow | $37,828,552 | $19,985,400 | $99,181,054 | $57,760,937 |
| Adjusted cash flow per share | $0.59 | $0.31 | $1.55 | $0.90 |
Liquidity and Capital Resources
The Corporation has $49.0 million in cash as at September 30, 2014 with total current assets of $78.4 million and working capital of $40.6 million. During the quarter, the Corporation earned operating cash flows of $40.5 million and increased the cash balance by $14.9 million after dividends paid.
Cash balances consist of deposits in Canadian dollars with a Canadian chartered bank. 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 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 and debt.
The Corporation has a $50 million revolving credit facility with a term ending on September 18, 2017 with provision for annual one-year extensions. No amount is currently drawn under this facility (2013 – nil) leaving $50.0 million available to provide for any capital required by IOC or requirements of the Corporation.
Outlook
Although the iron ore price decline has been severe, other positive factors are in place to mitigate a large portion of the effect on LIORC's revenue. While production results to date this year have been disappointing due to the encountering of production problems at IOC, we understand that they have been largely rectified and production volumes in October are progressing towards the levels that are expected with the IOC expansion program now complete. Also, the price for pellets has not fallen as far as the concentrate price, because strong demand for pellets has kept the pellet premium at the high end of its traditional range. IOC is currently making efforts to maximize pellet production and thus maximize revenue and is also continuing with its program to reduce costs. If the increased production volume can be realized, this would offset most of the reduction in our royalty revenue due to current lower pricing. It would also result in lower unit cost of production at IOC, offsetting at least part of the effect of the lower prices on its net profit. The decline in the value of the Canadian dollar against its US counterpart also partially offsets the iron ore price decline. Barring a substantial further decline in the price of iron ore, and if IOC can obtain the expected increased production, LIORC should have satisfactory results going forward.
Bruce C. Bone
President and Chief Executive Officer
Toronto, Ontario
November 6, 2014
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 condensed consolidated financial statements.
| LABRADOR IRON ORE ROYALTY CORPORATION | |||||
| INTERIM CONDENSED CONSOLIDATED BALANCE SHEETS | |||||
| As at | |||||
| September 30, | December 31, | ||||
| Canadian $ | 2014 | 2013 | |||
| (Unaudited) | |||||
| Assets | |||||
| Current Assets | |||||
| Cash | $ 49,031,330 | $ 52,613,924 | |||
| Amounts receivable | 27,601,887 | 35,818,924 | |||
| Income taxes recoverable | 1,746,349 | - | |||
| Total Current Assets | 78,379,566 | 88,432,848 | |||
| Non-Current Assets | |||||
| Iron Ore Company of Canada ("IOC"), | |||||
| royalty and commission interests | 276,913,290 | 279,576,792 | |||
| Investment in IOC | 399,817,323 | 407,622,445 | |||
| Total Non-Current Assets | 676,730,613 | 687,199,237 | |||
| Total Assets | $ 755,110,179 | $ 775,632,085 | |||
| Liabilities and Shareholders' Equity | |||||
| Current Liabilities | |||||
| Accounts payable | $ 5,791,621 | $ 7,508,145 | |||
| Dividend payable | 32,000,000 | 48,000,000 | |||
| Income taxes payable | - | 8,317,812 | |||
| Total Current Liabilities | 37,791,621 | 63,825,957 | |||
| Non-Current Liabilities | |||||
| Deferred income taxes | 126,630,000 | 128,478,000 | |||
| Total Liabilities | 164,421,621 | 192,303,957 | |||
| Shareholders' Equity | |||||
| Share capital | 317,708,147 | 317,708,147 | |||
| Retained earnings | 282,021,411 | 273,225,981 | |||
| Accumulated other comprehensive loss | (9,041,000) | (7,606,000) | |||
| 590,688,558 | 583,328,128 | ||||
| Total Liabilities and Shareholders' Equity | $ 755,110,179 | $ 775,632,085 | |||
| LABRADOR IRON ORE ROYALTY CORPORATION | |||||
| INTERIM CONDENSED CONSOLIDATED STATEMENTS | |||||
| OF COMPREHENSIVE INCOME | |||||
| For the Three Months Ended | |||||
| September 30, | |||||
| Canadian $ | 2014 | 2013 | |||
| (Unaudited) | |||||
| Revenue | |||||
| IOC royalties | $ 30,255,072 | $ 35,625,687 | |||
| IOC commissions | 408,479 | 368,180 | |||
| Interest and other income | 97,860 | 44,288 | |||
| 30,761,411 | 36,038,155 | ||||
| Expenses | |||||
| Newfoundland royalty taxes | 6,051,015 | 7,125,137 | |||
| Amortization of royalty and commission interests | 903,657 | 1,093,530 | |||
| Administrative expenses | 677,072 | 773,879 | |||
| 7,631,744 | 8,992,546 | ||||
| Income before equity earnings and income taxes | 23,129,667 | 27,045,609 | |||
| Equity earnings in IOC | 11,128,721 | 25,791,779 | |||
| Income before income taxes | 34,258,388 | 52,837,388 | |||
| Provision for income taxes | |||||
| Current | 6,893,781 | 8,153,739 | |||
| Deferred | (1,619,000) | 3,453,000 | |||
| 5,274,781 | 11,606,739 | ||||
| Net income for the period | 28,983,607 | 41,230,649 | |||
| Other comprehensive loss | |||||
| Share of other comprehensive loss of IOC that will not be | |||||
| reclassified subsequently to profit or loss (net of taxes) | (478,000) | (544,000) | |||
| Comprehensive income for the period | $ 28,505,607 | $ 40,686,649 | |||
| Net income per share | $ 0.46 | $ 0.65 | |||
| LABRADOR IRON ORE ROYALTY CORPORATION | ||||
| INTERIM CONDENSED CONSOLIDATED STATEMENTS | ||||
| OF COMPREHENSIVE INCOME | ||||
| For the Nine Months Ended | ||||
| September 30, | ||||
| Canadian $ | 2014 | 2013 | ||
| (Unaudited) | ||||
| Revenue | ||||
| IOC royalties | $ 90,412,549 | $ 103,423,572 | ||
| IOC commissions | 1,045,759 | 1,104,149 | ||
| Interest and other income | 278,298 | 139,222 | ||
| 91,736,606 | 104,666,943 | |||
| Expenses | ||||
| Newfoundland royalty taxes | 18,082,510 | 20,680,878 | ||
| Amortization of royalty and commission interests | 2,663,502 | 3,083,684 | ||
| Administrative expenses | 1,857,139 | 2,666,132 | ||
| 22,603,151 | 26,430,694 | |||
| Income before equity earnings and income taxes | 69,133,455 | 78,236,249 | ||
| Equity earnings in IOC | 41,938,682 | 54,495,063 | ||
| Income before income taxes | 111,072,137 | 132,731,312 | ||
| Provision for income taxes | ||||
| Current | 20,681,707 | 23,558,996 | ||
| Deferred | (1,605,000) | 7,071,000 | ||
| 19,076,707 | 30,629,996 | |||
| Net income for the period | 91,995,430 | 102,101,316 | ||
| Other comprehensive (loss)/gain | ||||
| Share of other comprehensive (loss)/gain of IOC that will not be | ||||
| reclassified subsequently to profit or loss (net of taxes) | (1,435,000) | 5,951,000 | ||
| Comprehensive income for the period | $ 90,560,430 | $ 108,052,316 | ||
| Net income per share | $ 1.44 | $ 1.60 | ||
| LABRADOR IRON ORE ROYALTY CORPORATION | ||||||
| INTERIM CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS | ||||||
| For the Nine Months Ended | ||||||
| September 30, | ||||||
| Canadian $ | 2014 | 2013 | ||||
| (Unaudited) | ||||||
| Net inflow (outflow) of cash related | ||||||
| to the following activities | ||||||
| Operating | ||||||
| Net income for the period | $ 91,995,430 | $ 102,101,316 | ||||
| Items not affecting cash: | ||||||
| Equity earnings in IOC | (41,938,682) | (54,495,063) | ||||
| Current income taxes | 20,681,707 | 23,558,996 | ||||
| Deferred income taxes | (1,605,000) | 7,071,000 | ||||
| Amortization of royalty and commission interests | 2,663,502 | 3,083,684 | ||||
| Common share dividends from IOC | 48,065,804 | - | ||||
| Change in amounts receivable and accounts payable | 6,500,513 | (2,458,067) | ||||
| Income taxes paid | (30,745,868) | (19,295,132) | ||||
| Cash flow from operating activities | 95,617,406 | 59,566,734 | ||||
| Financing | ||||||
| Dividends paid to shareholders | (99,200,000) | (72,000,000) | ||||
| Cash flow used in financing activities | (99,200,000) | (72,000,000) | ||||
| Decrease in cash, during the period | (3,582,594) | (12,433,266) | ||||
| Cash, beginning of period | 52,613,924 | 26,923,421 | ||||
| Cash, end of period | $ 49,031,330 | $ 14,490,155 | ||||
| LABRADOR IRON ORE ROYALTY CORPORATION | ||||
| INTERIM CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY | ||||
| Accumulated | ||||
| other | ||||
| Share | Retained | comprehensive | ||
| Canadian $ | capital | earnings | loss | Total |
| (Unaudited) | ||||
| Balance as at December 31, 2012 | $ 317,708,147 | $ 244,395,841 | $ (17,598,000) | $ 544,505,988 |
| Net income for the period | - | 102,101,316 | - | 102,101,316 |
| Dividends declared to shareholders | - | (72,000,000) | - | (72,000,000) |
| Share of other comprehensive income from investment in IOC (net of taxes) | - | - | 5,951,000 | 5,951,000 |
| Balance as at September 30, 2013 | $ 317,708,147 | $ 274,497,157 | $ (11,647,000) | $ 580,558,304 |
| Balance as at December 31, 2013 | 317,708,147 | 273,225,981 | (7,606,000) | 583,328,128 |
| Net income for the period | - | 91,995,430 | - | 91,995,430 |
| Dividends declared to shareholders | - | (83,200,000) | - | (83,200,000) |
| Share of other comprehensive loss from investment in IOC (net of taxes) | - | - | (1,435,000) | (1,435,000) |
| Balance as at September 30, 2014 | $ 317,708,147 | $ 282,021,411 | $ (9,041,000) | $ 590,688,558 |
| See accompanying notes to interim condensed consolidated financial statements. | ||||
The complete interim consolidated financial statements for the third quarter ended September 30, 2014, including the notes thereto, are posted on sedar.com and labradorironore.com.
Contact
Bruce C. Bone, President & Chief Executive Officer, (416) 863-7133