Big Gold Inc. press release

Labrador Iron Ore Royalty Corporation - 2016 Results of Operations

2017-03-02

CSE - Canadian National Stock Exchange · Gold · Silver · Copper · Zinc · Canada

Canada NewsWire

TORONTO, March 2, 2017

TORONTO, March 2, 2017/CNW/ - Labrador Iron Ore Royalty Corporation ("LIORC") (TSX: LIF) announced the results of its operations for the year ended December 31, 2016.

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

Financial Performance

The Shareholders' cash flow from operations for the year ended December 31, 2016was $63.5 millionor $0.99per share as compared to $59.9 millionor $0.94per share for 2015.

The Shareholders' consolidated net income for the year ended December 31, 2016was $78.2 millionor $1.22per share compared to $54.7 millionor $0.85per share in 2015. Equity earnings from Iron Ore Company of Canada("IOC") amounted to $24.7 millioncompared to $2.4 millionin 2015. LIORC received an IOC dividend in the fourth quarter of 2016 in the amount of $15.1 millionor $0.23per share. IOC's 2016 iron ore sales for calculating the royalty to LIORC totaled 18.2 million tonnes compared to 17.9 million tonnes in 2015. Royalty revenue increased to $113.1 millionas compared to $99.7 millionin 2015.

The cash flow from operations, equity earnings and net income for the year were higher than last year mainly due to improved prices for concentrate, particularly in the fourth quarter of 2016, plus higher pellet sales tonnages. Iron ore prices in 2016 were higher than most forecasts had predicted, due to Chinese government stimulus, a shortage of coking coal increasing the demand for higher grade iron ore, and a decline in Chinese domestic production.

As reported by Bloomberg, the price of 62% Fe concentrate CFR China averaged US$58per tonne in 2016 compared to US$56per tonne in 2015. The pellet premium, also as reported by Bloomberg, averaged US$26per tonne in 2016, approximately the same as in 2015. While the reported annual average prices were not much different year-over-year, the prices received by IOC improved in 2016 compared to 2015. With improving pellet premiums in 2016, IOC focused on increased pellet production, and the pellet sales tonnage in 2016 was 6% higher than in 2015. Concentrate for sale ("CFS") tonnages in 2016 were lower than in 2015 by 3% as IOC maximized pellet sales when possible.

IOC Developments

Total concentrate production of 19.2 million tonnes in 2016 was 3% higher as compared to 2015 of 18.7 million tonnes, but below the 21 million tonne objective for 2016. The causes for the shortfall from plan were largely in the mine and the parallel ore delivery system. Early in 2016 the weight yield achieved was lower than planned, predominantly due to a small pit which is now mostly depleted. In November 2016an apron feeder at the gyratory crusher providing feed to the parallel ore delivery system failed resulting in a 15-day disruption. The concentrator and pellet plant performed well in 2016. The overall employee productivity was slightly better in 2016 than 2015.

The cost per tonne of concentrate produced declined by 2% in 2016. The objective of a concentrate unit cash cost of US$30by late 2016 was not achieved largely due to a stronger Canadian dollar than forecast and lower concentrate production than planned. None-the-less, during the year a number of production records were set, including the total tonnes of concentrate produced. With the establishment of a pilot operations center and the important union agreement for a temporary workforce, IOC continues efforts to improve safety, and to increase production and lower unit costs.

Capital expenditure for IOC in 2016 was $99 millionas compared to $143 millionin 2015. The 2016 capital was almost all sustaining capital. The capital program for 2016 was set when the price outlook was poor and the expansion program had been largely completed. Therefore the capital budget was set for minimal sustaining capital.

Outlook

Most forecasts for seaborne iron ore, 62% Fe, CFR China, are for the price to decline and average approximately US$55per tonne in 2017, based on anticipated increased supply, notably from Vale'sS11D mine in Braziland Roy Hill'smine in Australia. It is also reportedly feasible that the Samarco operation in Brazilcould re-open in late 2017 or in 2018, which would likely adversely affect pellet premiums.

Rio Tinto has released guidance for 2017 of between 11.4 million to 12.4 million tonnes for their 58.7% share of saleable production – pellets and concentrates for sale, from IOC. This would result in 19.4 million to 21.1 million tonnes of saleable production on a 100% basis. With the strong pellet premiums at present, IOC will continue to prioritize pellet production in 2017. The IOC objective is 22 million tonnes of concentrate production with sales of approximately 11 million tonnes of pellets and 9.5 million tonnes of CFS in 2017.

The capital expenditures for 2017 will be substantially higher than in 2016, possibly up to $245 million, with the refurbishment of induration machines in two pellet plant lines in early 2017, plus the development of the Wabush3 Pit. The six year collective agreements with the United Steelworkers of America union employees expire in March, 2018.

The price of iron ore in early 2017 has again exceeded forecasts. If the improved prices and premiums continue in 2017, IOC achieves the production guidance, and the Canadian dollar does not appreciate materially against the US dollar, the 2017 outlook for LIORC will be significantly improved cash flows.

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 the Corporation,

William H. McNeil President and Chief Executive Officer March 2, 2017

Corporate Structure

LIORC is a Canadian corporation resulting from the conversion of the Labrador Iron Ore Royalty Income 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.

LIORC, directly and through its wholly-owned subsidiary Hollinger-Hanna Limited, holds a 15.10% equity interest in IOC and receives a 7% gross overriding royalty and a 10 centper 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.

Seven 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 seven Directors sit on the board of IOC and the four 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 Newfoundlandroyalty tax. Expenses of the Corporation include administrative expenses. Hollinger-Hanna is a taxable corporation.

Income Taxes

Dividends 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. All dividends paid in 2016 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 one of Canada'slargest iron ore producers, operating a mine, concentrator and pellet plant at Labrador City, Newfoundlandand Labrador, and is among the top five producers of seaborne 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 26 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, Quebecvia 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 Eastand the Asia-Pacificregion.

IOC's 2016 sales totaled 18.3 million tonnes, comprised of 10.0 million tonnes of iron ore pellets and 8.3 million tonnes of iron ore concentrate. Production in 2016 was 9.8 million tonnes of pellets and 8.4 million tonnes of CFS. IOC generated ore sales revenues (excluding third party ore sales) of $1,620 millionin 2016 (2015 - $1,387 million).

Selected IOC Financial Information

| | | 2016 | 2015 | 2014 | 2013 | 2012 | | ($ in thousands) | | | | | | | | Operating Revenues | | 1,675,635 | 1,494,726 | 1,794,380 | 2,193,836 | 1,963,444 | | Cash flow from operating activities | | 456,361 | 267,136 | 454,597 | 780,976 | 505,319 | | Net income | | 169,531 | 21,195 | 273,282 | 549,010 | 393,437 | | Capital expenditures | | 98,551 | 142,537 | 187,042 | 275,445 | 757,323 |

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 Newfoundlandand Labrador. For the five years prior to 2016, the average royalty net of the 20% tax had been $101.8 millionper year and in 2016 the net royalty was $90.5 million(2015 - $79.8 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 centsper 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 2016, Hollinger-Hanna received a total of $1.8 millionin commissions from IOC (2015 - $1.8 million).

Quarterly Dividends

Dividends of $1.00per share were declared in 2016 (2015 – dividends of $1.00per share). These dividends were allocated as follows:

| | | | | | | | | | | | | Dividend | | Total | | Period | | Payment | | Income | | Dividend | | Ended | | Date | | per Share | | ($ Million) | | | | | | | | | | Mar. 31, 2016 | | Apr. 25, 2016 | | $0.25 | | $16.0 | | Jun. 30, 2016 | | Jul. 25, 2016 | | 0.25 | | 16.0 | | Sep. 30, 2016 | | Oct. 25, 2016 | | 0.25 | | 16.0 | | Dec. 31, 2016 | | Jan. 25, 2017 | | 0.25 | | 16.0 | | | | | | | | | | Dividend to Shareholders - 2016 | | $1.00 | | $64.0 | | | | | | | | | | | | Mar. 31, 2015 | | Apr. 25, 2015 | | $0.25 | | $16.0 | | Jun. 30, 2015 | | Jul. 25, 2015 | | 0.25 | | 16.0 | | Sep. 30, 2015 | | Oct. 25, 2015 | | 0.25 | | 16.0 | | Dec. 31, 2015 | | Jan. 25, 2016 | | 0.25 | | 16.0 | | | | | | | | | | Dividend to Shareholders - 2015 | | $1.00 | | $64.0 | | |

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 Corporation for the years ended December 31, 2016and 2015. This discussion should be read in conjunction with the consolidated financial statements of the Corporation and notes thereto for the years ended December 31, 2016and 2015. 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 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.

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 produced and sold, costs of production 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 had $23.9 million(2015 - $24.5 million) in cash as at December 31, 2016with total current assets of $62.9 million(2015 - $45.2 million). The Corporation has working capital of $38.8 million(2015 - $24.8 million). The Corporation's cash flow from operations was $63.5 million(2015 - $59.9 million) and dividends paid during the year were $64.0 million, resulting in cash balances declining $0.5 millionduring 2016.

Cash balances consist of deposits in Canadian dollars and US 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 centscommission 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 millionrevolving credit facility with a term ending September 18, 2019with provision for annual one-year extensions. No amount is currently drawn under this facility leaving $50.0 millionavailable to provide for any capital required by IOC or requirements of the Corporation.

Operating Results

The following table summarizes the Corporation's 2016 operating results as compared to 2015 results.

| Revenue | | 2016 | | 2015 | | IOC royalties (net of 20% Newfoundland royalty tax) | | $90,464,867 | | $79,751,617 | | IOC commissions | | 1,793,469 | | 1,759,426 | | Other | | 232,739 | | 249,565 | | | | 92,491,075 | | 81,760,608 | | Expenses | | | | | | Administrative expenses | | 2,743,124 | | 2,730,867 | | Income taxes expense – current | | 26,821,210 | | 22,809,371 | | | | 29,564,334 | | 25,540,238 | | Net Income before undernoted items | | 62,926,741 | | 56,220,370 | | Non cash revenue (expense) | | | | | | Equity earnings in IOC | | 24,722,536 | | 2,359,556 | | Deferred income taxes | | (4,343,000) | | 994,000 | | Amortization | | (5,133,615) | | (4,915,613) | | | | 15,245,921 | | (1,562,057) | | | | | | | | Net income for the year | | 78,172,662 | | 54,658,313 | | Other comprehensive gain | | 699,000 | | 596,000 | | Comprehensive income for the year | | $78,871,662 | | $55,254,313 |

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

| | | First Quarter 2016 | | Second Quarter 2016 | | Third Quarter 2016 | | Fourth Quarter 2016 | | Total

Year

2016 | | Total

Year

2015 | | | | | | | | | | | | | | | | Pellets | | 2.11 | | 2.43 | | 2.44 | | 3.08 | | 10.06 | | 9.47 | | Concentrates(1) | | 2.05 | | 2.15 | | 2.18 | | 1.79 | | 8.17 | | 8.41 | | | | | | | | | | | | | | | | Total | | 4.16 | | 4.58 | | 4.62 | | 4.87 | | 18.23 | | 17.88 |

| (1) | Excludes third party ore sales. |

IOC's 2016 iron ore sales for calculating the royalty to LIORC, totaled 18.2 million tonnes compared to 17.9 million tonnes in 2015. Royalty revenue increased to $113.1 millionas compared to $99.7 millionin 2015. Equity earnings from IOC amounted to $24.7 millioncompared to $2.4 millionin 2015.The higher royalty revenue and equity earnings than last year were mainly due to improved prices for concentrate, particularly in the fourth quarter of 2016, plus higher pellet sales tonnages. Iron ore prices in 2016 were higher than most forecasts had predicted, with Chinese government stimulus, a shortage of coking coal increasing the demand for higher grade iron ore, and a decline in Chinese domestic production.

As reported by Bloomberg, the price of 62% Fe concentrate CFR China averaged US$58per tonne in 2016 compared to US$56per tonne in 2015. The pellet premium, also as reported by Bloomberg, averaged US$26per tonne in 2016, approximately the same as in 2015. While the reported annual average prices were not much different year-over-year, the prices received by IOC improved in 2016 compared to 2015. With improving pellet premiums in 2016, IOC focused on increased pellet production, and the pellet sales tonnage in 2016 was 6% higher than in 2015. CFS tonnages in 2016 were lower than in 2015 by 3% as IOC maximized pellet sales when possible.

Capital expenditure by IOC in 2016 was $99 millionas compared to $143 millionin 2015. The 2016 capital was almost all sustaining capital. The capital program for 2016 was set when the price outlook was poor and the expansion program has been largely completed. Therefore the capital budget was set for minimal sustaining capital.

The Shareholders' consolidated net income for the year ended December 31, 2016was $78.2 millionor $1.22per share compared to $54.7 millionor $0.85per share in 2015. Equity earnings from IOC amounted to $24.7 millioncompared to $2.4 millionin 2015. The main cause of IOC's higher earnings for 2016 as compared to 2015 was the improved iron ore prices and premiums.

Fourth quarter 2016 sales of 4.9 million tonnes were higher than the 4.7 million tonnes last year but the sales prices of CFS and pellets were significantly improved, resulting in royalty income of $38.0 millionfor the quarter as compared to $21.5 millionfor the same period in 2015. Fourth quarter 2016 cash flow from operations was $28.3 millionor $0.44per share compared to 2015 of $20.0 millionor $0.31per share. LIORC received an IOC dividend in the fourth quarter of 2016 in the amount of $15.1 millionor $0.23per share. IOC recorded net income of $121.1 million(2015 – loss of $6.5 million) in the fourth quarter largely as a result of substantially higher iron ore prices.

Selected Consolidated Financial Information

The following table sets out financial data from a Shareholder's perspective for the three years ended December 31, 2016, 2015 and 2014.

| | | Years Ended December 31 | | | | | | Description | | 2016 | | 2015 | | 2014 | | | | (in millions except per Share information) | | | | | | Revenue | | $115.1 | | $101.7 | | $117.5 | | Net Income | | $78.2 | | $54.7 | | $104.1 | | Net Income per Share | | $1.22 | | $0.85 | | $1.63 | | Cash Flow from Operations | | $63.5(1) | | $59.9 | | $113.5(2) | | Cash Flow from Operations per Share | | $0.99 | | $0.94 | | $1.77 | | Total Assets | | $737.0 | | $714.1 | | $731.0 | | Dividend per Share | | $1.00 | | $1.00 | | $1.65 | | Number of Common Shares outstanding | | 64.0 | | 64.0 | | 64.0 |