Labrador Iron Ore Royalty Corporation press release
Labrador Iron Ore Royalty Corporation - 2020 Results of Operations
TSX - Toronto Stock Exchange · Iron · Canada
Canada NewsWire
TORONTO , March 4, 2021 /CNW/ - Labrador Iron Ore Royalty Corporation ("LIORC") (TSX: LIF) announced the results of its operations for the year ended December 31, 2020 .
To the Holders of Common Shares of Labrador Iron Ore Royalty Corporation
The Directors of Labrador Iron Ore Royalty Corporation ("LIORC" or the "Corporation") present the Annual Report for the year ended December 31, 2020 .
83 Years in Labrador West
Labrador Iron Ore Royalty Corporation has been involved in Labrador West for 83 years. Under a Statutory Agreement with Newfoundland made in 1938, a predecessor company, Labrador Mining and Exploration Limited, was granted extensive exploration and mining rights in Labrador West. LM&E found the iron ore bodies that now constitute the mine operated by Iron Ore Company of Canada . LM&E received grants of leases and licences under the Statutory Agreement. It also received a grant of surface rights to establish the town site that became Labrador City . LM&E sublet the leases to IOC and IOC, with major steel companies as original shareholders, built the infrastructure, mine, railway and port. Under the sublease, LIORC receives a 7% gross overriding royalty on iron ore products produced and sold by IOC.
In April 2020 , the Government of Newfoundland and Labrador granted renewals of all 12 of LIORC's mining leases in accordance with their terms for an additional 30 years.
Financial Performance
The COVID-19 global pandemic impacted IOC operations, as well as the global demand and supply of iron ore products. Despite the pandemic, from a financial perspective 2020 was a very good year for LIORC. Net income per share for the year ended December 31, 2020 was $3.55 per share, which was an 11% increase over 2019. The adjusted cash flow per share for 2020 was $3.09 per share, which was 5% lower than in 2019 as a result of IOC's decision to pay lower shareholder dividends in 2020 in order to retain a higher cash balance due in part to concerns that the COVID-19 pandemic may adversely affect IOC's operations. In 2020, IOC paid dividends to its shareholders of US$450 and had a year-end net working capital balance of US$184.6 million , compared to dividends of US$550 and a year-end net working capital balance of US$52.0 million in 2019. The financial results for LIORC in 2020 benefited from higher iron ore prices and increased sales tonnages.
The demand for iron ore by steel producers outside of China was reduced in 2020 because of the COVID-19 global pandemic. For example, the World Steel Association has reported that steel production in the European Union, Japan and the United States was lower in 2020 year over year by 12%, 16% and 17%, respectively. However seaborne iron ore prices increased throughout the year, as steel production in China was unexpectedly 5% higher in 2020 year over year. IOC sells concentrate for sale ("CFS") based on the Platts index for 65% Fe, CFR China ("65% Fe index"). In 2020, the 65% Fe index increased throughout the year from an average US$106 per tonne in January to an average of US$168 per tonne in December. The average price for 2020 was US$122 per tonne, an increase of 16% year over year. The monthly Atlantic Blast Furnace 65% Fe pellet premium index as quoted by Platts (the "pellet premium"), on average was 49% lower in 2020 year over year, predominantly as a result of the weaker demand from European and other steel producers outside of China , who have been the traditional purchasers of pellets. As a result, IOC took advantage of stronger market conditions in Asia in the first half of the year and switched its product mix, prioritising CFS over pellets, and then returned to higher pellet production as European demand recovered. Overall, the average price realized by IOC for CFS and pellets, FOB Sept-Îles, net of selling costs was approximately C$155 per tonne in 2020, an increase of 5% year over year.
Iron Ore Company of Canada Operations
Operations In order to protect IOC's people and to prevent COVID-19 outbreaks within IOC's operations which could affect IOC's capacity to operate, IOC took measures early in March 2020 to limit the exposure risk at different levels. Main actions taken by IOC included limiting on-site presence of personnel to essential operational activities (remote work for administration and supports) and reduction of contractors on-site (favouring local rather than out-of-province when possible). In parallel, several protocols were put in place including strict approval processes for all travel between sites and out-of-province contractors, mandatory on-line health questionnaires linked to gate access, COVID-19 screening for all out-of-province contractors and employees and daily temperature checks at all site access points. As a result of these and other procedures and protocols, IOC was able to continue operations throughout 2020. The IOC saleable production (CFS plus pellets) of 17.7 million tonnes in 2020 was 1% lower than 2019, and slightly below the lower end of Rio Tinto's guidance of 17.9 to 20.4 million tonnes, predominantly because of the impact of COVID-19 and unplanned maintenance at the processing facilities in the third and fourth quarters.
The total cost of goods sold, excluding depreciation, was higher in 2020 than in 2019 by 7%, predominantly due to higher sales. The unit cost of goods sold, excluding depreciation, in 2020 was comparable to 2019.
Revenue from third party haulage by the Québec North Shore and Labrador Railway Company, Inc. ("QNS&L") in 2020 was 15% higher than in 2019, predominantly from increased shipments of iron ore concentrate from the Scully Mine, owned by Tacora Resources.
Sales as Reported for the LIORC Royalty Total iron ore sales tonnage by IOC (CFS plus pellets) of 18.3 million tonnes in 2020 was 7% higher than the total sales tonnage in 2019 as a result of timing differences and breakdowns in reclaiming and ship loading equipment at the terminal that negatively affected sales and increased inventory levels in 2019. In 2020, IOC also started selling limited quantities of CFS to Rio Tinto's port side trading operations in China . These sales are made on arm's length commercial terms and provide IOC with additional demand for its product.
Capital Expenditures Capital expenditures for IOC of $288 million in 2020 were 2% lower than in 2019 and 18% lower than IOC had forecasted for 2020, mainly because of the decision by IOC at the early stages of COVID-19 to defer some projects to 2021 and 2022 because the impact of COVID-19 on the market for high grade iron ore was unknown at that time. Capital expenditures were also lower due to the difficulty in getting contractors to site because of COVID-19 restrictions and protocols.
Outlook
Rio Tinto's 2021 guidance for IOC's saleable production tonnage (CFS plus pellets) is 17.9 million to 20.4 million tonnes. This compares to 17.7 million tonnes of saleable production in 2020. Pellet production of 9.6 million tonnes in 2020 was 5% lower than 2019 mainly because of IOC's strategic decision to change its product mix in response to lower pellet demand. In response to strengthening demand for pellets IOC reverted to maximizing pellet production in the fourth quarter of 2020.
IOC and its shareholders are committed to improving operations, which includes increased investment in IOC's capital assets. The capital expenditures for 2021 at IOC are forecasted to be approximately $460 million , as compared to $288 million in 2020. The 2021 forecast includes approximately $165 million of growth and development projects, as compared to $51 million of growth and development projects in 2020. Significant capital expenditure projects scheduled for 2021 include implementation of the Mill 11 circuit redesign to increase weight yield, redesign of the tailings system to increase the life of use and reduce electricity and water usage, replacement of the dumper cages and refurbishment of the dumper auxiliary system at Sept-Îles, and replacement of a number of locomotives on the mainline between Labrador City and Sept-Îles and on the Automatic Train Operation which delivers ore from the mine to the primary crushers located near the concentrator.
In December 2020 , IOC signed a Reconciliation and Collaboration Agreement with the Innu communities of Uashat mak Mani-utenam and Matimekush-Lac John laying the groundwork for a mutually beneficial relationship based on dialogue, collaboration and trust between IOC and the two communities over the coming decades, and ending the legal action initiated by the two communities against IOC.
The price outlook for seaborne iron ore remains robust. Global steel production outside of China is expected to revert to pre-COVID-19 levels, and as governments look to re-establish their domestic economies, new infrastructure spending is expected to drive additional demand for steel. Thus far in 2021 ( January 1, 2021 to February 23, 2021 ), the average price of the 65% Fe index has been US$189 , which is 55% higher than the average of the 65% Fe index for 2020. In addition, thus far in 2021 the average pellet premium has averaged US$42 compared to an average of US$29 for 2020. Given current iron ore prices and pellet premiums, as well as the positive outlook for steel production in 2021, LIORC is well positioned to benefit from increased revenues and cashflow generated by IOC.
On February 18, 2021 , IOC declared a dividend payable to shareholders on March 25 , 2021. The Corporation's portion is US$15.1 million or about CDN$0.30 per share.
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,
John F. Tuer President and Chief Executive Officer March 4, 2021
Corporate Structure
LIORC is a Canadian corporation formed to give effect to the conversion of the Labrador Iron Ore Royalty Income Fund (the "Fund") into a corporation under a plan of arrangement completed on July 1, 2010 . LIORC is also the successor by amalgamation of a predecessor of LIORC with Labrador Mining Company Limited, formerly a wholly-owned subsidiary of the Fund, that occurred pursuant to the plan of arrangement.
LIORC, directly and through its wholly-owned subsidiary Hollinger-Hanna, holds a 15.10% equity interest in IOC and receives a 7% gross overriding royalty and a 10 cent per tonne commission on all iron ore products produced, sold and shipped by IOC. Generally, LIORC pays cash dividends from its net income to the maximum extent possible, subject to the maintenance of appropriate levels of working capital. The common shareholders receive quarterly dividends on the common shares on the 25th day of the month following the end of each quarter.
Eight Directors are responsible for the governance of the Corporation and also serve as directors of Hollinger-Hanna. The Directors, in addition to managing the affairs of the Corporation and Hollinger-Hanna, oversee the Corporation's interests in IOC. The Audit, Compensation and Nominating Committees are composed of five independent Directors.
Taxation
The Corporation is a taxable corporation. Dividend income received from IOC and Hollinger-Hanna is received tax free while royalty income is subject to income tax and Newfoundland royalty tax. Expenses of the Corporation include administrative expenses. 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 2020 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's largest iron ore producers, operating a mine, concentrator and pellet plant at Labrador City, Newfoundland and 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 markets throughout the world from its year-round port facilities at Sept-Îles, Québec.
IOC has ore reserves sufficient for approximately 24 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, Québec via its wholly-owned QNS&L, a 418 kilometer rail line which links the mine and the port. From there, the products are shipped to markets throughout North America , Europe , the Middle East and the Asia-Pacific region.
IOC's 2020 sales totaled 18.6 million tonnes, comprised of 10.2 million tonnes of iron ore pellets and 8.4 million tonnes of iron ore concentrate. Production in 2020 was 9.6 million tonnes of pellets and 8.1 million tonnes of CFS. IOC generated ore sales revenues (excluding third party ore sales) of $2,915 million in 2020 (2019 - $2,558 million ).
Selected IOC Financial Information
| | 2020 | 2019 | 2018 | 2017 | 2016 | | | ($ in millions) | | | | | | | | Operating Revenues | 3,099 | 2,719 | 1,930 | 2,315 | 1,676 | | | Cash Flow from Operating Activities | 837 | 1,302 | 578 | 923 | 456 | | | Net Income | 842 | 749 | 383 | 499 | 170 | | | Capital Expenditures (1) | 288 | 294 | 205 | 265 | 99 | | | | | | | | | | | (1 ) Reported on an incurred basis | | | | | | |
IOC Royalty
The Corporation holds certain leases and licenses covering approximately 18,200 hectares of land near Labrador City . IOC has subleased certain portions of these lands from which it currently mines iron ore. In return, IOC pays the Corporation a 7% gross overriding royalty on all sales of iron ore products produced from these lands. A 20% tax on the royalty is payable to the Government of Newfoundland and Labrador . For the five years prior to 2020, the average royalty net of the 20% tax had been $107.7 million per year and in 2020 the net royalty was $160.1 million (2019 - $140.4 million ).
Because the royalty is "off-the-top", it is not dependent on the profitability of IOC. However, it is affected by changes in sales volumes, iron ore prices and, because iron ore prices are denominated in US dollars, the United States - Canadian dollar exchange rate.
IOC Equity
In addition to the royalty interest, the Corporation directly and through its wholly owned subsidiary, Hollinger-Hanna, owns a 15.10% equity interest in IOC. The other shareholders of IOC are Rio Tinto Limited with 58.72% and Mitsubishi Corporation with 26.18%.
IOC Commissions
Hollinger-Hanna has the right to receive a payment of 10 cents per tonne on the products produced and sold by IOC. Pursuant to an agreement, IOC is obligated to make the payment to Hollinger-Hanna so long as Hollinger-Hanna is in existence and solvent. In 2020, Hollinger-Hanna received a total of $1.8 million in commissions from IOC (2019 - $1.7 million ).
Quarterly Dividends
Dividends of $3.05 per share including special dividends of $0.50 per share were declared in 2020 (2019 – dividends of 4.00 per share including special dividends of $3.00 ). These dividends were allocated as follows:
| | | | | | | Period | Record | Payment | Dividend
Income | Total
Dividend | | Ended | Date | Date | per Share | ($ Million) | | | | | | | | Mar. 31, 2020 | Mar. 31, 2020 | Apr. 25, 2020 | $0.25 | $16.0 | | Special Dividend | Mar. 31, 2020 | Apr. 25, 2020 | 0.10 | 6.4 | | Jun. 30, 2020 | Jun. 30, 2020 | Jul. 25, 2020 | 0.25 | 16.0 | | Special Dividend | Jun. 30, 2020 | Jul. 25, 2020 | 0.20 | 12.8 | | Sep. 30, 2020 | Sep. 30, 2020 | Oct. 25, 2020 | 0.25 | 16.0 | | Special Dividend | Sep. 30, 2020 | Oct. 25, 2020 | 0.20 | 12.8 | | Dec. 31, 2020 | Dec. 31, 2020 | Jan. 26, 2021 | 1.80 | 115.2 | | | | | | | | Dividend to Shareholders – 2020 | | $3.05 | $195.2 | | | Mar. 31, 2019 | Mar. 31, 2019 | Apr. 25, 2019 | $0.25 | $16.0 | | Special Dividend | Mar. 31, 2019 | Apr. 25, 2019 | 0.80 | 51.2 | | Jun. 30, 2019 | Jun. 30, 2019 | Jul. 25, 2019 | 0.25 | 16.0 | | Jun. 30, 2019 | Jun. 30, 2019 | Jul. 25, 2019 | 0.65 | 41.6 | | Sep. 30, 2019 | Sep. 30, 2019 | Oct. 25, 2019 | 0.25 | 16.0 | | Special Dividend | Sep. 30, 2019 | Oct. 25, 2019 | 0.75 | 48.0 | | Dec. 31, 2019 | Dec. 31, 2019 | Jan. 25, 2020 | 0.25 | 16.0 | | Special Dividend | Dec. 31, 2019 | Jan. 25, 2020 | 0.80 | 51.2 | | | | | | | | Dividend to Shareholders – 2019 | | $4.00 | $256.0 | |
The quarterly dividends are payable to all shareholders of record on the last day of each calendar quarter and are paid on or after the 26th day of the following month.
Management's Discussion and Analysis
The following is a discussion of the consolidated financial condition and results of operations of the Corporation for the years ended December 31, 2020 and 2019. This discussion should be read in conjunction with the consolidated financial statements of the Corporation and notes thereto for the years ended December 31, 2020 and 2019. This information is prepared in accordance with International Financial Reporting Standards ("IFRS") as issued by the International Accounting Standards Board ("IASB") and all amounts are shown in Canadian dollars unless otherwise indicated.
Overview of the Business
The Corporation is a Canadian corporation resulting from the conversion of the Fund into a corporation under a plan of arrangement completed on July 1, 2010 . LIORC is also the successor by amalgamation of a predecessor of LIORC with Labrador Mining Company Limited, formerly a wholly-owned subsidiary of the Fund, that occurred pursuant to the plan of arrangement.
The Corporation is dependent on the operations of IOC. IOC's earnings and cash flows are affected by the volume and mix of iron ore products produced and sold, costs of production and the prices received. Iron ore demand and prices fluctuate and are affected by numerous factors which include demand for steel and steel products, the relative exchange rate of the US dollar, global and regional demand and production, political and economic conditions and production costs in major producing areas.
Financial Highlights
| | Three Months Ended | | Year Ended | | | | | December 31, | | December 31, | | | | ($ in millions except per share information) | 2020 | 2019 | | 2020 | 2019 | | Revenue | 54.4 | 39.6 | | 202.3 | 178.3 | | Equity earnings from IOC | 37.8 | 23.7 | | 126.0 | 112.1 | | Net income | 73.9 | 47.4 | | 227.2 | 205.3 | | Net income per share | $ 1.16 | $ 0.74 | | $ 3.55 | $ 3.21 | | Dividend(s) from IOC | 86.6 | 44.6 | | 86.6 | 110.1 | | Cash flow from operations | 116.0 | 79.1 | | 175.4 | 224.6 | | Cash flow from operations per share | $ 1.81 | $ 1.24 | | $ 2.74 | $ 3.51 | | Adjusted cash flow 1 | 116.4 | 66.2 | | 198.0 | 208.1 | | Adjusted cash flow per share | $ 1.82 | $ 1.03 | | $ 3.09 | $ 3.25 | | Dividends declared per share | $ 1.80 | $ 1.05 | | $ 3.05 | $ 4.00 | | | | | | | | | 1 This is a non-IFRS financial measure and does not have a standard meaning under IFRS | | | | | | | Please refer to Standardized Cash Flow and Adjusted Cash Flow section in the MD&A. | | | | | |
The higher revenue, net income and equity earnings achieved in 2020 as compared to 2019 were mainly due to (i) higher iron ore prices as a result of continued demand from China , and (ii) higher sales of pellets and CFS. While saleable production in 2020 was 1% lower than in 2019 due to unplanned maintenance at the processing facilities in the third and fourth quarters, sales were 7% higher as IOC took advantage of higher inventory levels that had accumulated in 2019.
Capital expenditures for IOC in 2020 were $288 million in total as compared to $294 million in 2019. At the beginning of 2020 IOC forecasted that capital expenditures for 2020 would be approximately $350 million . Capital expenditures were lower than forecasted mainly because of the decision by IOC at the early stages of COVID-19 to defer some projects to 2021 and 2022 because the impact of COVID-19 on the market for high grade iron ore was unknown at that time. Capital expenditures were also lower due to the difficulty in getting contractors to site because of COVID-19 restrictions and protocols.