Labrador Iron Ore Royalty Corporation press release

Labrador Iron Ore Royalty Corporation - 2017 Results of Operations

2018-03-09

TSX - Toronto Stock Exchange · Iron · Canada

Canada NewsWire

TORONTO, March 8, 2018

TORONTO, March 8, 2018/CNW/ - Labrador Iron Ore Royalty Corporation ("LIORC") (TSX: LIF) announced the results of its operations for the year ended December 31, 2017.

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

80 Years in Labrador West

Labrador Iron Ore Royalty Corporation has been involved in Labrador West for 80 years. Under a Statutory Agreement with Newfoundlandmade 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.

Financial Performance

The Shareholders' cash flow from operations for the year ended December 31, 2017was $167.0 millionor $2.61per share as compared to $63.5 millionor $0.99per share for 2016.

The Shareholders' consolidated net income for the year ended December 31, 2017was $157.3 millionor $2.46per share compared to $78.2 millionor $1.22per share in 2016. Equity earnings from Iron Ore Company of Canada("IOC") amounted to $74.3 millioncompared to $24.7 millionin 2016. LIORC received an IOC dividend in the fourth quarter of 2017 in the amount of $19.3 millionor $0.30per share compared to $15.1 millionor $0.23per share in the fourth quarter of 2016. IOC's 2017 iron ore sales for calculating the royalty to LIORC totaled 19.2 million tonnes compared to 18.2 million tonnes in 2016. Royalty revenue increased to $156.4 millionas compared to $113.1 millionin 2016.

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 first quarter of 2017, high premiums for concentrate and pellets, plus higher concentrate and pellet sales tonnages. Prices and premiums in 2017 were higher than most forecasts with the Chinese governments enacting and enforcing measures to reduce pollution; these measures favoured higher quality products such as the concentrate for sale ("CFS") and pellets produced by IOC.

The average index price for 62% fines increased 22% year-on-year to US$71per tonne CFR China in 2017. The pellet premiums also increased year-on-year, particularly in the last few months of 2017, approaching approximately US$60per tonne in October and November. The average price realized by IOC for CFS and pellets, FOB Sept-Îles, was approximately C$108per tonne in 2017 compared to C$80per tonne in 2016, an increase of 35%. The higher premiums for 65% Fe concentrate and pellets were driven by the changes in environmental policy by the Chinese governments, which caused Chinese steel producers to increase the usage of higher value-in-use iron ore, such as the concentrate and pellets produced by IOC. With improving pellet premiums in 2017, IOC again focused on maximizing pellet production to the extent possible, given that two pellet lines were refurbished in 2017 with none in 2016. The sales tonnage of pellets in 2017, for calculating the royalty to LIORC, was 4% higher than in 2016. The CFS tonnages in 2017 were higher than in 2016 by 6%.

Iron Ore Company of Canada Operations

Production

Total concentrate production of 20.2 million tonnes in 2017 was 5% higher as compared to 2016 of 19.2 million tonnes, but below the 22 million tonnes objective for 2017. In the fourth quarter of 2017, IOC experienced two site-wide power outages, weather conditions required the suspension of pit mining activities due to poor visibility, and the conveyor belt of the parallel ore delivery system split along several kilometers. The parallel ore delivery system ("PODS") was not operational for 21 days in December while repairs to the conveyor were undertaken. Quarterly concentrate production records were set in the first and third quarters of 2017 which drove the 5% improvement in concentrate production in 2017. Pellet production was 7% higher in 2017 as compared to 2016. While two pellet lines were down for several weeks for refurbishment, the annual pellet production improved with increased throughput being achieved in both lines once they returned to service.

The cost per tonne of concentrate produced declined by 5% in 2017 as compared to 2016. The total cash cost in Canadian dollars was well controlled and increased by only 2.4%. The overall IOC employee productivity improved by 3% in 2017.

Sales as Reported for the LIORC Royalty

Total iron ore tonnage sold by IOC (CFS plus pellets) of 19.2 million tonnes was 5% above the total sales tonnage in 2016. The pellet sales tonnage was 4% higher and CFS sales tonnage was 6% higher than in 2016. The increase in the sales of both pellets and CFS was achieved despite the repair over a 34-day period in July and August on the dumper for the rail wagons that transport the iron ore products to the port at Sept Isles. IOC crews are to be commended for the dumper repair work and the reduction of the high concentrate inventories at Carol Lake at the end of the third quarter to normal levels by year end.

As noted above, pellet premiums were strong in 2017 and IOC maximized pellet production, while still meeting CFS sales commitments.

Capital Expenditures

Capital expenditure for IOC in 2017 was $265 millionin total as compared to $99 millionin 2016. 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. For 2017, the total capital budget was increased to $245 millionas the price outlook in December 2016was much improved. The 2017 budget included some $40 millionas development capital for the Wabush3 pit (total budget $79 millionin 2017 and 2018). The sustaining capital included the refurbishment of the No. 2 and 5 pellet lines, capital to improve air emissions from the pellet plant, the refurbishment of track and the remediation of high wall rock cuts along the route of the Quebec North Shore and Labrador Railway. The planned capital programs were executed largely on budget. In late 2017 IOC purchased some $20 millionof leased equipment to reduce future operating costs which added to the budget.

Outlook

Many forecasts for seaborne iron ore, 62% Fe, CFR China, are for the price to decline and average below US$60per tonne in 2018. Reportedly, the Office of the Chief Economist of Australiapredicted in January 2018that iron ore prices will average $53per tonne (FOB Australia) in 2018, and $49in 2019. Most forecasts note the anticipated increased supply, particularly from Vale'sS11D mine in Brazil. It is also increasing likely that the Samarco operation in Brazilcould re-open in late 2018 or in 2019, which would likely adversely affect pellet premiums. However, some forecasts note the Chinese policies on pollution and the strong steel margins for Chinese producers as being supportive of iron ore prices and premiums for higher grade iron ore.

Rio Tinto has released guidance for 2018 of between 11.5 million to 12.5 million tonnes for their 58.7% share of IOC's saleable production (pellets and CFS tonnage). This would result in 19.6 million to 21.3 million tonnes of saleable production on a 100% basis. With the strong pellet premiums, IOC will continue to prioritize pellet production in 2018. The IOC objective is 22.2 million tonnes of concentrate production with sales of approximately 12.5 million tonnes of pellets and 8.4 million tonnes of CFS in 2018.

The capital expenditures for 2018 are expected to be $220 million, lower than the $265 millionin 2017. The refurbishment of one induration machine in the pellet plant is planned for 2018. Production of ore from the Wabush3 pit is on track as planned for July 2018. The six-year collective agreements with the United Steelworkers of America union employees expired on February 28, 2018. IOC expects to earn revenue from hauling product from the Bloom Lake mine of Quebec Iron Ore Inc., with mine production planned to start March 2018.

The price of iron ore early in 2018 has again exceeded forecasts. If the improved prices and premiums continue in 2018, IOC achieves the production guidance, and the Canadian dollar does not appreciate materially against the US dollar, the 2018 outlook for LIORC will be continued strong 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 8, 2018

Corporate Structure

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

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.

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. Two of the eight Directors sit on the board of IOC and the five 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 2017 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 markets throughout the world from its year-round port facilities at Sept-Iles, Quebec.

IOC has ore reserves sufficient for approximately 25 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 2017 sales totaled 19.0 million tonnes, comprised of 10.4 million tonnes of iron ore pellets and 8.6 million tonnes of iron ore concentrate. Production in 2017 was 10.5 million tonnes of pellets and 8.5 million tonnes of CFS. IOC generated ore sales revenues (excluding third party ore sales) of $2,249 millionin 2017 (2016 - $1,620 million).

Selected IOC Financial Information

| | 2017 | 2016 | 2015 | 2014 | 2013 | | | ($ in millions) | | | | | | Operating Revenues | 2,315 | 1,676 | 1,495 | 1,794 | 2,194 | | Cash Flow from Operating Activities | 923 | 456 | 267 | 455 | 781 | | | | | | | | | Net Income | 499 | 170 | 21 | 273 | 549 | | Capital Expenditures | 256 | 99 | 143 | 187 | 275 |

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 2017, the average royalty net of the 20% tax had been $94.2 millionper year and in 2017 the net royalty was $125.1 million(2016 - $90.5 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 2017, Hollinger-Hanna received a total of $1.9 millionin commissions from IOC (2016 - $1.8 million).

Quarterly Dividends

Dividends of $2.65per share including special dividends of $1.65per share were declared in 2017 (2016 – dividends of $1.00per share). These dividends were allocated as follows:

| | | | | | Period

Ended | Payment

Date | Dividend

Income

per Share | Total

Dividend

($ Million) | | | | | | | Mar. 31, 2017 | Apr. 25, 2017 | $0.25 | $ 16.0 | | Special Dividend | Apr. 25, 2017 | 0.25 | 16.0 | | Jun. 30, 2017 | Jul. 25, 2017 | 0.25 | 16.0 | | Special Dividend | Jul. 25, 2017 | 0.35 | 22.4 | | Sep. 30, 2017 | Oct. 25, 2017 | 0.25 | 16.0 | | Special Dividend | Oct. 25, 2017 | 0.75 | 48.0 | | Dec. 31, 2017 | Jan. 25, 2018 | 0.25 | 16.0 | | Special Dividend | Jan. 25, 2018 | 0.30 | 19.2 | | | | | | | Dividend to Shareholders - 2017 | $2.65 | $169.6 | | | | | | | | 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 | |

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, 2017and 2016. This discussion should be read in conjunction with the consolidated financial statements of the Corporation and notes thereto for the years ended December 31, 2017and 2016. 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 $40.5 million(2016 - $23.9 million) in cash as at December 31, 2017with total current assets of $82.6 million(2016 - $62.9 million). The Corporation has working capital of $33.1 million(2016 - $38.8 million). The Corporation's cash flow from operations was $167.0 million(2016 - $63.5 million) and dividends paid during the year were $150.4 million, resulting in cash balances increasing by $16.6 million during 2017.

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, 2020with 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 2017 operating results as compared to 2016 results (in '000's).

| Revenue | 2017 | | 2016 | | | | IOC royalties (net of 20% Newfoundland royalty tax) | $ | 125,094 | | $ | 90,465 | | IOC commissions | 1,885 | | 1,793 | | | | Other | 374 | | 233 | | | | | 127,353 | | 92,491 | | | | Expenses | | | | | | | Administrative expenses | 2,938 | | 2,743 | | | | Income taxes expense – current | 37,283 | | 26,821 | | | | | 40,221 | | 29,564 | | | | Net Income before undernoted items | 87,132 | | 62,927 | | | | Non cash revenue (expense) | | | | | | | Equity earnings in IOC | 74,300 | | 24,723 | | | | Deferred income taxes | 2,204 | | (4,343) | | | | Amortization | (6,352) | | (5,134) | | | | | 70,152 | | 15,246 | | | | | | | | | | | Net income for the year | 157,284 | | 78,173 | | | | Other comprehensive gain | 2,060 | | 699 | | | | Comprehensive income for the year | $ | 159,344 | | $ | 78,872 |

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

| | First Quarter 2017 | Second Quarter 2017 | Third Quarter 2017 | | Fourth Quarter 2017 | | Total Year 2017 | | Total Year 2016 | | Pellets | 2.48 | 2.44 | 2.78 | | 2.78 | | 10.48 | | 10.06 | | Concentrates(1) | 2.19 | 1.60 | 2.23 | | 2.66 | | 8.67 | | 8.17 | | | | | | | | | | | | | Total | 4.67 | 4.04 | 5.00 | | 5.44 | | 19.15 | | 18.23 | | (1) Excludes third party ore sales. | | | | | | | | | | | (2) Totals may not add up due to rounding. | | | | | | | | | |