Labrador Iron Ore Royalty Corporation press release

Labrador Iron Ore Royalty Corporation Results for the Second Quarter Ended June 30, 2019

2019-08-14

TSX - Toronto Stock Exchange · Iron · Canada

Canada NewsWire

TORONTO, Aug. 14, 2019

TORONTO, Aug. 14, 2019/CNW/ - Labrador Iron Ore Royalty Corporation ("LIORC", TSX: LIF) announced today its operation and cash flow results for the second quarter ended June 30, 2019.

Royalty revenue for the second quarter of 2019 amounted to $52.6 millionas compared to $5.1 millionfor the second quarter of 2018. Equity earnings from IOC amounted to $33.9 millionor $0.53per share in the second quarter of 2019 as compared to a loss of $6.1 millionor $0.09per share in the second quarter of 2018. Net income was $61.1 millionor $0.95per share for the second quarter of 2019 compared to a net loss of $3.2 millionor $0.05per share for the same period in 2018. Cash flow from operations for the second quarter was $47.8 millionor $0.75per share as compared to $15.5 millionor $0.24per share for the same period in 2018. LIORC received a dividend from Iron Ore Company of Canada("IOC") in the second quarter of 2019 in the amount of $25.4 millionor $0.40per share, whereas LIORC received no dividend in the second quarter of 2018. The 2018 production was negatively impacted by a nine-week work stoppage.

The cash flow from operations, equity earnings and net income for the second quarter of 2019 were higher than the second quarter of 2018, as a result of higher prices for concentrate and pellets, and higher production.

The average price for the Platts index for 62% Fe Iron Ore, CFR China ("62% Fe index") increased 53% to US$100per tonne in the second quarter of 2019 compared to the average price in the second quarter of 2018 of US$65per tonne. IOC's total sales for calculating the royalty to LIORC - concentrate for sale ("CFS") plus pellets - was 4.6 million tonnes in the second quarter of 2019 compared to 0.5 million tonnes in the same period in 2018, largely because 2018 CFS tonnages and pellet sales tonnages were negatively impacted by the work stoppage.

LIORC's results for the three months and six months ended June 30are summarized below:

| (in millions except per share information) | 3 Months Ended

Jun. 30, 2019 | 3 Months Ended

Jun. 30, 2018 | 6 Months Ended

Jun. 30, 2019 | 6 Months Ended

Jun. 30, 2018 | | | (Unaudited) | | | | | | | | | | | Revenue | $53.3 | $5.2 | $92.5 | $39.5 | | Cash flow from operations | $47.8 | $15.5 | $72.8 | $35.8 | | Operating cash flow per share | $0.75 | $0.24 | $1.14 | $0.56 | | Net income | $61.1 | $(3.2) | $100.4 | $27.1 | | Net income per share | $0.95 | $(0.05) | $1.57 | $0.42 |

Iron Ore Company of Canada Operations

Production Total concentrate production in the second quarter of 2019 of 4.5 million tonnes was 201% higher than the second quarter of 2018, which was negatively impacted by the work stoppage, and 1% higher than the first quarter of 2019, which was negatively impacted by frozen material and blocked feeders in the ore barn. Total concentrate production in the second quarter of 2019 was negatively impacted by a delay in the restart after the planned annual outage in June as a result of a flooding issue.

CFS production in the second quarter of 2019 of 2.0 million tonnes was 109% higher than in the second quarter of 2018 and 34% higher than the previous quarter. Pellet production in the second quarter of 2019 of 2.3 million tonnes was 347% higher than the second quarter of 2018 and 16% lower than the previous quarter. The pellet plant production in the second quarter of 2019 was negatively impacted by lack of feed as a result of lower concentrate production than planned, as well as lower indurating machine availability during the quarter.

Sales as Reported for the LIORC Royalty Total iron ore tonnage sold by IOC (CFS plus pellets) was 4.6 million tonnes in the second quarter of 2019 compared to 0.5 million tonnes in the same period in 2018, largely as a result of the lower production in 2018 due to the work stoppage. Second quarter 2019 sales tonnage of CFS was 2.1 million tonnes and pellet sales tonnage was 2.4 million tonnes, compared to second quarter 2018 sales tonnage of 0.05 million tonnes of CFS and 0.5 million tonnes of pellets.

IOC sells CFS based on the Platts index for 65% Fe Iron Ore, CFR China ("65% Fe index"). The average price for the 65% Fe index was US$115per tonne in the second quarter of 2019, a 34% increase over the average price in the second quarter of 2018 of US$86per tonne, and 20% higher than the average price in the first quarter of 2019 of US$95per tonne. The seaborne iron ore prices continued to be positively affected by a reduction of iron ore supply as a result of mine closures in Braziland lower production in Australia. The premium for the 65% Fe index compared to the 62% Fe index, which had been expanding over the last few years as the Chinese governments enacted and enforced measures to reduce pollution, remained lower in the second quarter of 2019 at 15%, as compared to 31% in the second quarter of 2018 and 15% in the first quarter of 2019, as steel producers continued to react to lower profit margins by substituting higher quality iron ore with cheaper lower quality iron ore. The quarterly Atlantic Basin blast furnace pellet premium, as reported by Platts, averaged US$68per tonne in the second quarter of 2019, a 17% increase over the second quarter of 2018 and 1% higher than the first quarter of 2019.

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

Ended

Dec. 31,

2018 | | | | | | | | | Pellets | 2.42 | 0.48 | 5.13 | 3.02 | 8.41 | | Concentrates(1) | 2.14 | 0.05 | 2.97 | 1.40 | 6.70 | | | | | | | | | Total(2) | 4.57 | 0.53 | 8.10 | 4.43 | 15.10 |

Outlook

As a result of lower than anticipated first half production, Rio Tinto lowered the 2019 guidance for IOC's saleable production of CFS and pellets on a 100% basis to between 18.2 and 19.2 million tonnes from between 19.2 and 20.9 million tonnes.

Benchmark prices for concentrate and pellet premiums remain attractive relative to historical levels despite recent price declines due to softer demand and uncertainty over trade tensions. On August 7, 2019the 62% Fe index was US$93per tonne as compared to an average of US$120per tonne in July. Supply continues to be constrained, predominantly as a result of mine closures in Brazil. Vale reaffirmed its 2019 iron ore sales guidance of 307 to 332 million tonnes, stating that expected sales volume will move towards the midpoint of the range with the restart of the Brucutu mine in June and the partial resumption of dry processing operations at Vargem Grande. This compares to Vale's 2018 iron ore production of 385 million tonnes.

Chinacrude steel production was up 9.9% in the first half of 2019 as compared to the same period in 2018, and the immediate outlook for Chinasteel production continues to be positive despite higher iron ore prices and weaker steel producer margins. Weaker steel producer margins are expected to continue to have some effect on iron ore demand outside of China. Despite the pullback, higher Chinaimport fines prices have made iron ore pellet premiums under existing formulas unaffordable for some producers given prevailing steel and raw materials prices. As a result, some steel producers in Europehave reduced output or replaced high cost pellets where possible with lower quality grades. Longer term, we would expect an increase in the global seaborne iron ore supply and for iron ore prices to begin to revert to levels more in line with historical averages.

The LIORC cash balance at June 30, 2019stood at $47.7 millionbefore LIORC dividends payable on July 25, 2019of $0.90per share or $57.6 million. The net royalty from IOC was paid on the same date, maintaining the Corporation's strong cash balance.

On August 7, 2019the Board of IOC declared a dividend of US$200 million, payable to shareholders of IOC on August 22, 2019.

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

John F. Tuer President and Chief Executive Officer August 14, 2019

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 2018 Annual Report, and the financial statements and notes contained therein and the June 30, 2019interim 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 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 revenue for the second quarter of 2019 amounted to $52.6 millionas compared to $5.1 millionfor the second quarter of 2018. Equity earnings from IOC amounted to $33.9 millionor $0.53per share in the second quarter of 2019 as compared to a loss of $6.1 millionor $0.09per share in the second quarter of 2018. Net income was $61.1 millionor $0.95per share for the second quarter of 2019 compared to a net loss of $3.2 millionor $0.05per share for the same period in 2018. Cash flow from operations for the second quarter was $47.8 millionor $0.75per share as compared to $15.5 millionor $0.24per share for the same period in 2018. LIORC received a dividend from IOC in the second quarter of 2019 in the amount of $25.4 millionor $0.40per share, whereas LIORC received no dividend in the second quarter of 2018. The 2018 production was negatively impacted by a nine-week work stoppage.

The average price for 62% Fe index increased 53% to US$100per tonne in the second quarter of 2019 compared to the average price in the second quarter of 2018 of US$65per tonne. IOC's total sales for calculating the royalty to LIORC - CFS plus pellets - was 4.6 million tonnes in the second quarter of 2019 compared to 0.5 million tonnes in the same period in 2018, largely because 2018 CFS tonnages and pellet sales tonnages were negatively impacted by the work stoppage.

Total concentrate production in the second quarter of 2019 of 4.5 million tonnes was 201% higher than the second quarter of 2018, which was negatively impacted by the work stoppage, and 1% higher than the first quarter of 2019, which was negatively impacted by frozen material and blocked feeders in the ore barn. Total concentrate production in the second quarter of 2019 was negatively impacted by a delay in the restart after the planned annual outage in June as a result of a flooding issue.

Total iron ore tonnage sold by IOC (CFS plus pellets) was 4.6 million tonnes in the second quarter of 2019 compared to 0.5 million tonnes in the same period in 2018, largely as a result of the lower production in 2018 due to the work stoppage. Second quarter 2019 sales tonnage of CFS was 2.1 million tonnes and pellet sales tonnage was 2.4 million tonnes, compared to second quarter 2018 sales tonnage of 0.05 million tonnes of CFS and 0.5 million tonnes of pellets.

IOC sells CFS based on the 65% Fe index. The average price for the 65% Fe index was US$115per tonne in the second quarter of 2019, a 34% increase over the average price in the second quarter of 2018 of US$86per tonne, and 20% higher than the average price in the first quarter of 2019 of US$95per tonne. The seaborne iron ore prices continued to be positively affected by a reduction of iron ore supply as a result of mine closures in Braziland lower production in Australia. The premium for the 65% Fe index compared to the 62% Fe index, which had been expanding over the last few years as the Chinese governments enacted and enforced measures to reduce pollution, remained lower in the second quarter of 2019 at 15%, as compared to 31% in the second quarter of 2018 and 15% in the first quarter of 2019, as steel producers continued to react to lower profit margins by substituting higher quality iron ore with cheaper lower quality iron ore. The quarterly Atlantic Basin blast furnace pellet premium, as reported by Platts, averaged US$68per tonne in the second quarter of 2019, a 17% increase over the second quarter of 2018 and 1% higher than the first quarter of 2019.

Results for the six months were affected by the same factors as affected the three month period. Royalty and commission interests amortization expense increased by $1.1 millionfor the six months compared to the same period in 2018 due to the increase in production. The 2018 production was negatively impacted by a nine-week work stoppage.

The following table sets out quarterly revenue, net income, cash flow and dividend data for 2019, 2018 and 2017.

| | Revenue | Net Income | Net Income per Share | Cash Flow | Cash Flow from Operations per Share | Adjusted Cash Flow per Share (1) | Dividends Declared per Share | | | | | | | | | | | (in millions except per share information) | | | | | | | | | | | | | | | | | | 2019 | | | | | | | | | | | | | | | | | | First Quarter | $39.2 | $39.3 | $0.61 | $25.0 | $0.39 | $0.34 | $1.05 | | | | | | | | | | | Second Quarter | $53.3 | $61.1 | $0.95 | $47.8(2) | $0.75(2) | $0.86(2) | $0.90 | | | | | | | | | | | 2018 | | | | | | | | | | | | | | | | | | First Quarter | $34.3 | $30.3 | $0.47 | $20.3 | $0.32 | $0.29 | $0.35 | | | | | | | | | | | Second Quarter | $5.2 | $(3.2) | $(0.05) | $15.5 | $0.24 | $0.04 | $0.25 | | | | | | | | | | | Third Quarter | $44.6 | $58.1 | $0.91 | $59.7(3) | $0.93(3) | $1.30(3) | $0.55 | | | | | | | | | | | Fourth Quarter | $46.8 | $43.4 | $0.68 | $53.3(4) | $0.83(4) | $0.79(4) | $0.60 | | | | | | | | | | | 2017 | | | | | | | | | | | | | | | | | | First Quarter | $43.4 | $42.9 | $0.67 | $28.2(5) | $0.44(5) | $0.53(5) | $0.50 | | | | | | | | | | | Second Quarter | $34.2 | $32.3 | $0.50 | $45.6(6) | $0.71(6) | $0.53(6) | $0.60 | | | | | | | | | | | Third Quarter | $40.4 | $43.8 | $0.69 | $53.6(7) | $0.84(7) | $0.85(7) | $1.00 | | | | | | | | | | | Fourth Quarter | $40.6 | $38.3 | $0.60 | $39.6(8) | $0.62(8) | $0.65(8) | $0.55 |

(1) _"Adjusted cash flow" (see below) _(2) _Includes $25.4 millionIOC dividend. _(3) _Includes $58.6 millionIOC dividend. _(4) _Includes $25.3 millionIOC dividend. _(5) _Includes $10.0 millionIOC dividend. _(6) _Includes $15.2 millionIOC dividend. _(7) _Includes $32.2 millionIOC dividend. _(8) Includes $19.3 millionIOC dividend.

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 $0.75for the quarter (2018 - $0.24). Cumulative standardized cash flow from inception of the Corporation is $28.61per share and total cash distributions since inception is $28.29per share, for a payout ratio of 99%.

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. 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).

| | 3 Months Ended

Jun. 30, 2019 | 3 Months Ended

Jun. 30, 2018 | 6 Months Ended

Jun. 30, 2019 | 6 Months Ended

Jun. 30, 2018 | | Standardized cash flow from operating activities | $47,837 | $15,496 | $72,800 | $35,773 | | Changes in amounts receivable, accounts payable and income taxes payable | 6,943 | (13,210) | 3,492 | (14,801) | | Adjusted cash flow | $54,780 | $2,286 | $76,292 | $20,972 | | Adjusted cash flow per share | $0.86 | $0.04 | $1.19 | $0.33 |

Liquidity and Capital Resources

The Corporation had $47.7 millionin cash as at June 30, 2019(December 31, 2018- $80.5 million) with total current assets of $102.8 million(December 31, 2018- $127.0 million). The Corporation had working capital of $27.6 millionas at June 30, 2019(December 31, 2018- $76.3 million). The Corporation's operating cash flow for the quarter was $47.8 millionand the dividend paid during the quarter was $67.2 million, resulting in cash balances decreasing by $19.4 millionduring the second quarter of 2019.

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 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 centscommission per tonne and dividends from its 15.10% equity interest in IOC. The Corporation normally pays cash dividends from its net income 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, 2021with provision for annual one-year extensions. No amount is currently drawn under this facility (2018– nil) leaving $50.0 millionavailable to provide for any capital required by IOC or requirements of the Corporation.

Outlook

As a result of lower than anticipated first half production, Rio Tinto lowered the 2019 guidance for IOC's saleable production of CFS and pellets on a 100% basis to between 18.2 and 19.3 million tonnes from between 19.2 and 20.9 million tonnes.

Labrador Iron Ore Royalty Corporation Results for the Second Quarter Ended June 30, 2019

Iron Ore Company of Canada Operations

Outlook

Management's Discussion and Analysis

Standardized Cash Flow and Adjusted Cash Flow

Liquidity and Capital Resources

Outlook

Earlier from Labrador Iron Ore Royalty Corporation