Labrador Iron Ore Royalty Corporation press release

Labrador Iron Ore Royalty Corporation - 2019 Results of Operations

2020-03-06

TSX - Toronto Stock Exchange · Iron · Canada

Canada NewsWire

TORONTO, March 5, 2020

TORONTO, March 5, 2020/CNW/ - Labrador Iron Ore Royalty Corporation ("LIORC") (TSX: LIF) announced the results of its operations for the year ended December 31, 2019.

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, 2019.

82 Years in Labrador West

Labrador Iron Ore Royalty Corporation has been involved in Labrador West for 82 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, 2019was $224.6 millionor $3.51per share as compared to $148.8 millionor $2.32per share for 2018. The financial results for LIORC in 2019 benefited from higher iron ore prices and increased sales tonnages.

The Shareholders' consolidated net income for the year ended December 31, 2019was $205.3 millionor $3.21per share compared to $128.5 millionor $2.01per share in 2018. Equity earnings from Iron Ore Company of Canada("IOC") amounted to $112.1 millioncompared to $57.0 millionin 2018. LIORC received dividends from IOC in 2019 totaling $110.1 millionor $1.72per share compared to $83.9 millionor $1.31per share in 2018. LIORC received an IOC dividend in the fourth quarter of 2019 in the amount of $44.6 millionor $0.70per share compared to $25.3 millionor $0.40per share in the fourth quarter of 2018. IOC's 2019 iron ore sales for calculating the royalty to LIORC totaled 17.1 million tonnes compared to 15.1 million tonnes in 2018. Royalty revenue increased to $175.4 millionas compared to $128.8 milliondue to higher realized iron ore prices and increased sales tonnages in 2019.

The cash flow from operations, equity earnings and net income for the year were higher than last year mainly due to: (i) higher sales tonnages for concentrate and pellets in 2019, as 2018 production and sales were negatively impacted by a work stoppage in the second quarter; and (ii) higher iron ore prices as a result of continued demand from Chinaand reduced supply predominantly from Vale.

Total concentrate production of 19.0 million tonnes in 2019 was 21% higher as compared to 2018 of 15.7 million tonnes, largely due to the work stoppage in the second quarter of 2018. Increased concentrate production lead to increased pellet and concentrate for sale ("CFS") tonnages in 2019. Sales tonnage of pellets in 2019, for calculating the royalty to LIORC, was 14% higher than in 2018 and the CFS tonnage in 2019 was higher than in 2018 by 12%.

IOC sells CFS based on the Platts index for 65% Fe, CFR China ("65% Fe index"). The average price for the 65% Fe index increased 16% to US$104per tonne in 2019 compared to the average price in 2018 of US$90per tonne. The seaborne iron ore prices were affected by a reduction of iron ore supply, predominantly from Valeas a result of the collapse of the tailings dam at Vale'sCorrego do Fejao mine in Brumadinho, Minas Gerais state, Brazil("Brumadinho") and the subsequent closure of other dams. The premium for the 65% Fe index compared to the Platts index for 62% Fe, CFR China ("62% Fe index"), which had been expanding over the last few years, declined to 12% in 2019 as compared to 30% in 2018. The 62% Fe index averaged US$93per tonne in 2019 compared to US$69per tonne in 2018. The monthly Atlantic Blast Furnace 65% Fe pellet premium index (the "pellet premium"), as quoted by Platts, averaged US$57per tonne in 2019, compared to an average in 2018 of US$59. Blast Furnace pellet premiums were relatively stable for the first half of 2019 at approximately US$67per tonne, but decreased in the second half of 2019 as high underlying benchmark prices combined with weak margins for steel producers caused buyers, particularly in Europe, to reduce demand and substitute lower quality product for higher quality pellets. In the fourth quarter of 2019 the pellet premium averaged US$37per tonne compared to US$61per tonne in the fourth quarter of 2018.

The average price realized by IOC for CFS and pellets, FOB Sept-Îles, net of selling costs was approximately C$148per tonne in 2019 compared to C$119per tonne in 2018. Higher iron ore prices, particularly for CFS, together with a slightly lower Canadian dollar exchange rate increased the average realized price FOB Sept-Îles in 2019. Despite greater variability throughout the year, on average shipping costs for 2019 were similar to shipping costs in 2018.

Iron Ore Company of Canada Operations

Production

Total concentrate production of 19.0 million tonnes in 2019 was 21% higher as compared to 2018 of 15.7 million tonnes, largely due to the work stoppage in the second quarter of 2018. Concentrate production in 2019 was adversely affected in the first half of 2019 by frozen material and blocked feeders in the ore barn and a delay in the restart after the planned annual outage in June as a result of a flooding issue. Fourth quarter concentrate production at IOC was 7% lower than the corresponding period of 2018 as a result of a derailment of an automated train and unscheduled autogenous mill repairs and tailings flume repairs.

The IOC saleable production (CFS plus pellets) of 17.9 million tonnes in 2019 was 18% higher than saleable production of 15.2 million tonnes in 2018, but slightly below the lower end of Rio Tinto's revised guidance of 18.2 to 19.3 million tonnes. Total pellet production in 2019 of 10.1 million tonnes was 18% higher than pellet production of 8.5 million tonnes in 2018, largely due to the work stoppage in the second quarter of 2018. Pellet production in 2019 was at times adversely affected by lack of feed from the concentrator and unplanned induration machine maintenance.

The total cost of goods sold, excluding depreciation, was higher in 2019 than in 2018 by 14%, predominantly due to higher production. The unit cost of goods sold, excluding depreciation, in 2019 was 4% lower than in 2018.

Third party haulage by the Québec North Shore and Labrador Railway Company, Inc. ("QNS&L") in 2019 was 30% higher than in 2018, predominantly from increased shipments of iron ore concentrate from the Bloom Lake Mine, owned by Champion Iron Limited ("Champion"). Champion reported that it sold 7.4 million dry metric tonnes of iron ore concentrate in the twelve months ending December 31, 2019.

Sales as Reported for the LIORC Royalty

Total iron ore sales tonnage by IOC (CFS plus pellets) of 17.1 million tonnes in 2019 was 14% higher than the total sales tonnage in 2018. The pellet sales tonnage was 14% higher and CFS sales tonnage was 12% higher than in 2018. The higher sales tonnages were the result of the higher saleable production, as explained above. Total iron ore sales tonnages were lower than saleable production in 2019, as a result of timing differences and breakdowns in reclaiming and ship loading equipment at the terminal. As a result, inventory levels of CFS and pellets at the terminal increased in 2019 by 1.3 million tonnes.

Capital Expenditures

Capital expenditures for IOC in 2019 were $294 millionin total as compared to $205 millionin 2018. At the beginning of 2019 IOC forecasted that capital expenditures for 2019 would be in the range of $225 millionto $245 million. Increased capital expenditures in 2019 included the purchase of five haul trucks, increased costs related to the induration machine #6 rebuild, and the Mill 11 circuit redesign.

Outlook

Rio Tinto's 2020 guidance for IOC's saleable production tonnage (CFS and pellets) is 17.9 million to 20.4 million tonnes. On February 2, 2020Platts listed the February price index for the Atlantic Blast Furnace 65% Fe pellet premium at US$30per tonne, up from the January 2019price of $29per tonne. At these pellet premiums, it is in IOC's economic interest to continue to maximize pellet production in 2020. IOC's current pellet capacity is 12.5 million tonnes.

The capital expenditures for 2020 at IOC are forecasted to be approximately $350 million, as compared to $294 millionin 2019. The 2020 forecast includes approximately $115 millionof growth and development projects, as compared to $70 millionof growth and development projects in 2019. The 2020 growth and development capital expenditure projects include the implementation of the Mill 11 circuit redesign to increase weight yield, various improvements to debottleneck and increase the pellet plant throughput rates and a redesign of the tailings system to increase the life of use and reduce electricity and water usage. The growth and development capital expenditure forecast also includes over $40 millionto increase third party haulage capacity, which is subject to finalizing the applicable third party service contracts.

The collapse of the Brumadinho tailings dam had a profound effect on the market for seaborne iron ore in 2019. Vale'stotal iron ore fines and pellet production in 2019 fell 21.5% and 24.4% to 302 million tonnes and 41.8 million tonnes, respectively. While some growth in supply is expected, Valeproduction levels in 2020 are not expected to reach 2018 levels. Valepredicts that 15 million tonnes of capacity will come back online in 2020 followed by a further 25 million tonnes in 2021. In its fourth quarter production report, Valemaintained its iron ore fines production guidance for 2020 at 340 to 355 million tonnes, of which 44 million tonnes is expected to be pellet production.

The average price of the 65% Fe index from January 1, 2020to February 13, 2020was US$104, the same as the average of the 65% Fe index for 2019. However, Chinacontinues to represent over 70% of the total demand for seaborne iron ore and it is unclear what the long-term effect of the coronavirus ("COVID-19") will be on iron ore prices. From January 23, 2020(the first day of widespread concern about COVID-19) to February 13, 2020the average price of the 65% Fe index dropped from US$106to US$100.

If current iron ore prices and premiums continue for the rest of 2020 and IOC achieves its production guidance, LIORC should continue to be the beneficiary of strong revenues at IOC.

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 5, 2020

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 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.

Six 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 three independent Directors. On January 7, 2020LIORC appointed two additional independent Directors to the Board. Effective January 1, 2019, Suske Capital 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 2019 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-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 Eastand the Asia-Pacificregion.

IOC's 2019 sales totaled 17.2 million tonnes, comprised of 9.6 million tonnes of iron ore pellets and 7.6 million tonnes of iron ore concentrate. Production in 2019 was 10.1 million tonnes of pellets and 7.9 million tonnes of CFS. IOC generated ore sales revenues (excluding third party ore sales) of $2,558 millionin 2019 (2018 - $1,815 million).

Selected IOC Financial Information

| | 2019 | 2018 | 2017 | 2016 | 2015 | | ($ in millions) | | | | | | | Operating Revenues | 2,719 | 1,930 | 2,315 | 1,676 | 1,495 | | Cash Flow from Operating Activities | 1,302 | 578 | 923 | 456 | 267 | | Net Income | 749 | 383 | 499 | 170 | 21 | | Capital Expenditures (1) | 294 | 205 | 265 | 99 | 143 |

| | | | (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 Newfoundlandand Labrador. For the five years prior to 2019, the average royalty net of the 20% tax had been $98.2 millionper year and in 2019 the net royalty was $140.4 million(2018 - $103.0 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 2019, Hollinger-Hanna received a total of $1.7 millionin commissions from IOC (2018 - $1.5 million).

Quarterly Dividends

Dividends of $4.00per share including special dividends of $3.00per share were declared in 2019 (2018 – dividends of $1.75per share including special dividends of $0.75). These dividends were allocated as follows:

| Period | Record | Payment | Dividend

Income | Total

Dividend | | Ended | Date | Date | per Share | ($ Million) | | | | | | | | 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 | | | | | | | | | Mar. 31, 2018 | Mar. 31, 2018 | Apr. 25, 2018 | $0.25 | $16.0 | | Special Dividend | Mar. 31, 2018 | Apr. 25, 2018 | 0.10 | 6.4 | | Jun. 30, 2018 | Jun. 30, 2018 | Jul. 25, 2018 | 0.25 | 16.0 | | Sep. 30, 2018 | Sep. 30, 2018 | Oct. 25, 2018 | 0.25 | 16.0 | | Special Dividend | Sep. 30, 2018 | Oct. 25, 2018 | 0.30 | 19.2 | | Dec. 31, 2018 | Dec. 31, 2018 | Jan. 25, 2019 | 0.25 | 16.0 | | Special Dividend | Dec. 31, 2018 | Jan. 25, 2019 | 0.35 | 22.4 | | | | | | | | Dividend to Shareholders - 2018 | | $1.75 | $112.0 | |

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, 2019and 2018. This discussion should be read in conjunction with the consolidated financial statements of the Corporation and notes thereto for the years ended December 31, 2019and 2018. 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 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.

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 $77.9 million(2018 - $80.5 million) in cash as at December 31, 2019with total current assets of $114.0 million(2018 - $127.0 million). The Corporation had working capital of $28.2 million(2018 - $76.1 million). The Corporation's operating cash flow was $224.6 million(2018 - $148.8 million) and dividends paid during the year were $227.2 million, resulting in cash balances decreasing by $2.6 millionduring 2019.