Labrador Iron Ore Royalty Corporation press release

Labrador Iron Ore Royalty Corporation results for the first quarter ended March 31, 2019

2019-05-13

TSX - Toronto Stock Exchange · Iron · Canada

Canada NewsWire

TORONTO, May 13, 2019

TORONTO, May 13, 2019/CNW/ - Labrador Iron Ore Royalty Corporation ("LIORC", TSX: LIF) announced today its operation and cash flow results for the first quarter ended March 31, 2019.

Royalty revenue for the first quarter of 2019 amounted to $38.5 millionas compared to $33.8 millionfor the first quarter of 2018. Equity earnings from Iron Ore Company of Canada("IOC") amounted to $22.4 millionor $0.35per share in the first quarter of 2019 as compared to $14.6 millionor $0.23per share in the first quarter of 2018. Net income was $39.3 millionor $0.61per share for the first quarter of 2019 compared to $30.3 millionor $0.47per share for the same period in 2018. Cash flow from operations for the first quarter was $25.0 millionor $0.39per share as compared to $20.3 millionor $0.32per share for the same period in 2018.

The cash flow from operations, equity earnings and net income for the first quarter of 2019 were higher than the first quarter of 2018, despite lower sales of concentrate, as a result of higher prices for concentrate and pellets. The average price for the Platts index for 62% Fe Iron Ore, CFR China ("62% Fe index") increased 12% to US$83per tonne in the first quarter of 2019 compared to the average price in the first quarter of 2018 of US$74per tonne. Total IOC's sales for calculating the royalty to LIORC - concentrate for sale ("CFS") plus pellets of 3.5 million tonnes - was 9% lower in the first quarter of 2019 compared to the same period in 2018, largely as a result of CFS tonnages being 39% lower than in the same period in 2018. The pellet sales tonnages in the first quarter of 2019 were 6% higher than in the first quarter of 2018.

LIORC's results for the three months ended March 31are summarized below:

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

Mar. 31, 2019 | 3 Months Ended

Mar. 31, 2018 | | | | (Unaudited) | | | | | | | | Revenue | | $39.2 | $34.3 | | Cash flow from operations | | $25.0 | $20.3 | | Operating cash flow per share | | $0.39 | $0.32 | | Net income | | $39.3 | $30.3 | | Net income per share | | $0.61 | $0.47 |

Iron Ore Company of Canada Operations

Production Frozen material and blocked feeders in the ore barn as a result of adverse weather in January and February caused various delays which lowered production. There were also delays associated with starting the mine development program with a new contractor in 2019. These were partially offset by higher production in March, mainly due to higher than plan weight yield and robust feed from the mine. As a result, total concentrate production in the first quarter of 2019 of 4.4 million tonnes was 7% higher than the first quarter of 2018.

As is usual for the first quarter of any year, due to weather, concentrate production in the first quarter of 2019 was 12% lower than the fourth quarter of 2018.

The lower than budgeted concentrate production in the first quarter primarily affected CFS production since pellet production was favoured due to continued strong demand and premiums. CFS production in the first quarter of 2019 of 1.5 million tonnes was 11% higher than in the first quarter of 2018 and 38% lower than the previous quarter. Pellet production in the first quarter of 2019 of 2.7 million tonnes was 2% higher than the first quarter of 2018 and 13% higher than the previous quarter. The pellet plant production in the first quarter of 2019 was negatively impacted by unplanned maintenance to induration machine #1, while lower pellet production than budgeted in the fourth quarter of 2018 was mainly due to the rebuild of induration machine #4, which was deferred from the second quarter of 2018 due to the strike.

Sales as Reported for the LIORC Royalty First quarter 2019 total iron ore tonnage sold by IOC (CFS plus pellets) of 3.5 million tonnes was 9% lower in the first quarter of 2019 compared to the same period in 2018, largely as a result of CFS tonnage being 39% lower than in the same period in 2018. Despite higher CFS production in the first quarter of 2019 than in the same period in 2018, sales of CFS were lower in the first quarter of 2019 compared to the first quarter of 2018 due to timing differences. In the first quarter of 2019, the pellet sales tonnage was 6% higher than in the first quarter of 2018.

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 increased 6% to US$95per tonne in the first quarter of 2019 compared to the average price in the first quarter of 2018 of US$90per tonne. The seaborne iron ore prices were affected by a reduction of iron ore supply by Vale as a result of the collapse of the tailings dam at Vale's Córrego do Feijão mine in Brumadinho, Minas Gerais state, Brazil("Brumadinho") and subsequent closing of other dams. 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, declined somewhat in the first quarter of 2019 to 15%, as compared to 22% in the first quarter of 2018. The quarterly Atlantic Basin blast furnace pellet premium, as reported by Platts, averaged US$67per tonne in the first quarter of 2019, a 16% increase over the first quarter of 2018 and 10% higher than the fourth quarter of 2018.

The Canadian dollar was 5% weaker in the first quarter of 2019 as compared to the first quarter of 2018. As a result of higher concentrate and pellet prices, and the effect of the weaker Canadian dollar, somewhat offset by reduced concentrate sales tonnages, the royalty revenue for LIORC in the first quarter of 2019 was 14% higher than the royalty revenue in last year's first quarter.

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

| | | 3 Months Ended

Mar. 31,

2019 | 3 Months Ended

Mar. 31,

2018 | Year

Ended

Dec. 31,

2018 | | | | | | | | Pellets | | 2.70 | 2.54 | 8.41 | | Concentrates(1) | | 0.83 | 1.35 | 6.70 | | Total(2) | | 3.53 | 3.89 | 15.10 |

| | | | (1) | Excludes third party ore sales | | (2) | Totals may not add up due to rounding |

Outlook

The outlook for LIORC remains positive. Rio Tinto's 2019 guidance for IOC's saleable production of CFS and pellets remains unchanged at between 19.2 and 20.9 million tonnes on a 100% basis. Benchmark amounts for concentrate and pellet premiums remain attractive. The Brumadinho dam failure on January 25, 2019 and subsequent closures resulted in approximately 10% of the world's iron ore pellet production being removed from the market. The major suppliers of pellets are generally operating at near planned capacity with no new pellet plants or additional capacity coming on line in the short or medium term. In addition, long-term fundamental changes, such as Chinataking action to reduce the effects of pollution and placing a greater emphasis on producing higher quality steel products, could provide continued support for higher quality iron ore products, like those sold by IOC. LIORC can expect strong royalty revenue and the possibility of IOC dividends, if these market conditions continue.

The LIORC cash balance at March 31, 2019stood at $67.1 millionbefore LIORC dividends payable on April 25, 2019of $1.05per share or $67.2 million. The net royalty from IOC was paid on the same date, maintaining the Corporation's strong cash balance. On May 9, 2019the Board of IOC declared a dividend of US$125 million, payable to shareholders of IOC on May 23, 2019.

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

John F. Tuer President and Chief Executive Officer May 13, 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 March 31, 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 first quarter of 2019 amounted to $38.5 millionas compared to $33.8 millionfor the first quarter of 2018. Equity earnings from IOC amounted to $22.4 millionor $0.35per share in the first quarter of 2019 as compared to $14.6 millionor $0.23per share in the first quarter of 2018. Net income was $39.3 millionor $0.61per share for the first quarter of 2019 compared to $30.3 millionor $0.47per share for the same period in 2018. Cash flow from operations for the first quarter was $25.0 millionor $0.39per share as compared to $20.3 millionor $0.32per share for the same period in 2018.

The cash flow from operations, equity earnings and net income for the first quarter of 2019 were higher than the first quarter of 2018, despite lower sales of concentrate, as a result of higher prices for concentrate and pellets. The average price for the 62% Fe index increased 12% to US$83per tonne in the first quarter of 2019 compared to the average price in the first quarter of 2018 of US$74per tonne. Total IOC's sales for calculating the royalty to LIORC - CFS plus pellets of 3.5 million tonnes - was 9% lower in the first quarter of 2019 compared to the same period in 2018, largely as a result of CFS tonnages being 39% lower than in the same period in 2018. The pellet sales tonnages in the first quarter of 2019 were 6% higher than in the first quarter of 2018.

Frozen material and blocked feeders in the ore barn as a result of adverse weather in January and February caused various delays which lowered production. There were also delays associated with starting the mine development program with a new contractor in 2019. These were partially offset by higher production in March, mainly due to higher than plan weight yield and robust feed from the mine. As a result, total concentrate production in the first quarter of 2019 of 4.4 million tonnes was 7% higher than the first quarter of 2018. As is usual for the first quarter of any year, due to weather, concentrate production in the first quarter of 2019 was 12% lower than the fourth quarter of 2018.

The lower than budgeted concentrate production in the first quarter primarily affected CFS production since pellet production was favoured due to continued strong demand and premiums. CFS production in the first quarter of 2019 of 1.5 million tonnes was 11% higher than in the first quarter of 2018 and 38% lower than the previous quarter. Pellet production in the first quarter of 2019 of 2.7 million tonnes was 2% higher than the first quarter of 2018 and 13% higher than the previous quarter. The pellet plant production in the first quarter of 2019 was negatively impacted by unplanned maintenance to induration machine #1, while lower pellet production than budgeted in the fourth quarter of 2018 was mainly due to the rebuild of induration machine #4, which was deferred from the second quarter of 2018 due to the strike.

First quarter 2019 total iron ore tonnage sold by IOC (CFS plus pellets) of 3.5 million tonnes was 9% lower in the first quarter of 2019 compared to the same period in 2018, largely as a result of CFS tonnage being 39% lower than in the same period in 2018. Despite higher CFS production in the first quarter of 2019 than in the same period in 2018, sales of CFS were lower in the first quarter of 2019 compared to the first quarter of 2018 due to timing differences. In the first quarter of 2019, the pellet sales tonnage was 6% higher than in the first quarter of 2018.

IOC sells CFS based on the Platts index for the 65% Fe index. The average price for the 65% Fe Index increased 6% to US$95per tonne in the first quarter of 2019 compared to the average price in the first quarter of 2018 of US$90per tonne. The seaborne iron ore prices were affected by a reduction of iron ore supply by Vale as a result of the collapse of the tailings dam in Brumadinho and subsequent closing of other dams. 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, declined somewhat in the first quarter of 2019 to 15%, as compared to 22% in the first quarter of 2018. The quarterly Atlantic Basin blast furnace pellet premium, as reported by Platts, averaged US$67per tonne in the first quarter of 2019, a 16% increase over the first quarter of 2018 and 10% higher than the fourth quarter of 2018.

The Canadian dollar was 5% weaker in the first quarter of 2019 as compared to the first quarter of 2018. As a result of higher concentrate and pellet prices, and the effect of the weaker Canadian dollar, somewhat offset by reduced concentrate sales tonnages, the royalty revenue for LIORC in the first quarter of 2019 was 14% higher than the royalty revenue in last year's first quarter.

The following table sets out quarterly revenue, net income and cash flow 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 | | | | | | | | | | | 2018 | | | | | | | | | | | | | | | | | | First Quarter | $34.3 | $30.3 | $0.47 | $20.3 | $0.32 | $0.29 | $0.35 | | | | | | | | | | | Second Quarter | $5.2 | $(3.3) | $(0.05) | $15.5 | $0.24 | $0.04 | $0.25 | | | | | | | | | | | Third Quarter | $44.6 | $58.1 | $0.91 | $59.7(2) | $0.93(2) | $1.30(2) | $0.55 | | | | | | | | | | | Fourth Quarter | $46.8 | $43.4 | $0.68 | $53.3(3) | $0.83(3) | $0.79(3) | $0.60 | | | | | | | | | | | 2017 | | | | | | | | | | | | | | | | | | First Quarter | $43.4 | $42.9 | $0.67 | $28.2(4) | $0.44(4) | $0.53(4) | $0.50 | | | | | | | | | | | Second Quarter | $34.2 | $32.3 | $0.50 | $45.6(5) | $0.71(5) | $0.53(5) | $0.60 | | | | | | | | | | | Third Quarter | $40.4 | $43.8 | $0.69 | $53.6(6) | $0.84(6) | $0.85(6) | $1.00 | | | | | | | | | | | Fourth Quarter | $40.6 | $38.3 | $0.60 | $39.6(7) | $0.62(7) | $0.65(7) | $0.55 |

| | | | (1) | "Adjusted cash flow" (see below) | | (2) | Includes $58.6 million IOC dividend | | (3) | Includes $25.3 million IOC dividend | | (4) | Includes $10.0 million IOC dividend | | (5) | Includes $15.2 million IOC dividend | | (6) | Includes $32.2 million IOC dividend | | (7) | Includes $19.3 million IOC 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 $0.39for the quarter (2018 - $0.32). Cumulative standardized cash flow from inception of the Corporation is $27.86per share and total cash distributions since inception is $27.39per share, for a payout ratio of 98%.

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

Mar. 31, 2019 | | 3 Months Ended

Mar. 31, 2018 | | Standardized cash flow from operating activities | $24,963 | | $20,277 | | Changes in amounts receivable, accounts payable and income taxes payable | (3,451) | | (1,591) | | Adjusted cash flow | $21,512 | | $18,686 | | Adjusted cash flow per share | $0.34 | | $0.29 |

Liquidity and Capital Resources

The Corporation had $67.1 millionin cash as at March 31, 2019(December 31, 2018- $80.5 million) with total current assets of $107.4 million(December 31, 2018- $127.0 million). The Corporation had working capital of $30.4 millionas at March 31, 2019(December 31, 2018- $76.3 million). The Corporation's operating cash flow for the quarter was $25.0 millionand the dividend paid during the quarter was $38.4 million, resulting in cash balances decreasing by $13.4 millionduring the first 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 had increased its cash balance based on the directors' view that it was prudent at that particular time to have some additional financial flexibility. On March 7, 2019the directors determined that the cash balance be reduced to a more typical level with excess cash distributed to shareholders by means of a special dividend to be paid on April 25, 2019.

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

The outlook for LIORC remains positive. Rio Tinto's 2019 guidance for IOC's saleable production of CFS and pellets remains unchanged at between 19.2 and 20.9 million tonnes on a 100% basis. Benchmark amounts for concentrate and pellet premiums remain attractive. The Brumadinho dam failure on January 25, 2019and subsequent closures resulted in approximately 10% of the world's iron ore pellet production being removed from the market. The major suppliers of pellets are generally operating at near planned capacity with no new pellet plants or additional capacity coming on line in the short or medium term. In addition, long-term fundamental changes, such as Chinataking action to reduce the effects of pollution and placing a greater emphasis on producing higher quality steel products, could provide continued support for higher quality iron ore products, like those sold by IOC. LIORC can expect strong royalty revenue and the possibility of IOC dividends, if these market conditions continue.

The LIORC cash balance at March 31, 2019stood at $67.1 millionbefore LIORC dividends payable on April 25, 2019of $1.05per share or $67.2 million. The net royalty from IOC was paid on the same date, maintaining the Corporation's strong cash balance. On May 9, 2019the Board of IOC declared a dividend of US$125 million, payable to shareholders of IOC on May 23, 2019.