Labrador Iron Ore Royalty Corporation press release
LABRADOR IRON ORE ROYALTY CORPORATION - 2023 RESULTS OF OPERATIONS
TSX - Toronto Stock Exchange · Iron · Canada
Canada NewsWire
TORONTO , March 12, 2024 /CNW/ - Labrador Iron Ore Royalty Corporation (TSX: LIF) announced the results of its operations for the year ended December 31, 2023 .
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, 2023 .
86 Years in Labrador West
Labrador Iron Ore Royalty Corporation has been involved in Labrador West for 86 years. Under a Statutory Agreement with Newfoundland made in 1938, a predecessor company, Labrador Mining and Exploration Limited ("LM&E"), 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 sublets 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
In 2023, LIORC's financial results were negatively impacted by lower iron ore prices and lower pellet premiums, as well as a less advantageous product mix (lower volumes of pellet sales and higher volumes of concentrate for sale ("CFS") sales). Net income per share for the year ended December 31, 2023 was $2.91 per share, which was a 30% decrease over 2022. The cash flow from operations per share for 2023 was $2.38 per share, which was 17% lower than in 2022 due to lower royalty revenues and decreased dividends from IOC. IOC dividends decreased as a result of lower earnings at IOC and a decision by IOC to pay lower shareholder dividends in order to retain a higher cash balance due in part to expectations of higher capital expenditure needs going forward. In 2023, IOC paid dividends to its shareholders totalling US$250 million and had a year-end net working capital balance of US$345.8 million , compared to dividends of US$345 million and a year-end net working capital balance of US$274.7 million in 2022.
In December 2023 steel production in China , which had seen 1.5% growth year-to-date, dropped 15% relative to December 2022 . As a result, global steel production ended the year flat relative to 2022, and 5% lower than 2021, when the market experienced record prices for iron ore. On the supply side, three producers, Rio Tinto, BHP and Vale, account for over half the world's volume of seaborne iron ore. The combined production of iron ore in calendar 2023 by these producers was 907 million tonnes, an increase of 2.4% over calendar 2022.
IOC sells CFS based on the the Platts index for 65% Fe, CFR China (the "65% Fe index"). All references to tonnes and per tonne prices in this report refer to wet metric tonnes, other than references to Platts quoted pricing, which refer to dry metric tonnes. Historically, IOC's wet ore contains approximately 3% less ore per equivalent volume than dry ore. In 2023, the average price for the 65% Fe index was US$132 per tonne, a decrease of 5% year over year. The 65% Fe index continued to be quite volatile throughout the year, starting the year at US$131 per tonne and trading as low as US$110 per tonne in May, before ending the year at US$151 per tonne.
In addition to the reduction in iron ore prices, pellet premiums dropped as steel producers, faced with tightening profit margins, substituted high quality pellets with cheaper, lower quality iron feed.
The monthly Atlantic Blast Furnace 65% Fe pellet premium index as quoted by Platts (the "pellet premium") averaged US$45 per tonne in 2023, a decrease of 38% from 2022.
Rio Tinto disclosed that IOC achieved an average realised price for pellets, FOB Sept-Îles of approximately US$155 per tonne, a decrease of 18% year over year. Based on sales as reported for the LIORC Royalty, the overall average price realized by IOC for CFS and pellets, FOB Sept-Îles was approximately US$130 per tonne in 2023, a decrease of 15% year over year. The decrease in the average realized price FOB Sept-Îles in 2023 was a result of lower CFS and pellet prices.
Iron Ore Company of Canada Operations
Operations
Total concentrate production in 2023 was 17.7 million tonnes. This was 7% lower than 2022. While concentrate production was 5% higher in the fourth quarter of 2023 compared to the fourth quarter of 2022, this was not enough to offset the lower concentrate production in the third quarter due to unexpected equipment failures with the thickener rake drive and the overland delivery system conveyor belt and the lower concentrate production in the second quarter due to the impact of the forest fires.
The IOC saleable production (CFS plus pellets) of 16.5 million tonnes in 2023 was 6% lower than 2022 and was 8% lower than the low end of the range of Rio Tinto's original annual guidance of 17.9 to 19.6 million tonnes, due to extended plant downtime in the second and third quarters as a result of the equipment failures and forest fires referred to above. Saleable production in the fourth quarter of 4.6 million tonnes was 7% higher than the fourth quarter of 2022. In 2023, CFS production of 8.2 million tonnes was 3% higher than 2022, mainly due to less concentrate being diverted to make pellets. Pellet production in 2023 of 8.3 million tonnes was 14% lower than 2022, partly as a result of lack of feed, as well as an increase in the duration of the induration machine 3 rebuild.
Despite the forest fires that limited rail service in the second quarter of 2023, third party iron ore haulage by the Québec North Shore and Labrador Railway Company, Inc. ("QNS&L") of 17.7 million tonnes in 2023 was 21% higher than in 2022 and 38% higher than in 2021, predominantly due to increased shipments of iron ore from Champion Iron Limited.
Sales as Reported for the LIORC Royalty
Total iron ore sales tonnage by IOC (CFS plus pellets) of 16.3 million tonnes in 2023 was 1% lower than the total sales tonnage in 2022, predominantly due to inventory availability in both 2023 and 2022.
Capital Expenditures
Capital expenditures for IOC were US$362 million in 2023, or 2% lower than 2022. Capital expenditures in 2023 were 11% lower than the US$407 million that IOC had originally forecasted, mainly due to the decision by IOC to defer certain capital projects, including the rebuild of shovel 101 at the mine and culvert replacements along the QNS&L line, and delays in the development of the mine wireless network, the execution of the Mill 11 fine circuit redesign project to increase recovery yield, and the replacement of existing heavy fuel oil steam capacity with an electric boiler to reduce carbon emissions.
Outlook
Rio Tinto's 2024 guidance for IOC's saleable production tonnage (CFS plus pellets) is 16.7 million to 19.6 million tonnes. This compares to 16.5 million tonnes of saleable production in 2023.
Despite ongoing lower pellet premiums, it is expected that IOC will continue to focus on maximizing pellet production in 2023.
The capital expenditures for 2024 at IOC are forecasted by IOC to be approximately US$431 million . The 2024 forecast includes approximately US$80 million of growth and development projects. Significant development capital expenditure projects include the redesign of Mill 11 Fine Circuit and the replacement of existing heavy fuel oil steam capacity with an electric boiler, which projects were previously scheduled for 2023 but delayed. Significant sustaining capital expenditure projects include the track replacement program at QNS&L to ensure the safe and efficient operation of the increased rail traffic.
In September, IOC announced a major donation of $4 million over two years to the Cégep de Sept-Îles in Quebec, Canada for the construction of its new pavilion for training, research and innovation in the railway, industrial maintenance and energy intelligence industries. The new partnership will strengthen Sept-Îles' position as a centre of excellence for specialised training in railway operations and provide local Indigenous communities with additional training and employment opportunities.
IOC's operator, Rio Tinto, continues to be committed to reaching net zero emissions by 2050 and is targeting a 15% reduction in Scope 1 & 2 emissions by 2025 and a 50% reduction by 2030 (1) (from a 2018 equity baseline). Approximately 70% of IOC's current total greenhouse gas ("GHG") emissions come from pelletizing. In 2023, IOC began its pilot project to test the use of four new plasma torches in the pellet plant, which could potentially replace the use of bunker 'C' fuel oil in the induration process. More immediately, IOC has initiated a project (expected to be completed in the first half of 2025) to install an electric boiler to displace emissions from the usage of the heavy fuel oil boilers, as well as instrumentation and fuel-efficient burners to further reduce heavy fuel oil consumption in the induration process. Through the Low Carbon Economy Fund, the Government of Canada has awarded $18.1 million (or approximately 25% of the expected total cost of the project) to IOC to support the project, which is expected to eliminate approximately 9% of IOC's GHG emissions, or a cumulative reduction of about 2.2 million tonnes of GHG emissions over the lifetime of the project.
Rio Tinto's approach to addressing Scope 3 emissions is to engage with its customers on climate change and work with them to develop the technologies to decarbonize. Steel production currently accounts for approximately 9% of GHG emissions. Strategies to reduce steel production GHG emissions include optimizing the use of traditional blast furnaces through the use of higher-grade iron ore (such as that produced by IOC), and more importantly processing high-grade direct reduction iron ore pellets (such as those produced by IOC) for use as direct feed in electric arc furnaces. In regard to this second process, Rio Tinto has stated that it is studying the feasibility of building a hydrogen-based hot briquetted iron plant at IOC. The proposed plant would have access to high-grade Direct Reduction pellets from IOC, and renewable electricity, with the prospect of producing green hydrogen.
Despite ongoing concerns regarding the global economy and the property sector in China in particular, the outlook for steel demand and for iron ore prices remains quite robust. Currently, the World Steel Association is forecasting a 1.9% increase in global steel production for 2024. Thus far in 2024 (January and February), the average price of the 65% Fe index has been US$142 per tonne, up from an average of US$132 per tonne in 2023. However, the demand for pellets has remained weaker and thus far in 2024 (January and February) the average pellet premium has averaged US$40 per tonne compared to an annual average of US$45 per tonne in 2023 and an annual average of US$72 per tonne in 2022.
I would like to take this opportunity to thank our Shareholders for their interest and support and my fellow Directors for their guidance.
| (1) Source: Rio Tinto Climate Change Report 2023. |
Respectfully submitted on behalf of the Directors of the Corporation,
John F. Tuer President and Chief Executive Officer March 12, 2024
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 on all iron ore product produced, sold and shipped by IOC and a 10 cent per tonne commission on all iron ore products produced and sold by IOC. Generally, LIORC pays cash dividends from the free cash flow generated from IOC to the maximum extent possible, subject to the maintenance of appropriate levels of working capital. Quarterly dividends are payable to all shareholders of record on the last business day of each calendar quarter and are paid on or after the 26th day of the following month.
Seven 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 and Governance and Human Resources Committees are composed of four 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 and Labrador 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 2023 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 21 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 2023 sales tonnages totaled 16.3 million tonnes, comprised of 8.4 million tonnes of iron ore pellets and 7.9 million tonnes of iron ore concentrate. Saleable production in 2023 was 8.3 million tonnes of pellets and 8.2 million tonnes of CFS. IOC generated ore sales revenues (excluding third party ore sales) of $2,830 million in 2023 (2022 - $3,184 million ).
Selected IOC Financial Information
| | 2023 | 2022 | 2021 | 2020 | 2019 | | | ($ in millions) | | | | | | | | Operating Revenues (1) | 3,122 | 3,426 | 4,147 | 3,099 | 2,719 | | | Cash Flow from Operating Activities | 788 | 1,021 | 1,955 | 837 | 1,302 | | | Net Income | 568 | 1,028 | 1,551 | 842 | 749 | | | Capital Expenditures (2) | 494 | 460 | 498 | 288 | 294 | |
| (1) | 2023, 2022 and 2021 Ore sales revenue is presented on a net basis (net of related freight costs) to align with IFRS financial statements presentation. | | (2) | 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 2023, the average royalty net of the 20% tax had been $162.1 million per year and in 2023 the net royalty was $158.8 million (2022 - $184.6 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 2023, Hollinger-Hanna received a total of $1.6 million in commissions from IOC (2022 - $1.6 million ).
Quarterly Dividends
Dividends of $2.55 per share were declared in 2023 (2022 – dividends of $3.10 per share). These dividends were allocated as follows:
| Period | Record | Payment | Dividend
Income | Total
Dividend | | Ended | Date | Date | per Share | ($ Million) | | | | | | | | Mar. 31, 2023 | Mar. 31, 2023 | Apr. 26, 2023 | $0.50 | $32.0 | | Jun. 30, 2023 | Jun. 30, 2023 | Jul. 26, 2023 | 0.65 | 41.6 | | Sep. 30, 2023 | Sep. 29, 2023 | Oct. 26, 2023 | 0.95 | 60.8 | | Dec. 31, 2023 | Dec. 29, 2023 | Jan. 26, 2024 | 0.45 | 28.8 | | | | | | | | Dividend to Shareholders – 2023 | $2.55 | $163.2 | | | | | | | | | | Mar. 31, 2022 | Mar. 31, 2022 | Apr. 26, 2022 | $0.50 | $32.0 | | Jun. 30, 2022 | Jun. 30, 2022 | Jul. 26, 2022 | 0.90 | 57.6 | | Sep. 30, 2022 | Sep. 29, 2022 | Oct. 26, 2022 | 1.00 | 64.0 | | Dec. 31, 2022 | Dec. 30, 2022 | Jan. 26, 2023 | 0.70 | 44.8 | | | | | | | | Dividend to Shareholders – 2022 | $3.10 | $198.4 | | |
The quarterly dividends are payable to all shareholders of record on the last business 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, 2023 and 2022. This discussion should be read in conjunction with the consolidated financial statements of the Corporation and notes thereto for the years ended December 31, 2023 and 2022 which are 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 economically 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 | | Twelve Months Ended | | | | | December 31, | | December 31, | | | | | 2023 | 2022 | | 2023 | 2022 | | | (in millions except per share information) | | | | | | | | | | | | | Revenue | $ 54.9 | $ 48.3 | | $ 201.3 | $ 232.9 | | Equity earnings from IOC | $ 26.2 | $ 19.7 | | $ 84.7 | $ 154.1 | | Net income | $ 51.4 | $ 44.6 | | $ 186.3 | $ 265.4 | | Net income per share | $ 0.80 | $ 0.70 | | $ 2.91 | $ 4.15 | | Dividend from IOC | - | $ 15.4 | | $ 50.4 | $ 69.1 | | Cash flow from operations | $ 26.4 | $ 60.5 | | $ 152.5 | $ 184.2 | | Cash flow from operations per share (1) | $ 0.41 | $ 0.95 | | $ 2.38 | $ 2.88 | | Adjusted cash flow (1) | $ 30.2 | $ 41.9 | | $ 161.5 | $ 197.8 | | Adjusted cash flow per share (1) | $ 0.47 | $ 0.65 | | $ 2.52 | $ 3.09 | | Dividends declared per share | $ 0.45 | $ 0.70 | | $ 2.55 | $ 3.10 |