Labrador Iron Ore Royalty Corporation press release

Labrador Iron Ore Royalty Corporation Announces Results for the Second Quarter Ended June 30, 2018

2018-08-07

TSX - Toronto Stock Exchange · Iron · Canada

Canada NewsWire

TORONTO, Aug. 7, 2018

TORONTO, Aug. 7, 2018/CNW/ - Labrador Iron Ore Royalty Corporation ("LIORC", TSX: LIF) announced today its operation and cash flow results for the second quarter ended June 30, 2018.

Royalty revenue for the second quarter of 2018 amounted to $5.1 millionas compared to $33.8 millionfor the second quarter of 2017. Equity (losses) earnings from the Iron Ore Company of Canada("IOC") amounted to ($6.1) millionor ($0.09)per share as compared to $14.3 millionor $0.22per share in 2017. Net (loss) income was ($3.3) millionor ($0.05)per share compared to $32.3 millionor $0.50per share for the same period in 2017. The shareholders' cash flow from operations for the second quarter was $15.5 millionor $0.24per share as compared to $45.6 millionor $0.71per share for the same period in 2017.

The cash flow from operations, equity earnings and net income for the second quarter of 2018 were lower than the second quarter of 2017, due to the work stoppage at IOC during which operations were suspended until a new labour agreement was reached. The strike closed down the IOC production facilities on March 27, 2018. The workforce returned to work on May 28, 2018. A new five-year collective agreement is now in place and the ramp up to normal production rates was achieved by the end of June. IOC is making every effort to maximize production for the remainder of the year. Sales for the second quarter of 2018 were restricted by the availability of product as port inventories had to be rebuilt.

The average index price for 62% fines increased 3% to US$65per tonne CFR China in the second quarter of 2018 compared to the average price in the second quarter of 2017 of US$63per tonne. Total IOC sales for calculating the royalty to LIORC – pellets plus concentrate for sale ("CFS") – of 0.53 million tonnes was 87% lower in the second quarter of 2018 compared to the same period in 2017. In the second quarter of 2018 concentrate production continued to be preferentially directed to the pellet plant due to the strong pellet demand and premiums. LIORC received an IOC dividend in the second quarter of 2017 in the amount of $15.3 millionor $0.24per share, whereas LIORC received no dividend in the second quarter of 2018.

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

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

June 30, 2018 | 3 Months Ended

June 30, 2017 | 6 Months Ended

June 30, 2018 | 6 Months Ended

June 30, 2017 | | | | (Unaudited) | | | | | | | | | | Revenue | $5.2 | $34.2 | $39.5 | $77.6 | | Cash flow from operations | $15.5 | $45.6 | $35.8 | $73.8 | | Operating cash flow per share | $0.24 | $0.71 | $0.56 | $1.15 | | Net (loss) income | ($3.2) | $32.3 | $27.1 | $75.2 | | Net (loss) income per share | ($0.05) | $0.50 | $0.42 | $1.17 |

Iron Ore Company of Canada Operations

Production Total concentrate production in the second quarter of 2018 of 1.5 million tonnes was 69% lower than the second quarter of 2017 and was 64% lower than the first quarter of 2018. Similarly, pellet production in the second quarter of 2018 was 78% lower than the second quarter of 2017 and 81% lower than the first quarter of 2017. As noted above, IOC production was negatively affected by the labour strike.

Sales as Reported for the LIORC Royalty Second quarter 2018 total iron ore tonnage sold by IOC (pellets plus CFS) of 0.53 million tonnes was 87% below the total sales tonnage in the second quarter 2017. Again, sales of CFS and pellets were negatively impacted by the labour strike.

Largely as a result of the strike, the royalty revenue for LIORC in the second quarter of 2018 was 85% lower than the revenue in last year's second quarter.

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

| | 3 Months Ended June 30, 2018 | 3 Months Ended June 30, 2017 | 6 Months Ended June 30, 2018 | 6 Months Ended June 30, 2017 | Year

Ended

Dec. 31,

2017 | | Pellets | 0.48 | 2.44 | 3.02 | 4.92 | 10.48 | | Concentrates(1) | 0.05 | 1.60 | 1.40 | 3.79 | 8.67 | | Total(2) | 0.53 | 4.04 | 4.43 | 8.71 | 19.15 |

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

Outlook

IOC is expecting good production and sales tonnages in the third and fourth quarters of 2018. Rio Tinto has reduced the IOC production guidance for 2018 to 9.0 to 10.0 million tonnes of iron ore pellets and concentrates for its 58.72% interest in IOC, which is total saleable production of 15.3 to 17.0 million tonnes on a 100% basis. Achieving the low end of the guidance would result in approximately 2% less total saleable tonnes produced in the second half of 2018 over the saleable production of 10.06 million tonnes in the second half of 2017. Achieving the high end of the guidance would result in approximately 15% more total saleable tonnes produced in the second half of 2018 over the saleable production in the second half of 2017.

In the second quarter of 2018 the Platts 62% Fe CFR China benchmark iron ore price averaged US$65per tonne, but was largely range bound with a high price of US$68per tonne, and a low of US$63per tonne. IOC sells its CFS product based on the 65% Fe index, and the Platts index price for 65% Fe concentrate averaged US$86per tonne in the second quarter of 2018, 13% higher than the price in the second quarter of 2017, but 5% lower than the average price in the first quarter of 2018. Atlantic Basin blast furnace pellet premiums, as reported by Platts, improved by 29% from US$45per tonne in the second quarter of 2017 to US$58per tonne against the comparable 2018 quarter.

In the second quarter of 2018, prices for iron ore products with higher value-in-use characteristics have remained firm, supported by the environmental policies of the Chinese governments, and by China'sstrong steel demand and margins. The differential between the Platts indexes for 65% Fe CFS and 62% Fe CFS has widened to US$27per tonne at the time of writing, the highest spread in recent years. In the second quarter of 2018 the Canadian dollar weakened, reflecting concerns regarding international trade. Benchmark iron ore prices have also been somewhat negatively impacted by trade concerns but have been more resilient than other base metals, notably copper and zinc.

The IOC employees and management continue their efforts to increase production and reduce unit operating costs. Based on LIORC management's July site visit, they are optimistic regarding the production and unit costs in the third and fourth quarter of 2018. Consistent ore production from the Wabush3 pit is expected in September. The No. 4 pellet line is scheduled to be refurbished over approximately nine weeks, starting in late September. The usual maintenance of the rail and port facilities is scheduled for the summer. Third-party rail haulage volumes are considerably improved over 2017. Capital expenditures are still forecast at C$220 millionfor 2018.

The LIORC cash balance at June 30, 2018stood at $18.7 millionwith LIORC dividends payable on July 25, 2018of $16.0 million. As at June 30, 2018the current assets exceeded the current liabilities by $15.7 million. With our expectation of strong production, sales and premiums for the high value-in-use iron ore products from IOC over the balance of 2018, LIORC is in a good position to maintain the regular dividend. In order to maintain the dividend policy of a regular dividend of $0.25per share per quarter, LIORC will plan to rebuild the cash balance back to approximately $30 million, the pre-strike level, as sales and prices permit.

Our shareholders will be aware from its June 18, 2018press release that the LIORC Directors approved a special meeting of shareholders to seek approval of changes to the Articles. LIORC is working on the details for the special meeting, including the preparation of the management information circular and negotiating debt financing options. The Directors will determine the date of the special meeting, likely to be in the fall of 2018. The LIORC Directors are aware of an investment opportunity that they believe should result in the Corporation being stronger by adding a third revenue stream to the royalty and equity investment in IOC. Shareholders are advised that the board will only proceed with the proposed acquisition if it is accretive to shareholder value and is consistent with our existing distribution and balance sheet objectives. Changes to the Articles are required to make the proposed investment. Upon the amendment of the Articles, shareholders will enjoy the rights and protections afforded to shareholders of a TSX-listed Canada Business Corporation Act (CBCA) corporation (including with respect to corporate law duties on directors and officers and the requirement to obtain shareholder approval of fundamental changes and certain dilutive share issuances), ensuring that their interests continue to be adequately protected. The Board of Directors believes these measures, which are consistent with those enjoyed by shareholders of other TSX-listed CBCA corporations, are appropriate to protect the interests of LIORC's shareholders. We understand shareholder concerns regarding dilution and maintaining its on-going dividends, and we plan to manage both in a manner consistent with the past. Some shareholders have expressed concern regarding the lack of diversification and growth. The Directors believe the most prudent plan forward is to balance all these objectives in a very conservative manner by periodically pursuing acquisitions only in circumstances where the acquisition will increase shareholder value and will be consistent with our existing distribution and balance sheet objectives. We do not expect such opportunities to present themselves often, but when they do – such as the one before us now – the Directors need the authority to fully consider it on the merits. It is not our intention to use the proposed amendments to materially change LIORC, as the Board expects to exercise its discretion in the same conservative manner as it has managed the Corporation since its inception.

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

William H. McNeil President and Chief Executive Officer August 7, 2018

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 2017 Annual Report, the financial statements and notes contained therein and the June 30, 2018interim 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 strike closed down the IOC production facilities on March 27, 2018. The workforce returned to work on May 28, 2018. A new five-year collective agreement is now in place and the ramp up to normal production rates was achieved by the end of June. IOC is making every effort to maximize production for the remainder of the year. Sales for the second quarter of 2018 were restricted by the availability of product as port inventories had to be rebuilt.

The first quarter sales of IOC are traditionally adversely affected by the 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 2018 amounted to $5.1 millionas compared to $33.8 millionfor the second quarter of 2017. Equity (losses) earnings from IOC amounted to ($6.1) millionor ($0.09)per share as compared to $14.3 millionor $0.22per share in 2017. Net (loss) income was ($3.3 millionor ($0.05)per share compared to $32.3 millionor $0.50per share for the same period in 2017. The shareholders' cash flow from operations for the second quarter was $15.5 millionor $0.24per share as compared to $45.6 millionor $0.71per share for the same period in 2017.

The cash flow from operations, equity earnings and net income for the second quarter of 2018 were lower than the second quarter of 2017, due to the work stoppage at IOC during which operations were suspended until a new labour agreement was reached.

The average index price for 62% fines increased 3% to US$65per tonne CFR China in the second quarter of 2018 compared to the average price in the second quarter of 2017 of US$63per tonne. Total IOC sales for calculating the royalty to LIORC – pellets plus CFS – of 0.53 million tonnes was 87% lower in the second quarter of 2018 compared to the same period in 2017. In the second quarter of 2018 concentrate production continued to be preferentially directed to the pellet plant due to the strong pellet demand and premiums. LIORC received an IOC dividend in the second quarter of 2017 in the amount of $15.3 millionor $0.24per share, whereas LIORC received no dividend in the second quarter of 2018.

Total concentrate production in the second quarter of 2018 of 1.5 million tonnes was 69% lower than the second quarter of 2017 and was 64% lower than the first quarter of 2018. Similarly, pellet production in the second quarter of 2018 was 78% lower than the second quarter of 2017 and 81% lower than the first quarter of 2017. As noted above, IOC production was negatively affected by the labour strike.

Second quarter 2018 total IOC sales for calculating the royalty to LIORC (pellets plus CFS) of 0.53 million tonnes was 87% below the total sales tonnage in the second quarter 2017. Again, sales of CFS and pellets were negatively impacted by the labour strike.

Largely as a result of the strike, the royalty revenue for LIORC in the second quarter of 2018 was 85% lower than the revenue in last year's second quarter.

Results for the six months were affected by the same factors as affected the three month period. Royalty and commission interests amortization expense decreased by $1.2 millionfor the six months due to the decrease in production as a result of the labour strike.

The following table sets out quarterly revenue, net income, cash flow and dividend data for 2018, 2017 and 2016.

| | 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) | | | | | | | | | | | | | | | | | | 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 | | | | | | | | | | | 2017 | | | | | | | | | | | | | | | | | | First Quarter | $43.4 | $42.9 | $0.67 | $28.2(2) | $0.44(2) | $0.53(2) | $0.50 | | | | | | | | | | | Second Quarter | $34.2 | $32.3 | $0.50 | $45.6(3) | $0.71(3) | $0.53(3) | $0.60 | | | | | | | | | | | Third Quarter | $40.4 | $43.8 | $0.69 | $53.6(4) | $0.84(4) | $0.85(4) | $1.00 | | | | | | | | | | | Fourth Quarter | $40.6 | $38.3 | $0.60 | $39.6(5) | $0.62(5) | $0.65(5) | $0.55 | | | | | | | | | | | 2016 | | | | | | | | | | | | | | | | | | First Quarter | $22.3 | $11.0 | $0.17 | $12.5 | $0.19 | $0.19 | $0.25 | | | | | | | | | | | Second Quarter | $25.8 | $8.3 | $0.13 | $7.6 | $0.12 | $0.22 | $0.25 | | | | | | | | | | | Third Quarter | $28.4 | $21.2 | $0.33 | $15.2 | $0.24 | $0.24 | $0.25 | | | | | | | | | | | Fourth Quarter | $38.6 | $37.7 | $0.59 | $28.3(6) | $0.44(6) | $0.57(6) | $0.25 |

| (1) | "Adjusted cash flow" (see below) | | (2) | Includes $10.0 million IOC dividend. | | (3) | Includes $15.3 million IOC dividend. | | (4) | Includes $32.2 million IOC dividend. | | (5) | Includes $19.3 million IOC dividend. | | (6) | Includes$15.1million 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 $0.24for the quarter (2017 - $0.71). Cumulative standardized cash flow from inception of the Corporation is $25.71per share and total cash distributions since inception is $25.19per 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 are excluded. 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

June 30, 2018 | 3 Months

Ended

June 30, 2017 | 6 Months Ended

June 30, 2018 | 6 Months Ended

June 30, 2017 | | Standardized cash flow from operating activities | $15,496 | $45,576 | $35,773 | $73,758 | | Excluding: changes in amounts receivable, accounts payable and income taxes payable | (13,210) | (11,515) | (14,801) | (6,074) | | Adjusted cash flow | $2,286 | $34,061 | $20,972 | $67,684 | | Adjusted cash flow per share | $0.04 | $0.53 | $0.33 | $1.06 |

Liquidity and Capital Resources

The Corporation had $18.7 millionin cash as at June 30, 2018(December 31, 2017- $40.5 million) with total current assets of $33.0 million(December 31, 2017- $82.6 million). The Corporation had working capital of $15.7 millionas at June 30, 2018(December 31, 2017- $33.1 million). The Corporation's operating cash flow for the quarter was $15.5 millionand the dividend paid during the quarter was $22.4 million, resulting in cash balances decreasing by $6.9 millionduring the second quarter of 2018.

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 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 (2017 – nil) leaving $50.0 millionavailable to provide for any capital required by IOC or requirements of the Corporation.

Outlook

IOC is expecting good production and sales tonnages in the third and fourth quarters of 2018. Rio Tinto has reduced the IOC production guidance for 2018 to 9.0 to 10.0 million tonnes of iron ore pellets and concentrates for its 58.72% interest in IOC, which is total saleable production of 15.3 to 17.0 million tonnes on a 100% basis. Achieving the low end of the guidance would result in approximately 2% less total saleable tonnes produced in the second half of 2018 over the saleable production of 10.06 million tonnes in the second half of 2017. Achieving the high end of the guidance would result in approximately 15% more total saleable tonnes produced in the second half of 2018 over the saleable production in the second half of 2017.