Labrador Iron Ore Royalty Corporation press release

Labrador Iron Ore Royalty Corporation - 2018 Results of Operations

2019-03-08

TSX - Toronto Stock Exchange · Iron · Canada

Canada NewsWire

TORONTO, March 7, 2019

TORONTO, March 7, 2019/CNW/ - Labrador Iron Ore Royalty Corporation ("LIORC") (TSX: LIF) announced the results of its operations for the year ended December 31, 2018.

To the Holders of Common Shares of Labrador Iron Ore Royalty Corporation

81 Years in Labrador West

Labrador Iron Ore Royalty Corporation has been involved in Labrador West for 81 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, 2018was $148.8 millionor $2.32per share as compared to $167.0 millionor $2.61per share for 2017. The financial results for LIORC in 2018 were adversely affected by the nine-week labour strike from March 26 to May 29, 2018, which halted all iron ore production at IOC.

The Shareholders' consolidated net income for the year ended December 31, 2018was $128.5 millionor $2.01per share compared to $157.3 millionor $2.46per share in 2017. Equity earnings from Iron Ore Company of Canada("IOC") amounted to $57.0 millioncompared to $74.3 millionin 2017. LIORC received dividends from IOC in 2018 totaling $83.9 millionor $1.31per share compared to $76.7 millionin 2017, or $1.20per share. Post the labour strike, IOC drew down its cash balance to pay the higher annual dividend. LIORC received an IOC dividend in the fourth quarter of 2018 in the amount of $25.3 millionor $0.40per share compared to $19.3 millionor $0.30per share in the fourth quarter of 2017. IOC's 2018 iron ore sales for calculating the royalty to LIORC totaled 15.10 million tonnes compared to 19.15 million tonnes in 2017. Royalty revenue decreased to $128.8 millionas compared to $156.4 millionin 2017 due to the labour strike in the second quarter of 2018.

The cash flow from operations, equity earnings and net income for the year were lower than last year mainly due to the reduced sales tonnages for concentrate and pellets caused by the labour strike. As in 2017, prices and premiums were higher than most forecasts, with the Chinese governments continuing to enforce measures to reduce pollution; these measures favoured higher quality products such as the concentrate for sale ("CFS") and pellets produced by IOC.

While the Platts index for 62% Fe, CFR China averaged US$69per tonne in 2018 compared to US$71per tonne in 2017, a 3% decline, the Platts index for 65% Fe, CFR China averaged US$90per tonne in 2018 compared to US$87per tonne in 2017, a 3% increase. Since the CFS sold by IOC is priced on the 65% Fe, CFR China benchmark, the stronger prices for the 65% Fe product somewhat offset the lower CFS sales tonnages in 2018. The monthly Atlantic Blast Furnace 65% Fe pellet premium index, as quoted by Platts, averaged US$59per tonne for 2018, and was 31% higher than in 2017. Blast Furnace pellet premiums were stable at approximately US$58per tonne for most of 2018 but increased to US$62per tonne in November and December 2018. The strong year-over-year increase in pellet premiums was supported by generally healthy margins for steel producers in 2018.

The average price realized by IOC for CFS and pellets, FOB Sept-Îles, net of selling costs and royalties was approximately C$110per tonne in 2018 compared to C$108per tonne in 2017. Increased freight rates and lower sales tonnages affected the average realized price FOB Sept-Îles in 2018. The premiums for 65% Fe concentrate and pellets continued to be supported by the environmental policies of the Chinese governments, which, as in 2017, caused Chinese steel producers to favour the usage of higher value-in-use iron ore, such as the concentrate and pellets produced by IOC. With strong pellet premiums in 2018, IOC again focused on maximizing pellet production to the extent possible, given the labour strike and the refurbishment of one pellet line in 2018, as compared to two lines in 2017. The sales tonnage of pellets in 2018, for calculating the royalty to LIORC, was 20% lower than in 2017. The CFS tonnage in 2018 was lower than in 2017 by 23%.

Iron Ore Company of Canada Operations

Production

Total concentrate production of 15.73 million tonnes in 2018 was 22% lower as compared to 2017 of 20.21 million tonnes, largely due to the labour strike in the second quarter of 2018. The Moss Pit (formerly known as Wabush3) commenced production in the third quarter. Monthly concentrate production records were set in July and October of 2018. However, third quarter production was adversely affected by maintenance and the commissioning of a productivity improvement project on the spiral plant, which temporarily restricted throughput. Fourth quarter production at IOC was 4% higher than the corresponding period of 2017. The overall IOC saleable production (CFS plus pellets) was slightly below Rio Tinto's lower revised guidance, provided after the labour strike.

The unit operating costs for concentrate and pellets were higher than in 2017 due to the labour strike and the fixed costs incurred during the suspension of production. The total cash costs were lower in 2018 than in 2017 by 6%.

Haulage by the Quebec North Shore and Labrador Railway Company, Inc. ("QNS&L") for the iron ore concentrate from the Bloom Lake Mine, owned by Champion Iron Limited ("Champion"), began in March 2018, as scheduled by Champion. As reported by Champion, the dry metric tonnes of iron ore concentrate sold totaled 5.4 million tonnes in the nine months ending December 31, 2018.

Sales as Reported for the LIORC Royalty

Total iron ore tonnage sold by IOC (CFS plus pellets) of 15.10 million tonnes was 21% below the total sales tonnage in 2017. The pellet sales tonnage was 20% lower and CFS sales tonnage was 23% lower than in 2017. The reduced sales tonnages were the result of the reduced production tonnages, as explained above.

As noted above, pellet premiums were strong in 2018 and IOC maximized pellet production. Pellet sales were comparable in the second half of 2018 to the same period in 2017. Production and sales in both periods were affected by the refurbishment of a pellet line. IOC is focused on restoring the capacity of the pellet plant to 12.5 million tonnes per annum by improving maintenance and operating practices.

Capital Expenditures

Capital expenditures for IOC in 2018 were $205 millionin total as compared to $265 millionin 2017. The 2018 capital expenditures were essentially on budget and included the completion of the development of the Moss Pit in September, the refurbishment of the No. 4 Pellet Line, the track replacement program for 2018 for the QNS&L railway and dewatering for the Luce Pit.

Outlook

The collapse of the tailings dam and loss of human life at Vale's Corrego de Feijao mine in Brumadinho, Minas Gerais state, Brazil("Brumadinho") on January 25, 2019had a profound influence on the seaborne iron ore market. The full impacts are uncertain at present. The initial price response for the 62% Fe, CFR China benchmark index was a sharp increase to over US$90per tonne from US$74per tonne the day prior to the disaster. However, low profit margins for Chinese steelmakers at present could limit the duration of the price spike. The benchmark price for the 62% Fe, CFR China index declined in mid-February 2019to US$84per tonne, as steelmakers looked to purchase less expensive, lower grade products and reduce port stocks in China.

Vale announced on January 29, 2019plans to cut production of some 40 million tonnes per year, including the pellet feed needed for the production of 11 million tonnes per year of pellets. Additional Vale production cuts of 30 million tonnes per annum were announced in February 2019as a result of a civil court order which Vale is appealing.

As reported by Platts on February 13, 2019, in response to the Vale supply cuts, the National Australia Bank raised its forecast for iron ore from US$62to US$80per tonne for 2019 and from US$60to US$70per tonne for 2020. The forecast decline over the two years is because of the expectation of softer growth in Chinese demand.

As at mid-February there was uncertainty in the Atlantic pellet market, as the Brumadinho disaster caused delays in the annual pellet negotiations between Vale and the European steelmakers. In late 2019 steelmakers were faced with falling margins which causes them to purchase less expensive, lower quality iron ore. In addition, just prior to the disaster, Vale had been negotiating to change the annual pricing of pellet contracts to be based on the 65% index as opposed to the 62% index. The steelmakers judged that this would result in an increase in the cost of pellets and resisted the change. The Brumadinho disaster is expected to result in a decreased supply of pellets worldwide, and there are reports that Vale will fill Brazilian orders for pellets over other customers.

Prior to the Brumadinho disaster, the market was generally assuming the re-opening of the Samarco pellet plant in Brazilin 2020. This is now seen as highly unlikely. Some analysts are modelling a partial re-start of Samarco in 2021.

On February 2, 2019Platts listed the February price index for the Atlantic Blast Furnace 65% Fe pellet premium at US$67.50per tonne, no change from the January 2019price. Pellet producers were maximizing pellet production before the Brumadinho disaster, and therefore it is expected that pellet premiums will remain strong for the balance of 2019 at least, considering no likely Samarco production, the cuts to pellet production announced by Vale, and the limited ability of existing major producers to ramp up production. A potential brake on pellet price increases is the consideration that the margins for European steelmakers are relatively low at present.

Rio Tinto's guidance for 2019 is 11.3 million to 12.3 million tonnes for its 58.7% share of IOC's saleable production tonnage (CFS and pellets). This is 19.2 million to 20.9 million tonnes of saleable production on a 100% basis. With the strong pellet premiums, IOC is expected to continue to prioritize pellet production in 2019. The 2019 IOC objective is approximately 20 million tonnes of concentrate production with sales of up to 12.5 million tonnes of pellets and approximately 6 million tonnes of CFS.

The capital expenditures for 2019 at IOC are expected to be in the range of $225 millionto $245 million, higher than the 2018 amount of $205 million. The refurbishment of one induration machine in the pellet plant, a new rope shovel for the mine, productivity improvements in the concentrator and pellet plant, and additional locomotive capacity for the QNS&L railway are planned for 2019. IOC expects to earn revenue from hauling product from the Bloom Lake mine of Champion. The reported production capacity of the Bloom Lake is 7.5 million tonnes per annum of iron concentrate. Tacora Resources Inc. (Tacora) announced on November 27, 2018that the financing for the re-start of the Scully Mine is complete. The concentrate produced by Tacora is to be hauled by the QNS&L.

The price of iron ore early in 2019 has exceeded forecasts. If the strong prices and premiums continue in 2019, the policies of the Chinese government on pollution are not materially relaxed, there are no major negative impacts from the China-US trade negotiations, IOC achieves the production guidance, and the Canadian dollar does not appreciate materially against the US dollar, the 2019 outlook for LIORC will be continued strong cash flows.

Responses to Shareholder Questions

On June 18, 2018the Corporation announced in a press release that its Board of Directors had determined to call a special meeting of shareholders to seek approval of an amendment to LIORC's articles of incorporation to provide LIORC with the flexibility to invest in additional non-operating metal or mineral assets, including royalties and streams, and issue shares to finance such investments, for the specific purpose of allowing the Company to pursue a potentially compelling opportunity that it had been made aware of. That opportunity never materialized as anticipated and after extensive consultation with shareholders, in a press release dated February 6, 2019it was stated that the directors wished to indicate that they have no intention of calling a special meeting on or before the upcoming Annual General Meeting, nor is a further special meeting currently contemplated. The directors also clarified that they have no intention of making an acquisition without shareholder approval.

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. It was noted in the February 6, 2019press release that there have been times when the directors have determined that it is appropriate to draw down on its cash reserves and other times where it has been prudent to build cash reserves back up. The recent increase in the cash balance was 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.

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,

William H. McNeil President and Chief Executive Officer March 7, 2019

Corporate Structure

LIORC is a Canadian corporation resulting from the conversion of the Labrador Iron Ore Royalty Income Fund (the "Fund") under an Arrangement effective on July 1, 2010. LIORC is also the successor by amalgamation under the Arrangement of Labrador Mining Company Limited, formerly a wholly-owned subsidiary of the Fund.

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.

Eight 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 Compensation and Nominating Committees are composed of five independent Directors. The Audit Committee is composed of four independent Directors. 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 2018 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-Iles, Quebec.

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, Quebecvia 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 2018 sales totaled 15.0 million tonnes, comprised of 8.4 million tonnes of iron ore pellets and 6.6 million tonnes of iron ore concentrate. Production in 2018 was 8.5 million tonnes of pellets and 6.7 million tonnes of CFS. IOC generated ore sales revenues (excluding third party ore sales) of $1,815 millionin 2018 (2017 - $2,249 million).

Selected IOC Financial Information

| | 2018 | 2017 | 2016 | 2015 | 2014 | | ($ in millions) | | | | | | | Operating Revenues | 1,930 | 2,315 | 1,676 | 1,495 | 1,794 | | Cash Flow from Operating

Activities | 578 | 923 | 456 | 267 | 455 | | Net Income | 383 | 499 | 170 | 21 | 273 | | Capital Expenditures | 205 | 265 | 99 | 143 | 187 |

IOC Royalty

The Corporation holds certain leases and licenses covering approximately 18,200 hectares of land near Labrador City. IOC has leased 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 2018, the average royalty net of the 20% tax had been $99.6 millionper year and in 2018 the net royalty was $103.0 million(2017 - $125.1 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 2018, Hollinger-Hanna received a total of $1.5 millionin commissions from IOC (2017 - $1.9 million).

Quarterly Dividends

Dividends of $1.75per share including special dividends of $0.75per share were declared in 2018 (2017 – dividends of $2.65per share including special dividends of $1.65). These dividends were allocated as follows:

| Period | Payment | Dividend

Income | Total

Dividend | | Ended | Date | per Share | ($ Million) | | | | | | | Mar. 31, 2018 | Apr. 25, 2018 | $0.25 | $ 16.0 | | Special Dividend | Apr. 25, 2018 | 0.10 | 6.4 | | Jun. 30, 2018 | Jul. 25, 2018 | 0.25 | 16.0 | | Sep. 30, 2018 | Oct. 25, 2018 | 0.25 | 16.0 | | Special Dividend | Oct. 25, 2018 | 0.30 | 19.2 | | Dec. 31, 2018 | Jan. 25, 2019 | 0.25 | 16.0 | | Special Dividend | Jan. 25, 2019 | 0.35 | 22.4 | | | | | | | Dividend to Shareholders - 2018 | | $1.75 | $112.0 | | Mar. 31, 2017 | Apr. 25, 2017 | $0.25 | $ 16.0 | | Special Dividend | Apr. 25, 2017 | 0.25 | 16.0 | | Jun. 30, 2017 | Jul. 25, 2017 | 0.25 | 16.0 | | Special Dividend | Jul. 25, 2017 | 0.35 | 22.4 | | Sep. 30, 2017 | Oct. 25, 2017 | 0.25 | 16.0 | | Special Dividend | Oct. 25, 2017 | 0.75 | 48.0 | | Dec. 31, 2017 | Jan. 25, 2018 | 0.25 | 16.0 | | Special Dividend | Jan. 25, 2018 | 0.30 | 19.2 | | | | | | | Dividend to Shareholders - 2017 | | $ 2.65 | $169.6 |