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
Newfoundland made 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, 2019 was $224.6 million or $3.51 per share as compared to $148.8 million or $2.32 per 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, 2019 was $205.3 million or $3.21 per share compared to $128.5 million or $2.01 per share in 2018. Equity earnings from
Iron Ore Company of Canada ("IOC")
amounted to $112.1 million compared
to $57.0 million in 2018. LIORC
received dividends from IOC in 2019 totaling $110.1 million or $1.72 per share compared to $83.9 million or $1.31 per share in 2018. LIORC received an IOC
dividend in the fourth quarter of 2019 in the amount of
$44.6 million or $0.70 per share compared to $25.3 million or $0.40 per 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
million as compared to $128.8
million due 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 China and
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$104 per tonne in 2019
compared to the average price in 2018 of US$90 per tonne. The seaborne iron ore prices
were affected by a reduction of iron ore supply, predominantly from
Vale as a result of the collapse
of the tailings dam at Vale's
Corrego 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$93 per tonne in 2019
compared to US$69 per tonne in 2018.
The monthly Atlantic Blast Furnace 65% Fe pellet premium index (the
"pellet premium"), as quoted by Platts, averaged US$57 per 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$67 per 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$37 per tonne compared to
US$61 per 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$148 per tonne in 2019 compared to C$119 per 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 million in total as compared to $205 million in 2018. At the beginning of
2019 IOC forecasted that capital expenditures for 2019 would be in
the range of $225 million to
$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, 2020 Platts listed the
February price index for the Atlantic Blast Furnace 65% Fe pellet
premium at US$30 per tonne, up from
the January 2019 price of
$29 per 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 million in 2019. The
2020 forecast includes approximately $115
million of growth and development projects, as compared to
$70 million of 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 million to 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's total 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, Vale production levels
in 2020 are not expected to reach 2018 levels. Vale predicts 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,
Vale maintained 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, 2020 to February 13, 2020 was US$104, the same as the average of the 65% Fe
index for 2019. However, China continues 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, 2020 the average price
of the 65% Fe index dropped from US$106 to 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
cent per 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,
2020 LIORC 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 Newfoundland 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 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'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 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 East and the Asia-Pacific region.
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 million in 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 Newfoundland and Labrador. For the five years prior to 2019,
the average royalty net of the 20% tax had been $98.2 million per 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 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 2019,
Hollinger-Hanna received a total of $1.7
million in commissions from IOC (2018 - $1.5 million).
Quarterly Dividends
Dividends of $4.00 per share
including special dividends of $3.00
per share were declared in 2019 (2018 – dividends of $1.75 per 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, 2019 and
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,
2019 and 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, 2019 with 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 million
during 2019.
Cash balances consist of deposits in Canadian dollars and US
dollars with Canadian chartered banks. Accounts 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
cents commission 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 has a $30 million
revolving credit facility with a term ending September 18, 2022 with provision for annual
one-year extensions. No amount is currently drawn under this
facility leaving $30 million
available to provide for any capital required by IOC or
requirements of the Corporation.
Operating Results
The following table summarizes the Corporation's 2019 operating
results as compared to 2018 results (in '000's).
Revenue
|
2019
|
|
2018
|
IOC royalties (net
of 20% Newfoundland royalty tax)
|
$
|
140,360
|
|
$
|
103,047
|
IOC
commissions
|
1,687
|
|
1,486
|
Other
|
1,126
|
|
580
|
|
143,173
|
|
105,113
|
Expenses
|
|
|
|
Administrative
expenses
|
3,182
|
|
3,503
|
Income taxes expense
– current
|
42,000
|
|
30,521
|
|
45,182
|
|
34,024
|
Net Income before
undernoted items
|
97,991
|
|
71,089
|
|
|
|
|
Non cash revenue
(expense)
|
|
|
|
Equity earnings in
IOC
|
112,076
|
|
56,987
|
Deferred income
taxes
|
1,417
|
|
5,597
|
Amortization
|
(6,145)
|
|
(5,186)
|
|
107,348
|
|
57,398
|
|
|
|
|
Net income for the
year
|
205,339
|
|
128,487
|
Other comprehensive
gain
|
(2,760)
|
|
775
|
Comprehensive income
for the year
|
$
|
202,579
|
|
$
|
129,262
|
A summary of IOC's sales for calculating the royalty to LIORC in
millions of tonnes is as follows:
|
First
Quarter 2019
|
Second
Quarter 2019
|
Third
Quarter 2019
|
Fourth
Quarter 2019
|
Total
Year
2019
|
Total
Year
2018
|
|
|
|
|
|
|
|
Pellets
|
2.70
|
2.42
|
2.04
|
2.46
|
9.62
|
8.41
|
Concentrates(1)
|
0.83
|
2.14
|
2.46
|
2.08
|
7.51
|
6.70
|
|
|
|
|
|
|
|
Total(2)
|
3.53
|
4.57
|
4.51
|
4.54
|
17.14
|
15.10
|
|
|
(1)
|
Excludes third party
ore sales.
|
|
|
(2)
|
Totals may not add up
due to rounding.
|
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
million as compared to $128.8
million in 2018. The Shareholders' consolidated net income
for the year ended December 31, 2019
was $205.3 million or $3.21 per share compared to $128.5 million or $2.01 per share in 2018. Equity earnings from IOC
amounted to $112.1 million compared
to $57.0 million in 2018. The higher
royalty revenue, net income and equity earnings achieved in 2019 as
compared to 2018 were 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
China and reduced supply
predominantly from Vale.
IOC sells CFS based on the 65% Fe index. The average price for
the 65% Fe index increased 16% to US$104 per tonne in 2019 compared to the average
price in 2018 of US$90 per tonne. The
seaborne iron ore prices were affected by a reduction of iron ore
supply, predominantly from Vale as
a result of the collapse of the Brumadinho tailings dam and the
subsequent closure 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, declined to 12% in 2019 as compared to 30% in 2018.
The 62% Fe index averaged US$93 per
tonne in 2019 compared to US$69 per
tonne in 2018. The monthly Blast Furnace pellet premium, as quoted
by Platts, averaged US$57 per 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$67 per 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$37 per tonne compared to US$61 per 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$148 per tonne in 2019 compared to C$119 per 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.
Capital expenditures for IOC in 2019 were $294 million in total as compared to $205 million in 2018. At the beginning of
2019 IOC forecasted that capital expenditures for 2019 would be in
the range of $225 million to
$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.
Administration expenses for the year ended December 31, 2019 totaling $3.2 million include cash bonuses and grants of
restricted share units accrued to date totaling $0.3 million. Amortization expense for royalty
and commission interests increased $1.0
million for the year ended December
31, 2019, as 2018 production was negatively impacted by a
work stoppage in the second quarter.
Fourth quarter 2019 CFS sales were lower year-over-year by 22%,
and pellet sales were lower by 6% as a result of lower concentrate
production due to a derailment of an automated train and
unscheduled autogenous mill repairs and tailings flume repairs, as
well lower shipments from the terminal due to breakdowns on
reclaiming and ship-loading equipment. However, this was
partially offset by an increase in the realized sales price of CFS,
resulting in royalty income of $38.9
million for the quarter as compared to $45.9 million for the same period in 2018. Fourth
quarter 2019 cash flow from operations was $79.1 million or $1.24 per share compared to 2018 of $53.3 million or $0.83 per share. LIORC received an IOC dividend
in the fourth quarter of 2019 in the amount of $44.5 million or $0.70 per share (2018 - $25.3 million or $0.40 per share). Equity earnings from IOC
amounted to $23.7 million or
$0.37 per share in the fourth quarter
2019 compared to $17.8 million or
$0.28 per share for the same period
in 2018.
Selected Consolidated Financial Information
The following table sets out financial data from a Shareholder's
perspective for the three years ended December 31, 2019, 2018 and 2017.
|
Years Ended December
31
|
Description
|
2019
|
|
2018
|
|
2017
|
|
(in millions
except per share information)
|
Revenue
|
$178.3
|
|
$130.9
|
|
$158.6
|
Net Income
|
$205.3
|
|
$128.5
|
|
$157.3
|
Net Income per
Share
|
$3.21
|
|
$2.01
|
|
$2.46
|
Cash Flow from
Operations
|
$224.6(1)
|
|
$149.0(2)
|
|
$167.0(3)
|
Cash Flow from
Operations per Share
|
$3.51(1)
|
|
$2.32(2)
|
|
$2.61(3)
|
Total
Assets
|
$743.0
|
|
$763.6
|
|
$750.0
|
Dividends Declared
per Share
|
$4.00
|
|
$1.75
|
|
$2.65
|
Number of Common
Shares outstanding
|
64.0
|
|
64.0
|
|
64.0
|
|
|
|
|
|
|
(1) Includes IOC
dividends totaling $110.1 million or $1.72 per
Share.
|
|
|
|
|
|
(2) Includes IOC
dividends totaling $83.9 million or $1.31 per Share.
|
|
|
|
|
|
(3) Includes IOC
dividend totaling $76.7 million or $1.20 per Share.
|
|
|
|
|
|
The following table sets out quarterly revenue, net
income, cash flow and dividend data for 2019 and 2018. Due to
seasonal weather patterns the first and fourth quarters generally
have lower production and sales. Royalty revenues and equity
earnings in IOC track iron ore spot prices, which can be very
volatile. Dividends, included in cash flow, are declared and paid
by IOC irregularly according to the availability of
cash. There were limited sales in the second quarter of 2018
due to the labour strike.
|
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
|
|
|
|
|
|
|
|
|
Second
Quarter
|
$53.3
|
$61.1
|
$0.95
|
$47.8(2)
|
$0.75(2)
|
$0.86(2)
|
$0.90
|
|
|
|
|
|
|
|
|
Third
Quarter
|
$46.2
|
$57.5
|
$0.90
|
$72.6(3)
|
$1.13(3)
|
$1.02(3)
|
$1.00
|
|
|
|
|
|
|
|
|
Fourth
Quarter
|
$39.6
|
$47.4
|
$0.74
|
$79.1(4)
|
$1.24(4)
|
$1.03(4)
|
$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(5)
|
$0.93(5)
|
$1.30(5)
|
$0.55
|
|
|
|
|
|
|
|
|
Fourth
Quarter
|
$46.8
|
$43.4
|
$0.68
|
$53.3(6)
|
$0.83(6)
|
$0.79(6)
|
$0.60
|
|
|
(1)
|
"Adjusted cash
flow" (see below)
|
(2)
|
Includes $25.4
million IOC dividend.
|
(3)
|
Includes $40.1
million IOC dividend.
|
(4)
|
Includes $44.6
million IOC dividend.
|
(5)
|
Includes $58.6
million IOC dividend.
|
(6)
|
Includes $25.3
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 $3.51 for
2019 (2018 - $2.32). Cumulative
standardized cash flow from inception of the Corporation is
$30.98 per share and total cash
distributions since inception are $30.34 per 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
IFRS. The Directors believe that adjusted cash flow is a
useful analytical measure as it better reflects cash available for
distributions to Shareholders.
The following reconciles standardized cash flow from operating
activities to adjusted cash flow (in '000's).
|
2019
|
|
2018
|
Standardized cash
flow from operating activities
|
$224,564
|
|
$148,797
|
Changes in amounts
receivable, accounts and interest payable and
income taxes recoverable and payable
|
(16,459)
|
|
6,377
|
Adjusted cash
flow
|
$208,105
|
|
$155,174
|
Adjusted cash flow
per share
|
$3.25
|
|
$2.42
|
Disclosure Controls and Internal Control over Financial
Reporting
The President and CEO and the CFO are responsible for
establishing and maintaining disclosure controls and procedures and
internal control over financial reporting for the
Corporation. Two directors serve as directors of IOC and IOC
provides monthly reports on its operations to them. The
Corporation also relies on financial information provided by IOC,
including its audited financial statements, and other material
information provided to the President and CEO and the CFO by
officers of IOC. IOC is a private corporation, and its
financial statements are not publicly available.
The Directors are informed of all material information relating
to the Corporation and its subsidiary by the officers of the
Corporation on a timely basis and approve all core disclosure
documents including the Management Information Circular, the annual
and interim financial statements and related Management's
Discussion and Analyses, the Annual Information Form, any
prospectuses and all press releases. An evaluation of the
design and operating effectiveness of the Corporation's disclosure
controls and procedures was conducted under the supervision of the
CEO and CFO. Based on their evaluation, they concluded that
the Corporation's disclosure controls and procedures were effective
in ensuring that all material information relating to the
Corporation was accumulated and communicated for the year ended
December 31, 2019.
The President and CEO and the CFO have designed internal control
over financial reporting to provide reasonable assurance regarding
the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
IFRS. An evaluation of the design and operating effectiveness
of the Corporation's internal control over financial reporting was
conducted under the supervision of the CEO and CFO. Based on
their evaluation, they concluded that the Corporation's internal
control over financial reporting was effective and that there were
no material weaknesses therein for the year ended December 31, 2019.
The preparation of financial statements requires the
Corporation's management to make estimates and assumptions that
affect the reported amounts of the assets, liabilities, revenue and
expenses reported each period. Each of these estimates varies with
respect to the level of judgment involved and the potential impact
on the Corporation's reported financial results. Estimates are
deemed critical when the Corporation's financial condition, change
in financial condition or results of operations would be materially
impacted by a different estimate or a change in estimate from
period to period. By their nature, these estimates are subject to
measurement uncertainty, and changes in these estimates may affect
the consolidated financial statements of future periods.
No material change in the Corporation's internal control over
financial reporting occurred during the year ended December 31, 2019.
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, 2020 Platts listed the
February price index for the Atlantic Blast Furnace 65% Fe pellet
premium at US$30 per tonne, up from
the January 2019 price of
$29 per 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 million in 2019. The
2020 forecast includes approximately $115
million of growth and development projects, as compared to
$70 million of 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 million to 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's total 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, Vale production levels
in 2020 are not expected to reach 2018 levels. Vale predicts 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,
Vale maintained 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, 2020 to February 13, 2020 was US$104, the same as the average of the 65% Fe
index for 2019. However, China continues to represent over 70% of the
total demand for seaborne iron ore and it is unclear what the
long-term effect of COVID-19 will be on iron ore prices. From
January 23, 2020 (the first day of
widespread concern about COVID-19) to February 13, 2020 the average price of the 65% Fe
index dropped from US$106 to
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.
Forward-Looking Statements
This report may contain "forward-looking" statements that
involve risks, uncertainties and other factors that may cause the
actual results, performance or achievements to be materially
different from any future results, performance or achievements
expressed or implied by such forward-looking statements. Words such
as "may", "will", "expect", "believe", "plan", "intend", "should",
"would", "anticipate" and other similar terminology are intended to
identify forward-looking statements. These statements reflect
current assumptions and expectations regarding future events and
operating performance as of the date of this report.
Forward-looking statements involve significant risks and
uncertainties, should not be read as guarantees of future
performance or results, and will not necessarily be accurate
indications of whether or not such results will be achieved. A
number of factors could cause actual results to vary significantly,
including iron ore price and volume volatility, exchange rates, the
performance of IOC, market conditions in the steel industry, mining
risks and insurance, relationships with aboriginal groups, changes
affecting IOC's customers, competition from other iron ore
producers, estimates of reserves and resources and government
regulation and taxation. A discussion of these factors is
contained in LIORC's annual information form dated March 5, 2020 under the heading, "Risk Factors".
Although the forward-looking statements contained in this report
are based upon what management of LIORC believes are reasonable
assumptions, LIORC cannot assure investors that actual results will
be consistent with these forward-looking statements. These
forward-looking statements are made as of the date of this report
and LIORC assumes no obligation, except as required by law, to
update any forward-looking statements to reflect new events or
circumstances. This report should be viewed in conjunction with
LIORC's other publicly available filings, copies of which can be
obtained electronically on SEDAR at www.sedar.com.
Additional information
Additional information relating to the Corporation, including
the Annual Information Form, is on SEDAR at www.sedar.com.
Additional information is also available on the Corporation's
website at www.labradorironore.com.
John F. Tuer
President and Chief Executive Officer
Toronto, Ontario
March 5, 2020
LABRADOR IRON ORE
ROYALTY CORPORATION
|
CONSOLIDATED
STATEMENTS OF FINANCIAL POSITION
|
|
|
|
|
As
at
|
|
|
December
31,
|
|
December
31,
|
(in thousands of
Canadian dollars)
|
2019
|
|
2018
|
|
|
|
Assets
|
|
|
|
Current
Assets
|
|
|
|
|
Cash and short-term
investments
|
$
|
77,859
|
|
$
|
80,495
|
|
Amounts
receivable
|
36,156
|
|
46,548
|
Total Current
Assets
|
114,015
|
|
127,043
|
|
|
|
|
|
Non-Current
Assets
|
|
|
|
|
Iron Ore Company of
Canada ("IOC")
|
|
|
|
|
royalty
and commission interests
|
247,701
|
|
253,846
|
|
Investment in
IOC
|
381,310
|
|
382,704
|
Total Non-Current
Assets
|
629,011
|
|
636,550
|
|
|
|
|
|
Total
Assets
|
$
|
743,026
|
|
$
|
763,593
|
|
|
|
|
|
|
|
|
|
|
Liabilities and
Shareholders' Equity
|
|
|
|
Current
Liabilities
|
|
|
|
|
Accounts
payable
|
$
|
7,939
|
|
$
|
9,969
|
|
Dividend
payable
|
67,200
|
|
38,400
|
|
Taxes
payable
|
10,710
|
|
2,613
|
Total Current
Liabilities
|
85,849
|
|
50,982
|
|
|
|
|
|
Non-Current
Liabilities
|
|
|
|
|
Deferred income
taxes
|
119,840
|
|
121,760
|
Total
Liabilities
|
205,689
|
|
172,742
|
|
|
|
|
|
Shareholders'
Equity
|
|
|
|
|
Share
capital
|
317,708
|
|
317,708
|
|
Retained
earnings
|
230,005
|
|
280,759
|
|
Accumulated other
comprehensive loss
|
(10,376)
|
|
(7,616)
|
|
|
537,337
|
|
590,851
|
|
|
|
|
|
Total Liabilities and
Shareholders' Equity
|
$
|
743,026
|
|
$
|
763,593
|
|
|
|
|
|
|
|
|
|
|
Approved by the
Directors,
|
|
|
|
|
|
|
|
|
("Signed")
|
("Signed")
|
|
|
John F.
Tuer
|
Patricia M.
Volker
|
|
|
Director
|
Director
|
|
|
LABRADOR IRON ORE
ROYALTY CORPORATION
|
CONSOLIDATED
STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
|
|
|
|
For the Year
Ended
|
|
December
31,
|
(in thousands of
Canadian dollars except for per share information)
|
2019
|
|
2018
|
|
|
Revenue
|
|
|
|
IOC
royalties
|
$
|
175,450
|
|
$
|
128,809
|
IOC
commissions
|
1,687
|
|
1,486
|
Interest and other
income
|
1,126
|
|
580
|
|
178,263
|
|
130,875
|
Expenses
|
|
|
|
Newfoundland royalty
taxes
|
35,090
|
|
25,762
|
Amortization of
royalty and commission interests
|
6,145
|
|
5,186
|
Administrative
expenses
|
3,182
|
|
3,503
|
|
44,417
|
|
34,451
|
|
|
|
|
Income before
equity earnings and income taxes
|
133,846
|
|
96,424
|
Equity earnings in
IOC
|
112,076
|
|
56,987
|
|
|
|
|
Income before
income taxes
|
245,922
|
|
153,411
|
|
|
|
|
Provision for
income taxes
|
|
|
|
Current
|
42,000
|
|
30,521
|
Deferred
|
(1,417)
|
|
(5,597)
|
|
40,583
|
|
24,924
|
|
|
|
|
Net income for the
year
|
205,339
|
|
128,487
|
|
|
|
|
Other
comprehensive (loss) income
|
|
|
|
Share of other
comprehensive (loss) income of IOC that will not
be
|
|
|
|
reclassified
subsequently to profit or loss (net of income taxes
|
|
|
|
of 2019 - $487; 2018 -
$137)
|
(2,760)
|
|
775
|
|
|
|
|
Comprehensive
income for the year
|
$
|
202,579
|
|
$
|
129,262
|
|
|
|
|
Net income per
share
|
$3.21
|
|
$2.01
|
LABRADOR IRON ORE
ROYALTY CORPORATION
|
|
|
|
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year
Ended
|
|
December
31,
|
(in thousands of
Canadian dollars)
|
2019
|
|
2018
|
|
|
Net inflow
(outflow) of cash related
|
|
|
|
to the following
activities
|
|
|
|
|
|
|
|
Operating
|
|
|
|
Net income for the
period
|
$
|
205,339
|
|
$
|
128,487
|
Items not affecting
cash:
|
|
|
|
Equity earnings in
IOC
|
(112,076)
|
|
(56,987)
|
Current income
taxes
|
42,000
|
|
30,521
|
Deferred income
taxes
|
(1,417)
|
|
(5,597)
|
Amortization of
royalty and commission interests
|
6,145
|
|
5,186
|
Common share dividend
from IOC
|
110,114
|
|
83,886
|
Change in amounts
receivable
|
10,392
|
|
(4,456)
|
Change in accounts
payable
|
(2,030)
|
|
1,368
|
Income taxes
paid
|
(33,903)
|
|
(33,611)
|
Cash flow from
operating activities
|
224,564
|
|
148,797
|
|
|
|
|
Financing
|
|
|
|
Dividends paid to
shareholders
|
(227,200)
|
|
(108,800)
|
Cash flow used in
financing activities
|
(227,200)
|
|
(108,800)
|
|
|
|
|
(Decrease)
increase in cash, during the year
|
(2,636)
|
|
39,997
|
|
|
|
|
Cash, beginning of
year
|
80,495
|
|
40,498
|
|
|
|
|
Cash, end of
year
|
$
|
77,859
|
|
$
|
80,495
|
LABRADOR IRON ORE
ROYALTY CORPORATION
|
|
|
|
|
CONSOLIDATED
STATEMENTS OF CHANGES IN EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
other
|
|
|
Share
|
Retained
|
comprehensive
|
|
(in thousands of
Canadian dollars)
|
capital
|
earnings
|
loss
|
Total
|
|
|
|
|
|
|
|
Balance as at
December 31, 2017
|
$
|
317,708
|
$
|
264,272
|
$
|
(8,391)
|
$
|
573,589
|
Net income for the
year
|
-
|
128,487
|
-
|
128,487
|
Dividends declared to
shareholders
|
-
|
(112,000)
|
-
|
(112,000)
|
Share of other
comprehensive income from investment in IOC (net of
taxes)
|
-
|
-
|
775
|
775
|
Balance as at
December 31, 2018
|
$
|
317,708
|
$
|
280,759
|
$
|
(7,616)
|
$
|
590,851
|
|
|
|
|
|
Balance as at
December 31, 2018
|
$
|
317,708
|
$
|
280,759
|
$
|
(7,616)
|
$
|
590,851
|
Adjustment on initial
application of IFRS 16
|
|
(93)
|
|
(93)
|
Net income for the
year
|
-
|
205,339
|
-
|
205,339
|
Dividends declared to
shareholders
|
-
|
(256,000)
|
-
|
(256,000)
|
Share of other
comprehensive loss from investment in IOC (net of taxes)
|
-
|
-
|
(2,760)
|
(2,760)
|
Balance as at
December 31, 2019
|
$
|
317,708
|
$
|
230,005
|
$
|
(10,376)
|
$
|
537,337
|
The complete consolidated financial statements for the year
ended December 31, 2019, including
the notes thereto, are posted on sedar.com and
labradorironore.com.
SOURCE Labrador Iron Ore Royalty Corporation