TORONTO, March 8, 2018 /CNW/ - Labrador Iron Ore Royalty
Corporation ("LIORC") (TSX: LIF) announced the results of its
operations for the year ended December 31,
2017.
To the Holders of Common Shares of Labrador Iron Ore Royalty
Corporation
80 Years in Labrador West
Labrador Iron Ore Royalty Corporation has been involved in
Labrador West for 80 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, 2017 was $167.0 million or $2.61 per share as compared to $63.5 million or $0.99 per share for 2016.
The Shareholders' consolidated net income for the year ended
December 31, 2017 was $157.3 million or $2.46 per share compared to $78.2 million or $1.22 per share in 2016. Equity earnings from
Iron Ore Company of Canada ("IOC")
amounted to $74.3 million compared to
$24.7 million in 2016. LIORC received
an IOC dividend in the fourth quarter of 2017 in the amount of
$19.3 million or $0.30 per share compared to $15.1 million or $0.23 per share in the fourth quarter of 2016.
IOC's 2017 iron ore sales for calculating the royalty to LIORC
totaled 19.2 million tonnes compared to 18.2 million tonnes in
2016. Royalty revenue increased to $156.4
million as compared to $113.1
million in 2016.
The cash flow from operations, equity earnings and net income
for the year were higher than last year mainly due to improved
prices for concentrate, particularly in the first quarter of 2017,
high premiums for concentrate and pellets, plus higher concentrate
and pellet sales tonnages. Prices and premiums in 2017 were higher
than most forecasts with the Chinese governments enacting and
enforcing measures to reduce pollution; these measures favoured
higher quality products such as the concentrate for sale ("CFS")
and pellets produced by IOC.
The average index price for 62% fines increased 22% year-on-year
to US$71 per tonne CFR China in 2017.
The pellet premiums also increased year-on-year, particularly in
the last few months of 2017, approaching approximately US$60 per tonne in October and November. The
average price realized by IOC for CFS and pellets, FOB Sept-Îles,
was approximately C$108 per tonne in
2017 compared to C$80 per tonne in
2016, an increase of 35%. The higher premiums for 65% Fe
concentrate and pellets were driven by the changes in environmental
policy by the Chinese governments, which caused Chinese steel
producers to increase the usage of higher value-in-use iron ore,
such as the concentrate and pellets produced by IOC. With improving
pellet premiums in 2017, IOC again focused on maximizing pellet
production to the extent possible, given that two pellet lines were
refurbished in 2017 with none in 2016. The sales tonnage of pellets
in 2017, for calculating the royalty to LIORC, was 4% higher than
in 2016. The CFS tonnages in 2017 were higher than in 2016 by
6%.
Iron Ore Company of Canada Operations
Production
Total concentrate production of 20.2 million tonnes in 2017 was
5% higher as compared to 2016 of 19.2 million tonnes, but below the
22 million tonnes objective for 2017. In the fourth quarter of
2017, IOC experienced two site-wide power outages, weather
conditions required the suspension of pit mining activities due to
poor visibility, and the conveyor belt of the parallel ore delivery
system split along several kilometers. The parallel ore delivery
system ("PODS") was not operational for 21 days in December while
repairs to the conveyor were undertaken. Quarterly concentrate
production records were set in the first and third quarters of 2017
which drove the 5% improvement in concentrate production in 2017.
Pellet production was 7% higher in 2017 as compared to 2016. While
two pellet lines were down for several weeks for refurbishment, the
annual pellet production improved with increased throughput being
achieved in both lines once they returned to service.
The cost per tonne of concentrate produced declined by 5% in
2017 as compared to 2016. The total cash cost in Canadian dollars
was well controlled and increased by only 2.4%. The overall IOC
employee productivity improved by 3% in 2017.
Sales as Reported for the LIORC Royalty
Total iron ore tonnage sold by IOC (CFS plus pellets) of 19.2
million tonnes was 5% above the total sales tonnage in 2016. The
pellet sales tonnage was 4% higher and CFS sales tonnage was 6%
higher than in 2016. The increase in the sales of both pellets and
CFS was achieved despite the repair over a 34-day period in July
and August on the dumper for the rail wagons that transport the
iron ore products to the port at Sept Isles. IOC crews are to be
commended for the dumper repair work and the reduction of the high
concentrate inventories at Carol Lake at the end of the third
quarter to normal levels by year end.
As noted above, pellet premiums were strong in 2017 and IOC
maximized pellet production, while still meeting CFS sales
commitments.
Capital Expenditures
Capital expenditure for IOC in 2017 was $265 million in total as compared to $99 million in 2016. The capital program
for 2016 was set when the price outlook was poor and the expansion
program had been largely completed. Therefore the capital budget
was set for minimal sustaining capital. For 2017, the total capital
budget was increased to $245 million
as the price outlook in December 2016
was much improved. The 2017 budget included some $40 million as development capital for the
Wabush 3 pit (total budget
$79 million in 2017 and 2018). The
sustaining capital included the refurbishment of the No. 2 and 5
pellet lines, capital to improve air emissions from the pellet
plant, the refurbishment of track and the remediation of high wall
rock cuts along the route of the Quebec North Shore and Labrador
Railway. The planned capital programs were executed largely on
budget. In late 2017 IOC purchased some $20
million of leased equipment to reduce future operating costs
which added to the budget.
Outlook
Many forecasts for seaborne iron ore, 62% Fe, CFR China, are for
the price to decline and average below US$60 per tonne in 2018. Reportedly, the Office
of the Chief Economist of Australia predicted in January 2018 that iron ore prices will average
$53 per tonne (FOB Australia) in
2018, and $49 in 2019. Most forecasts
note the anticipated increased supply, particularly from
Vale's S11D mine in Brazil. It is also increasing likely that the
Samarco operation in Brazil could
re-open in late 2018 or in 2019, which would likely adversely
affect pellet premiums. However, some forecasts note the Chinese
policies on pollution and the strong steel margins for Chinese
producers as being supportive of iron ore prices and premiums for
higher grade iron ore.
Rio Tinto has released guidance for 2018 of between 11.5 million
to 12.5 million tonnes for their 58.7% share of IOC's saleable
production (pellets and CFS tonnage). This would result in 19.6
million to 21.3 million tonnes of saleable production on a 100%
basis. With the strong pellet premiums, IOC will continue to
prioritize pellet production in 2018. The IOC objective is 22.2
million tonnes of concentrate production with sales of
approximately 12.5 million tonnes of pellets and 8.4 million tonnes
of CFS in 2018.
The capital expenditures for 2018 are expected to be
$220 million, lower than the
$265 million in 2017. The
refurbishment of one induration machine in the pellet plant is
planned for 2018. Production of ore from the Wabush 3 pit is on track as planned for
July 2018. The six-year collective
agreements with the United Steelworkers of America union employees
expired on February 28, 2018. IOC
expects to earn revenue from hauling product from the Bloom Lake
mine of Quebec Iron Ore Inc., with mine production planned to start
March 2018.
The price of iron ore early in 2018 has again exceeded
forecasts. If the improved prices and premiums continue in 2018,
IOC achieves the production guidance, and the Canadian dollar does
not appreciate materially against the US dollar, the 2018 outlook
for LIORC will be continued strong cash flows.
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 8, 2018
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 Limited, 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.
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.
Two of the eight Directors sit on the board of IOC and the five
independent Directors serve as members of the Audit, Nominating and
Compensation Committees. Scotia Managed Companies Administration
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 2017 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-Iles, Quebec.
IOC has ore reserves sufficient for approximately 25 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, Quebec via its wholly-owned Quebec North Shore
and Labrador Railway, 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 2017 sales totaled 19.0 million tonnes, comprised of 10.4
million tonnes of iron ore pellets and 8.6 million tonnes of iron
ore concentrate. Production in 2017 was 10.5 million
tonnes of pellets and 8.5 million tonnes of CFS. IOC generated ore
sales revenues (excluding third party ore sales) of $2,249 million in 2017 (2016 - $1,620 million).
Selected IOC Financial Information
|
2017
|
2016
|
2015
|
2014
|
2013
|
|
($ in
millions)
|
Operating
Revenues
|
2,315
|
1,676
|
1,495
|
1,794
|
2,194
|
Cash Flow from
Operating
Activities
|
923
|
456
|
267
|
455
|
781
|
|
|
|
|
|
|
Net Income
|
499
|
170
|
21
|
273
|
549
|
Capital
Expenditures
|
256
|
99
|
143
|
187
|
275
|
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 Newfoundland and Labrador. For the five years prior to 2017,
the average royalty net of the 20% tax had been $94.2 million per year and in 2017 the net
royalty was $125.1 million (2016 -
$90.5 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 2017,
Hollinger-Hanna received a total of $1.9
million in commissions from IOC (2016 - $1.8 million).
Quarterly Dividends
Dividends of $2.65 per share
including special dividends of $1.65
per share were declared in 2017 (2016 – dividends of $1.00 per share). These dividends were allocated
as follows:
|
|
|
|
Period
Ended
|
Payment
Date
|
Dividend
Income
per
Share
|
Total
Dividend
($
Million)
|
|
|
|
|
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
|
|
|
|
|
Mar. 31,
2016
|
Apr. 25,
2016
|
$0.25
|
$16.0
|
Jun. 30,
2016
|
Jul. 25,
2016
|
0.25
|
16.0
|
Sep. 30,
2016
|
Oct. 25,
2016
|
0.25
|
16.0
|
Dec. 31,
2016
|
Jan. 25,
2017
|
0.25
|
16.0
|
|
|
|
|
Dividend to
Shareholders - 2016
|
$ 1.00
|
$64.0
|
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, 2017 and
2016. This discussion should be read in conjunction with the
consolidated financial statements of the Corporation and notes
thereto for the years ended December 31,
2017 and 2016. 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 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.
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 $40.5 million
(2016 - $23.9 million) in cash as at
December 31, 2017 with total current
assets of $82.6 million (2016 -
$62.9 million). The Corporation has
working capital of $33.1 million
(2016 - $38.8 million). The
Corporation's cash flow from operations was $167.0 million (2016 - $63.5 million) and dividends paid during the year
were $150.4 million, resulting in
cash balances increasing by $16.6 million during 2017.
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 Company 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 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 million
revolving credit facility with a term ending September 18, 2020 with provision for annual
one-year extensions. No amount is currently drawn under this
facility leaving $50.0 million
available to provide for any capital required by IOC or
requirements of the Corporation.
Operating Results
The following table summarizes the Corporation's 2017 operating
results as compared to 2016 results (in '000's).
Revenue
|
2017
|
|
2016
|
IOC royalties (net
of 20% Newfoundland royalty tax)
|
$
|
125,094
|
|
$
|
90,465
|
IOC
commissions
|
1,885
|
|
1,793
|
Other
|
374
|
|
233
|
|
127,353
|
|
92,491
|
Expenses
|
|
|
|
Administrative
expenses
|
2,938
|
|
2,743
|
Income taxes expense
– current
|
37,283
|
|
26,821
|
|
40,221
|
|
29,564
|
Net Income before
undernoted items
|
87,132
|
|
62,927
|
Non cash revenue
(expense)
|
|
|
|
Equity earnings in
IOC
|
74,300
|
|
24,723
|
Deferred income
taxes
|
2,204
|
|
(4,343)
|
Amortization
|
(6,352)
|
|
(5,134)
|
|
70,152
|
|
15,246
|
|
|
|
|
Net income for the
year
|
157,284
|
|
78,173
|
Other comprehensive
gain
|
2,060
|
|
699
|
Comprehensive income
for the year
|
$
|
159,344
|
|
$
|
78,872
|
A summary of IOC's sales for calculating the royalty to LIORC in
millions of tonnes is as follows:
|
First
Quarter 2017
|
Second
Quarter 2017
|
Third
Quarter 2017
|
|
Fourth
Quarter
2017
|
|
Total Year 2017
|
|
Total Year 2016
|
Pellets
|
2.48
|
2.44
|
2.78
|
|
2.78
|
|
10.48
|
|
10.06
|
Concentrates(1)
|
2.19
|
1.60
|
2.23
|
|
2.66
|
|
8.67
|
|
8.17
|
|
|
|
|
|
|
|
|
|
|
Total
|
4.67
|
4.04
|
5.00
|
|
5.44
|
|
19.15
|
|
18.23
|
(1) Excludes
third party ore sales.
|
|
|
|
|
|
|
|
(2) Totals may
not add up due to rounding.
|
|
|
|
|
|
|
|
IOC's 2017 iron ore sales for calculating the royalty to LIORC,
totaled 19.2 million tonnes compared to 18.2 million tonnes in
2016. Royalty revenue increased to $156.4
million as compared to $113.1
million in 2016. Equity earnings from IOC amounted to
$74.3 million compared to
$24.7 million in 2016. The higher
royalty revenue and equity earnings achieved in 2017 as compared to
2016 was mainly due to improved prices for concentrate,
particularly in the first quarter of 2017, high premiums for
concentrate and pellets, plus higher concentrate and pellet sales
tonnages. Prices and premiums were higher than most forecasts with
the Chinese governments enacting and enforcing measures to reduce
pollution, which favoured higher value-in-use products, such as the
concentrates and pellets produced by IOC.
The average index price for 62% fines increased 22% year-on-year
to US$71 per tonne CFR China in 2017.
The pellet premiums also increased year-on- year, particularly in
the last few months of 2017, approaching approximately US$60 per tonne in October and November. The
average price realized by IOC for CFS and pellets, FOB Sept-Îles,
was approximately C$108 per tonne in
2017 compared to C$80 per tonne in
2016, an increase of 35%. The higher premiums for 65% Fe
concentrate and pellets were driven by the changes in environmental
policy by the Chinese governments, which caused Chinese steel
producers to increase the usage of higher value-in-use iron ore,
such as the concentrate and pellets produced by IOC. With improving
pellet premiums in 2017, IOC again focused on maximizing pellet
production to the extent possible, given that two pellet lines were
refurbished in 2017 with none in 2016. The sales tonnage of pellets
in 2017, for calculating the royalty to LIORC, was 4% higher than
in 2016. The CFS tonnages in 2017 were higher than in 2016 by
6%.
Capital expenditure for IOC in 2017 was $265 million in total as compared to $99 million in 2016. The capital program
for 2016 was set when the price outlook was poor and the expansion
program had been largely completed. Therefore the capital budget
was set for minimal sustaining capital. For 2017, the total capital
budget was increased to $245 million
as the price outlook in December 2016
was much improved. The 2017 budget included some $40 million as development capital for the
Wabush 3 pit (total budget
$79 million in 2017 and 2018). The
sustaining capital included the refurbishment of the No. 2 and 5
pellet lines, capital to improve air emissions from the pellet
plant, the refurbishment of track and the remediation of high wall
rock cuts along the route of the Quebec North Shore and Labrador
Railway. The planned capital programs were executed largely on
budget. In late 2017 IOC purchased some $20
million of leased equipment to reduce future operating costs
which added to the budget.
The Shareholders' consolidated net income for the year ended
December 31, 2017 was $157.3 million or $2.46 per share compared to $78.2 million or $1.22 per share in 2016. Equity earnings
from IOC amounted to $74.3 million
compared to $24.7 million in 2016.
The main cause of IOC's higher earnings for 2017 as compared to
2016 was the improved iron ore prices and premiums, and increased
sales tonnages.
Administrative expenses for the year ended December 31, 2017 include a non-cash foreign
exchange loss of $0.3 million on the
conversion of the dividend received from IOC in December 2016. Amortization expense for royalty
and commission interests increased $1.2
million for the year ended December
31, 2017 due to an increased amortization rate reflecting
lower estimated total mineral resources over the prior year.
Fourth quarter 2017 CFS sales were much improved year-over-year,
but pellet sales were lower as a result of the refurbishment of the
No. 5 pellet line. However, the achieved sales prices of CFS and
pellets were significantly improved, resulting in royalty income of
$40.0 million for the quarter as
compared to $38.0 million for the
same period in 2016. Fourth quarter 2017 cash flow from operations
was $39.6 million or $0.62 per share compared to 2016 of $28.3 million or $0.44 per share. LIORC received an IOC dividend
in the fourth quarter of 2017 in the amount of $19.3 million or $0.30 per share (2016 - $15.1 million or $0.23 per share). Equity earnings from IOC
amounted to $16.6 million in the
fourth quarter 2017 compared to $18.0
million for the same period in 2016 in part as a result of a
decline in the gross margin owing to higher product unit costs due
to lower production overall for the quarter offset by higher iron
ore prices and premiums achieved and increased sales tonnages.
Selected Consolidated Financial Information
The following table sets out financial data from a Shareholder's
perspective for the three years ended December 31, 2017, 2016 and 2015.
|
Years Ended December
31
|
Description
|
2017
|
2016
|
2015
|
|
(in millions
except per share information)
|
Revenue
|
$158.6
|
$115.1
|
$101.7
|
Net Income
|
$157.3
|
$78.2
|
$54.7
|
Net Income per
Share
|
$2.46
|
$1.22
|
$0.85
|
Cash Flow from
Operations
|
$167.0(1)
|
$63.5(2)
|
$59.9
|
Cash Flow from
Operations per Share
|
$2.61(1)
|
$0.99(2)
|
$0.94
|
Total
Assets
|
$750.0
|
$737.0
|
$714.1
|
Dividends Declared
per Share
|
$2.65
|
$1.00
|
$1.00
|
Number of Common
Shares outstanding
|
64.0
|
64.0
|
64.0
|
|
|
|
|
(1) Includes IOC
dividends totaling $76.7 million or $1.20 per Share.
|
(2) Includes IOC
dividend totaling $15.1 million or $0.23 per Share.
|
The following table sets out quarterly revenue, net
income, cash flow and dividend data for 2017 and 2016. 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.
|
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)
|
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
|
$7.5
|
$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 $15.2
million IOC dividend.
|
(4)
|
Includes $32.2
million IOC dividend.
|
(5)
|
Includes $19.3
million IOC dividend.
|
(6)
|
Includes $15.1
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 $2.61 for
2017 (2016 - $0.99). Cumulative
standardized cash flow from inception of the Corporation is
$25.15 per share and total cash
distributions since inception are $24.59 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).
|
2017
|
|
2016
|
Standardized cash
flow from operating activities
|
$166,960
|
|
$63,473
|
Changes in amounts
receivable, accounts and interest payable and
income taxes recoverable and payable
|
(3,116)
|
|
14,570
|
Adjusted cash
flow
|
$163,844
|
|
$78,044
|
Adjusted cash flow
per share
|
$2.56
|
|
$1.22
|
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, the Executive Vice
President and Secretary 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, 2017.
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, 2017.
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, 2017.
Outlook
Many forecasts for seaborne iron ore, 62% Fe, CFR China, are for
the price to decline and average below US$60 per tonne in 2018. Reportedly, the Office
of the Chief Economist of Australia predicted in January 2018 that iron ore prices will average
$53 per tonne (FOB Australia) in
2018, and $49 in 2019. Most forecasts
note the anticipated increased supply, particularly from
Vale's S11D mine in Brazil. It is also increasing likely that the
Samarco operation in Brazil could
re-open in late 2018 or in 2019, which would likely adversely
affect pellet premiums. However, some forecasts note the Chinese
policies on pollution and the strong steel margins for Chinese
producers as being supportive of iron ore prices and premiums for
higher grade iron ore.
Rio Tinto has released guidance for 2018 of between 11.5 million
to 12.5 million tonnes for their 58.7% share of IOC'saleable
production (pellets and CFS tonnage). This would result in 19.6
million to 21.3 million tonnes of saleable production on a 100%
basis. With the strong pellet premiums, IOC will continue to
prioritize pellet production in 2018. The IOC objective is 22.2
million tonnes of concentrate production with sales of
approximately 12.5 million tonnes of pellets and 8.4 million tonnes
of CFS in 2018.
The capital expenditures for 2018 are expected to be
$220 million, lower than the
$265 million in 2017. The
refurbishment of one induration machine in the pellet plant is
planned for 2018. Production of ore from the Wabush 3 pit is on track as planned for
July 2018. The six-year collective
agreements with the United Steelworkers of America union employees
expired on February 28, 2018. IOC
expects to earn revenue from hauling product from the Bloom Lake
mine of Quebec Iron Ore Inc., with mine production planned to start
March 2018.
The price of iron ore early in 2018 has again exceeded
forecasts. If the improved prices and premiums continue in 2018,
IOC achieves the production guidance, and the Canadian dollar does
not appreciate materially against the US dollar, the 2018 outlook
for LIORC will be continued strong cash flows.
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 8, 2018 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.
William H. McNeil
President and Chief Executive Officer
Toronto, Ontario
March 8, 2018
LABRADOR IRON ORE
ROYALTY CORPORATION
|
CONSOLIDATED
STATEMENTS OF FINANCIAL POSITION
|
|
|
|
|
|
As
at
|
|
|
December
31,
|
(in thousands of
Canadian dollars)
|
2017
|
|
2016
|
|
|
|
Assets
|
|
|
|
Current
Assets
|
|
|
|
|
Cash
|
$
|
40,498
|
|
$
|
23,937
|
|
Amounts
receivable
|
42,092
|
|
38,487
|
|
Income taxes
recoverable
|
-
|
|
490
|
Total Current
Assets
|
82,590
|
|
62,914
|
|
|
|
|
|
Non-Current
Assets
|
|
|
|
|
Iron Ore Company of
Canada ("IOC")
|
|
|
|
|
|
royalty and
commission interests
|
259,032
|
|
265,384
|
|
Investment in
IOC
|
408,691
|
|
408,680
|
Total Non-Current
Assets
|
667,723
|
|
674,064
|
|
|
|
|
|
Total
Assets
|
$
|
750,313
|
|
$
|
736,978
|
|
|
|
|
|
|
|
|
|
|
Liabilities and
Shareholders' Equity
|
|
|
|
Current
Liabilities
|
|
|
|
|
Accounts
payable
|
$
|
8,601
|
|
$
|
8,073
|
|
Dividend
payable
|
35,200
|
|
16,000
|
|
Taxes
payable
|
5,703
|
|
-
|
Total Current
Liabilities
|
49,504
|
|
24,073
|
|
|
|
|
|
Non-Current
Liabilities
|
|
|
|
|
Deferred income
taxes
|
127,220
|
|
129,060
|
Total
Liabilities
|
176,724
|
|
153,133
|
|
|
|
|
|
Shareholders'
Equity
|
|
|
|
|
Share
capital
|
317,708
|
|
317,708
|
|
Retained
earnings
|
264,272
|
|
276,588
|
|
Accumulated other
comprehensive loss
|
(8,391)
|
|
(10,451)
|
|
|
573,589
|
|
583,845
|
|
|
|
|
|
Total Liabilities and
Shareholders' Equity
|
$
|
750,313
|
|
$
|
736,978
|
|
|
|
Approved by the
Directors,
|
|
|
|
|
(Singed)
|
(Signed)
|
William H.
McNeil
|
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)
|
2017
|
|
2016
|
|
|
|
Revenue
|
|
|
|
|
IOC
royalties
|
$
|
156,367
|
|
$
|
113,081
|
|
IOC
commissions
|
1,885
|
|
1,793
|
|
Interest and other
income
|
374
|
|
233
|
|
|
158,626
|
|
115,107
|
Expenses
|
|
|
|
|
Newfoundland royalty
taxes
|
31,273
|
|
22,616
|
|
Amortization of
royalty and commission interests
|
6,352
|
|
5,134
|
|
Administrative
expenses
|
2,938
|
|
2,743
|
|
|
40,563
|
|
30,493
|
|
|
|
|
|
Income before
equity earnings and income taxes
|
118,063
|
|
84,614
|
Equity earnings in
IOC
|
74,300
|
|
24,723
|
Income before
income taxes
|
192,363
|
|
109,337
|
|
|
|
|
|
Provision for
income taxes
|
|
|
|
|
Current
|
37,283
|
|
26,821
|
|
Deferred
|
(2,204)
|
|
4,343
|
|
|
35,079
|
|
31,164
|
|
|
|
|
|
Net income for the
year
|
157,284
|
|
78,173
|
|
|
|
|
|
Other
comprehensive income
|
|
|
|
|
Share of other
comprehensive income of IOC that will not be
|
|
|
|
|
reclassified
subsequently to profit or loss (net of income
taxes
|
|
|
|
|
of 2017 - $364; 2016
- $47)
|
2,060
|
|
699
|
|
|
|
|
|
Comprehensive
income for the year
|
$
|
159,344
|
|
$
|
78,872
|
|
|
|
|
|
Net income per
share
|
$
|
2.46
|
|
$
|
1.22
|
LABRADOR IRON ORE
ROYALTY CORPORATION
|
|
|
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
|
For the Year
Ended
|
|
|
|
December
31,
|
(in thousands of
Canadian dollars)
|
2017
|
|
2016
|
|
|
|
|
|
Net inflow
(outflow) of cash related
|
|
|
|
|
to the following
activities
|
|
|
|
|
|
|
|
|
|
Operating
|
|
|
|
|
Net income for the
period
|
$
|
157,284
|
|
$
|
78,173
|
|
Items not affecting
cash:
|
|
|
|
|
|
Equity earnings in
IOC
|
(74,300)
|
|
(24,723)
|
|
|
Current income
taxes
|
37,283
|
|
26,821
|
|
|
Deferred income
taxes
|
(2,204)
|
|
4,343
|
|
|
Amortization of
royalty and commission interests
|
6,352
|
|
5,134
|
|
Common share dividend
from IOC
|
76,713
|
|
15,117
|
|
Change in amounts
receivable
|
(3,605)
|
|
(17,979)
|
|
Change in accounts
payable
|
528
|
|
3,658
|
|
Income taxes
paid
|
(31,090)
|
|
(27,071)
|
|
Cash flow from
operating activities
|
166,961
|
|
63,473
|
|
|
|
|
|
|
Financing
|
|
|
|
|
Dividends paid to
shareholders
|
(150,400)
|
|
(64,000)
|
|
Cash flow used in
financing activities
|
(150,400)
|
|
(64,000)
|
|
|
|
|
|
|
Increase
(decrease) in cash, during the year
|
16,561
|
|
(527)
|
|
|
|
|
Cash, beginning of
year
|
23,937
|
|
24,464
|
|
|
|
|
|
|
Cash, end of
year
|
$
|
40,498
|
|
$
|
23,937
|
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, 2015
|
$
|
317,708
|
$
|
262,415
|
$
|
(11,150)
|
$
|
568,973
|
Net income for the
year
|
-
|
78,173
|
-
|
78,173
|
Dividends declared to
shareholders
|
-
|
(64,000)
|
-
|
(64,000)
|
Share of other
comprehensive income from investment in IOC (net of
taxes)
|
-
|
-
|
699
|
699
|
Balance as at
December 31, 2016
|
$
|
317,708
|
$
|
276,588
|
$
|
(10,451)
|
$
|
583,845
|
|
|
|
|
|
Balance as at
December 31, 2016
|
$
|
317,708
|
$
|
276,588
|
$
|
(10,451)
|
$
|
583,845
|
Net income for the
year
|
-
|
157,284
|
-
|
157,284
|
Dividends declared to
shareholders
|
-
|
(169,600)
|
-
|
(169,600)
|
Share of other
comprehensive income from investment in IOC (net of
taxes)
|
-
|
-
|
2,060
|
2,060
|
Balance as at
December 31, 2017
|
$
|
317,708
|
$
|
264,272
|
$
|
(8,391)
|
$
|
573,589
|
The complete consolidated financial statements for the year
ended December 31, 2017, including
the notes thereto, are posted on sedar.com and
labradorironore.com.
SOURCE Labrador Iron Ore Royalty Corporation