Labrador Iron Ore Royalty Corporation - Results for the Second Quarter Ended June 30, 2012

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Labrador Iron Ore Royalty Corporation

Aug 08, 2012, 18:35 ET

TORONTO, Aug. 8, 2012 /CNW/ - Labrador Iron Ore Royalty Corporation (TSX: LIF.UN) announced today its operation and cash flow results for the second quarter ended June 30, 2012.

Royalty income for the second quarter of 2012 amounted to $36.0 million as compared to $37.8 million for the second quarter of 2011. The unitholders' cash flow from operating activities after adjustments for changes in amounts receivable, accounts payable and income taxes payable (adjusted cash flow) for the quarter was $22.3 million or $0.35 per unit compared to last year's $23.0 million or $0.36 per unit. Net income was $36.8 million or $0.57 per unit compared to $48.2 million or $0.75 per unit for the same period in 2011. Equity earnings from Iron Ore Company of Canada (IOC) amounted to $18.2 million or $0.28 per unit as compared to $30.4 million or $0.48 per unit in 2011.

All net income, adjusted cash flow and per unit figures referred to in this report use the totals according to the financial statements plus (where applicable) the $7,488,000 ($0.117 per stapled unit) and $14,976,000 ($0.234 per stapled unit) interest on the subordinated notes for the three months and six months periods, respectively.

IOC production and sales volumes for the quarter were above last year's second quarter but were still somewhat affected by the commissioning of the new ore delivery system and the additional grinding mill. We reported last quarter that the commissioning, which started at the beginning of the year, was expected to be completed by mid-year. This has now occurred and we expect to see the resultant increased production in the third quarter. The lower revenue and cash flow for the quarter in spite of the increased sales volumes resulted from lower prices for iron ore in the quarter. Equity earnings from IOC were substantially lower in the quarter mainly due to the lower iron ore prices.

Results for the three months and six months ended June 30 are summarized below:

	3 Months Ended June 30, 2012	3 Months Ended June 30, 2011	6 Months Ended June 30, 2012	6 Months Ended June 30, 2011
	(Unaudited)

Revenue (in millions)	$36.4	$38.1	$58.8	$68.8
Adjusted cash flow (in millions)	$22.3	$23.0	$36.7	$71.0
Adjusted cash flow per unit	$0.35	$ 0.36	$0.57	$ 1.11
Net income (in millions)	$ 36.8	$ 48.2	$ 59.8	$ 87.1
Net income per unit	$ 0.57	$ 0.75	$ 0.93	$ 1.36

"Adjusted cash flow" (defined as cash flow from operating activities as shown on the attached financial statements adjusted for changes in amounts receivable, accounts payable and income taxes payable) 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 unitholders.

A summary of IOC's sales in millions of tonnes is as follows:

	3 Months Ended June 30, 2012	3 Months Ended June 30, 2011	6 Months Ended June 30, 2012	6 Months Ended June 30, 2011	Year Ended Dec. 31, 2011

Pellets	2.74	1.90	4.59	4.17	8.71
Concentrates	0.70	1.05	1.20	1.33	4.85

Total	3.44	2.95	5.79	5.50	13.56

Proposed Tax Changes

On July 25, 2012 the Department of Finance released the proposed legislative amendments to the Income Tax Act concerning stapled securities originally announced on July 20, 2011. It appears that the effect of the legislative changes on the Corporation is to deny the deduction of interest on the $248 million subordinated notes after July 20, 2012. The Board of Directors has been considering the alternatives available to the Corporation and expects to call a meeting of the unitholders in the near future to consider a response to the legislative changes.

Outlook

With the commissioning of the new ore delivery system and the additional grinding mill completing the first phase of the IOC's expansion and phase two expected to be completed early next year, the increased production capacity bodes well for increased royalty revenue. Currently offsetting the gains expected from increased volumes is weakness in the pricing of iron ore. The general market consensus seems to be that prices will recover later in the year.

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

Bruce C. Bone
President and Chief Executive Officer
August 8, 2012

Management's Discussion and Analysis

The following discussion and analysis should be read in conjunction with the Management's Discussion and Analysis section of the Corporation's 2011 Annual Report and the interim financial statements and notes contained in this report. Although management believes that expectations reflected in forward-looking statements are reasonable, such statements involve risk and uncertainties including the factors discussed in the Corporation's 2011 Annual Report.

The Corporation's revenues are entirely dependent on the operations of Iron Ore Company of Canada (IOC) as its principal assets relate to the operations of IOC and its principal source of revenue is the 7% royalty it receives on all sales of iron ore products by IOC. In addition to the volume of iron ore sold, the Corporation's royalty revenue is affected by the price of iron ore and the Canadian - U.S. dollar exchange rate.

The sales of IOC are usually 15% - 20% of the annual volume in the first quarter, with the balance spread fairly evenly throughout the other three quarters. For 2012, because of the coming on stream of the phase one expansion, we expect the first two quarters' sales to total less than 40% of sales for the year. Because of the size of individual shipments, some quarters may be affected by the timing of the loading of ships that can be delayed from one quarter to the next.

Royalty income for the second quarter of 2012 amounted to $36.0 million as compared to $37.8 million for the second quarter of 2011. The unitholders' cash flow from operating activities after adjustments for changes in amounts receivable, accounts payable and income taxes payable (adjusted cash flow) for the quarter was $22.3 million or $0.35 per unit compared to last year's $23.0 million or $0.36 per unit. Net income was $36.8 million or $0.57 per unit compared to $48.2 million or $0.75 per unit for the same period in 2011. Equity earnings from IOC amounted to $18.2 million or $0.28 per unit as compared to $30.4 million or $0.48 per unit in 2011.

The six months results were affected by the same factors as the second quarter and, in addition, the adjusted cash flow was substantially lower because IOC did not pay a dividend in the first quarter of 2012 (2011 - $29 million).

The following table sets out quarterly revenue, net income and cash flow data for 2012, 2011 and 2010.

			Revenue	Net Income	Net Income per Unit	Adjusted Cash Flow⁽¹⁾	Adjusted Cash Flow per Unit⁽¹⁾	Distributions Declared per Unit
			(in millions except per Unit information)
2012
First Quarter⁽²⁾			$22.4	$23.0	$0.36	$14.4	$0.23	$0.375
Second Quarter⁽²⁾			$36.4	$36.8	$0.57	$22.3	$0.35	$0.375
2011
First Quarter⁽²⁾			$30.7	$38.9	$0.61	$48.0 ⁽³⁾	$0.75	$0.75
Second Quarter⁽²⁾			$38.1	$48.2	$0.75	$23.0	$0.36	$0.375
Third Quarter ⁽²⁾			$54.9	$76.3	$1.19	$63.7 ⁽⁴⁾	$0.99	$0.75
Fourth Quarter⁽²⁾			$38.8	$45.9	$0.72	$23.4	$0.37	$0.375
2010
First Quarter			$16.7	$15.7	$0.25	$22.3 ⁽⁵⁾	$0.35	$0.375
Second Quarter			$52.5	$69.1	$1.08	$30.5	$0.48	$0.375
Third Quarter⁽²⁾			$40.9	$64.4	$1.02	$85.9 ⁽⁶⁾	$1.34	$0.50
Fourth Quarter⁽²⁾			$54.3	$62.8	$0.99	$31.9	$0.50	$1.00
Notes:	⁽¹⁾	"Adjusted cash flow" (see below)
	⁽²⁾	Commencing with third quarter 2010, net income, adjusted cash flow, distributions and per unit figures referred to in this table use the totals according to the financial statements plus (where applicable) the $7,488,000 ($0.117 per unit) interest on the subordinated notes
	⁽³⁾	Includes a $29.0 million IOC dividend
	⁽⁴⁾	Includes a $31.2 million IOC dividend
	⁽⁵⁾	Includes a $11.5 million IOC dividend
	⁽⁶⁾	Includes a $62.2 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 distributions. Standardized cash flow per unit was $0.04⁽¹⁾ for the quarter (2011 - $0.67⁽¹⁾). Cumulative standardized cash flow from inception of the Corporation is $16.43 per unit and total cash distributions since inception are $15.90 per unit, for a payout ratio of 97%.

"Adjusted cash flow" is defined as cash flow from operating activities as shown on the attached financial statements adjusted for changes in amounts receivable, accounts and interest payable and income taxes 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 unitholders.

The following reconciles cash flow from operating activities to adjusted cash flow.

	3 Months Ended June 30, 2012	3 Months Ended June 30, 2011	6 Months Ended June 30, 2012	6 Months Ended June 30, 2011
Standardized cash flow from operating activities	$2,343,296	$42,731,031	$19,171,109	$57,452,557
Excluding: changes in amounts receivable, accounts payable and income taxes payable	12,477,896	(27,229,486)	2,557,205	(1,417,676)
Adjusted cash flow⁽¹⁾	$14,821,192	$15,501,545	$21,728,314	$56,034,881
Adjusted cash flow per unit⁽¹⁾	$0.23	$0.24	$0.34	$0.88

^{(1) Excludes note interest on subordinated notes paid directly to unitholders of $7,488,000 ($0.117 per stapled unit) and $14,976,000 ($0.234 per stapled unit) for the three months and six months periods, respectively.}

Liquidity

The Corporation has a $50 million revolving credit facility to September 18, 2014 with provision for annual one-year extensions. No amounts are currently drawn under this facility (2011 - nil) leaving $50 million available to provide for any capital required by IOC or other Corporation requirements.

Proposed Tax Changes

On July 25, 2012 the Department of Finance released the proposed legislative amendments to the Income Tax Act concerning stapled securities originally announced on July 20, 2011. It appears that the effect of the legislative changes on the Corporation is to deny the deduction of interest on the $248 million subordinated notes after July 20, 2012. This would increase LIORC's taxes payable for 2012 by approximately $4.0 million and $8.7 million annually thereafter. The Board of Directors has been considering the alternatives available to the Corporation and expects to call a meeting of the unitholders in the near future to consider a response to the legislative changes.

Outlook

Bruce C. Bone
President and Chief Executive Officer
Toronto, Ontario
August 8, 2012

LABRADOR IRON ORE ROYALTY CORPORATION
INTERIM CONDENSED CONSOLIDATED BALANCE SHEETS



		As at
		June 30,		December 31,
Canadian $		2012		2011
		(Unaudited)
Assets
Current Assets
	Cash	$	27,645,293	$	41,498,184
	Amounts receivable (note 4)		36,541,047		40,669,780
	Income taxes recoverable		6,173,958		392,173
Total Current Assets			70,360,298		82,560,137

Non-Current Assets
Iron Ore Company of Canada ("IOC"),
	royalty and commission interests		284,364,064		287,131,292
Investment in IOC (note 5)			327,683,177		299,280,483
Total Non-Current Assets			612,047,241		586,411,775

Total Assets		$	682,407,539	$	668,971,912


Liabilities and Shareholders' Equity
Current Liabilities
	Accounts payable	$	7,515,236	$	8,419,389
	Interest payable on subordinated notes		7,488,000		7,488,000
	Dividend payable		16,512,000		16,512,000
Total Current Liabilities			31,515,236		32,419,389

Non-Current Liabilities
Deferred income taxes (note 6)			118,200,000		114,830,000
Subordinated notes			248,000,000		248,000,000
Total Non-Current Liabilities			366,200,000		362,830,000

Total Liabilities			397,715,236		395,249,389

Equity
	Share capital		69,708,147		69,708,147
	Retained earnings		230,806,156		219,001,376
	Accumulated other comprehensive loss		(15,822,000)		(14,987,000)
			284,692,303		273,722,523

Total Equity and Liabilities		$	682,407,539	$	668,971,912



Approved by the Directors,


(signed) Bruce C. Bone		(signed) Alan R. Thomas
Director		Director

LABRADOR IRON ORE ROYALTY CORPORATION
INTERIM CONDENSED CONSOLIDATED STATEMENTS
OF COMPREHENSIVE INCOME


		For the Three Months
		Ended June 30,
Canadian $		2012		2011
		(Unaudited)
Revenue
	IOC royalties	$	35,996,161	$	37,754,213
	IOC commissions		337,774		290,334
	Interest and other income		93,949		104,172
			36,427,884		38,148,719
Expenses
	Newfoundland royalty taxes		7,199,232		7,550,843
	Amortization of royalty and commission interests		1,425,808		1,112,870
	Administrative expenses		495,322		705,404
	Interest expense:
	Credit facility		94,521		93,494
	Subordinated notes		7,488,000		7,488,000
			16,702,883		16,950,611

Income before equity earnings and income taxes			19,725,001		21,198,108
Equity earnings in IOC			18,174,251		30,431,486

Income before income taxes			37,899,252		51,629,594

Provision for income taxes
	Current		6,329,617		6,809,433
	Deferred		2,275,772		4,102,000
			8,605,389		10,911,433

Net income for the period			29,293,863		40,718,161

Other comprehensive loss
	Share of other comprehensive loss of IOC, net of tax		(433,000)		(371,000)

Comprehensive income for the period		$	28,860,863	$	40,347,161

Net income per common share		$	0.46	$	0.64

LABRADOR IRON ORE ROYALTY CORPORATION
INTERIM CONDENSED CONSOLIDATED STATEMENTS
OF COMPREHENSIVE INCOME


		For the Six Months Ended
		June 30,
Canadian $		2012		2011
		(Unaudited)
Revenue
	IOC royalties	$	58,006,234	$	68,034,430
	IOC commissions		568,777		541,303
	Interest and other income		216,161		236,961
			58,791,172		68,812,694
Expenses
	Newfoundland royalty taxes		11,601,247		13,606,886
	Amortization of royalty and commission interests		2,767,228		2,171,238
	Administrative expenses		1,079,382		1,105,556
	Interest expense:
	Credit facility		188,014		185,959
	Subordinated notes		14,976,000		14,976,000
			30,611,871		32,045,639

Income before equity earnings and income taxes			28,179,301		36,767,055
Equity earnings in IOC (note 5)			29,379,694		49,682,954

Income before income taxes			57,558,995		86,450,009

Provision for income taxes (note 6)
	Current		9,218,215		11,898,227
	Deferred		3,512,000		2,406,000
			12,730,215		14,304,227

Net income for the period			44,828,780		72,145,782

Other comprehensive loss
	Share of other comprehensive loss of IOC, net of tax		(835,000)		(743,000)

Comprehensive income for the period		$	43,993,780	$	71,402,782

Net income per common share		$	0.70	$	1.13

LABRADOR IRON ORE ROYALTY CORPORATION
INTERIM CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS




			For the Six Months Ended
			June 30,
Canadian $			2012	2011
			(Unaudited)
Net inflow (outflow) of cash related
	to the following activities

Operating
	Net income for the period		$ 44,828,780	$ 72,145,782
	Items not affecting cash:
		Equity earnings in IOC	(29,379,694)	(49,682,954)
		Current income taxes	9,218,215	11,898,227
		Deferred income taxes	3,512,000	2,406,000
		Amortization of royalty and commission interests	2,767,228	2,171,238
		Interest expense	15,164,014	15,161,959
	Common share dividend from IOC		-	28,994,815
	Change in amounts receivable and accounts payable		3,224,580	10,261,996
	Interest paid		(15,164,014)	(15,161,959)
	Income taxes paid		(15,000,000)	(20,742,547)
	Cash flow from operating activities		19,171,109	57,452,557

Financing
	Dividends paid to shareholders		(33,024,000)	(97,024,000)
	Cash flow used in financing activities		(33,024,000)	(97,024,000)

Decrease in cash, during the period			(13,852,891)	(39,571,443)

Cash, beginning of period			41,498,184	73,611,888

Cash, end of period			$ 27,645,293	$ 34,040,445

LABRADOR IRON ORE ROYALTY CORPORATION
INTERIM CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

					Accumulated
					other
	Capital		Retained		comprehensive
Canadian $	stock		earnings		income (loss)		Total
			(Unaudited)

Balance as at December 31, 2010	$	69,708,147	$	147,934,994	$	(4,271,000)	$	213,372,141
Net income for the period		-		72,145,782		-		72,145,782
Dividends declared to shareholders		-		(57,024,000)		-		(57,024,000)
Share of other comprehensive loss from investment in IOC		-		-		(743,000)		(743,000)
Balance as at June 30, 2011		69,708,147		163,056,776		(5,014,000)		227,750,923

Balance as at December 31, 2011		69,708,147		219,001,376		(14,987,000)		273,722,523
Net income for the period		-		44,828,780		-		44,828,780
Dividends declared to shareholders		-		(33,024,000)		-		(33,024,000)
Share of other comprehensive loss from investment in IOC		-		-		(835,000)		(835,000)
Balance as at June 30, 2012	$	69,708,147	$	230,806,156	$	(15,822,000)	$	284,692,303

The complete consolidated financial statements for the second quarter ended June 30, 2012, including notes thereto, are posted on sedar.com and labradorironore.com.

SOURCE: Labrador Iron Ore Royalty Corporation

Bruce C. Bone
President & Chief Executive Officer
(416) 863-7133
E-mail: [email protected]

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