Labrador Iron Ore Royalty Corporation - 2019 Results of Operations
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 | 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 | Second | Third | Fourth | 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 | Net |
Cash | Cash Flow | Adjusted | Dividends | |
(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 |
(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
John F. Tuer, President & Chief Executive Officer, (416) 362-0066
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