Labrador Iron Ore Royalty Corporation - Results for the Third Quarter Ended September 30, 2021

TORONTO, Nov. 4, 2021 /CNW/ - Labrador Iron Ore Royalty Corporation ("LIORC") (TSX: LIF) announced today its operation and cash flow results for the quarter ended September 30, 2021.

Financial Performance

In the third quarter of 2021, LIORC's financial results benefited from higher iron ore prices and pellet premiums, partially offset by lower volumes of concentrate for sale ("CFS") sales. Royalty revenue for the third quarter of 2021 amounted to $74.2 million compared to $52.4 million for the third quarter of 2020. Equity earnings from Iron Ore Company of Canada ("IOC") were $60.5 million in the third quarter of 2021 compared to $34.9 million in the third quarter of 2020. Net income per share for the third quarter of 2021 was $1.64 per share, which was an 82% increase over the same period in 2020. The adjusted cash flow per share for the third quarter of 2021 was $1.99 per share, which was 333% higher than in the same period in 2020, as a result of higher royalty revenues and the decision by IOC to pay a dividend. In the third quarter of 2021, LIORC received a dividend in the amount of $85.8 million from IOC.

In the third quarter of 2021, iron ore prices dropped from the record levels experienced in the second quarter of 2021, as China, which accounts for a majority of the world's steel production and over 70% of all seaborne iron ore demand, placed restrictions on its steel production in an effort to curb year-over-year production growth. According to the World Steel Association, global crude steel production in China in the third quarter of 2021 was 14% lower than the same quarter of 2020 and 16% lower than the second quarter of 2021. In addition, in the quarter ending September 30, iron ore production by the three largest seaborne iron ore producers, Vale, Rio Tinto and BHP, while consistent with the same quarter of 2020, was 9% higher than the prior quarter.

IOC sells CFS based on the Platts index for 65% Fe, CFR China ("65% Fe index"). All references to tonnes and per tonne prices in this report refer to wet metric tonnes, other than references to Platts quoted pricing, which refer to dry metric tonnes. Historically, IOC's wet ore contains approximately 3% less ore per equivalent volume than dry ore. In the third quarter of 2021, the 65% Fe index averaged US$190 per tonne, a 47% increase over the average of US$129 per tonne in the third quarter of 2020, and an 18% decrease over the average of US$233 in the second quarter of 2021. The monthly Atlantic Blast Furnace 65% Fe pellet premium index as quoted by Platts (the "pellet premium") averaged US$77 per tonne in the third quarter of 2021, up substantially from an average of US$29 in the same quarter of 2020, which had been negatively impacted by a reduction in demand from European steel producers due to COVID-19.

Based on sales as reported for the LIORC Royalty, the overall average price realized by IOC for CFS and pellets, FOB Sept-Îles, was approximately C$247 per tonne in the third quarter of 2021, compared to approximately C$162 per tonne in the third quarter of 2020 and C$275 per tonne in the second quarter of 2021.

Iron Ore Company of Canada Operations

Operations

IOC continues to follow COVID-19 procedures and protocols to prevent COVID-19 outbreaks within IOC's operations, which has allowed IOC to effectively operate throughout 2021.  Total concentrate production in the third quarter of 2021 was 3.9 million tonnes. This was 8% lower than the third quarter of 2020 and 18% lower than the second quarter of 2021 due mainly to labour and equipment availability issues during the quarter which impacted feed availability. As well, the annual maintenance shutdown, which was completed in September, took longer than expected.

The IOC saleable production (CFS plus pellets) of 3.7 million tonnes in the third quarter of 2021 was 8% lower than the same period in 2020 and 20% lower than the second quarter of 2021, mainly as a result of lower concentrate production referred to above. 

In the third quarter of 2021, CFS production of 1.4 million tonnes was 20% lower than the same quarter last year, mainly due to lower concentrate production, as well as the decision by IOC to produce less pellets and more CFS in 2020. CFS production in the third quarter of 2021 was 28% lower than the second quarter of 2021, due to lower concentrate production. Pellet production in the third quarter of 2021 of 2.3 million tonnes was 3% higher than the corresponding quarter in 2020 due to IOC's decision to reduce the focus on the production of pellets in 2020, and 15% lower than the second quarter of 2021, due to issues related to lack of feed from the concentrator. 

Sales as Reported for the LIORC Royalty

Total iron ore sales tonnage by IOC (CFS plus pellets) of 4.2 million tonnes in the third quarter of 2021 was 10% lower than the total sales tonnage for the same period in 2020 mainly as a result of lower product availability.  Total iron ore sales tonnage in the third quarter of 2021 was 2% higher than the second quarter of 2021, as sales tonnage in the second quarter of 2021 was negatively impacted by the lack of availability of reclaimers during the quarter. Pellet sales in the third quarter of 2021 of 2.4 million tonnes was 1% higher than the total sales tonnage for the same quarter last year and 5% higher than the second quarter of 2021. CFS sales tonnage was 22% lower than the same quarter last year and 2% lower than the second quarter of 2021.

Outlook

Rio Tinto has lowered the 2021 guidance for IOC's saleable production (CFS plus pellets) from 17.9 to 20.4 million tonnes to 16.2 to 17.9 million tonnes. This compares to 17.7 million tonnes of saleable production in 2020 and 12.3 million tonnes in the first nine months of 2021.

Despite lower than expected sales in the first nine months, IOC is in an excellent financial position, having benefitted in 2021 from a very strong iron ore pricing environment.  In the first nine months of 2021, IOC generated net after tax cash from operating activities of US$1,259 million, had capital expenditures of US$170 million, and paid shareholder dividends of US$950 million. As at September 30, 2021, IOC had no debt, total current assets of US$665 million, and total current liabilities of US$517 million.

IOC experienced decreasing iron ore prices throughout the third quarter.  The monthly average price of the 65% Fe index dropped from an average of US$244 in July to an average of US$143 in September. Since the end of the third quarter (October 1, 2021 to October 26, 2021), the average price of the 65% Fe index has been US$146 per tonne. To put this in perspective, this is 28% lower than the average of US$204 for the first nine months of 2021, but 20% higher than the annual average of US$122 for 2020. The pellet premium has also declined. In October, 2021, the pellet premium of US$56 was 10% lower than the average of first nine months of 2021, but 92% higher than the annual average of 2020. 

Future government action regarding steel production output in China and its resulting impact on iron ore prices remains somewhat uncertain. That said, in the current pricing environment LIORC remains well positioned to profit from its royalty and commission interests in IOC and to receive future IOC dividends, albeit at lower levels than in the first three quarters of 2021.

LIORC has no debt and at September 30, 2021 had positive net working capital (current assets less current liabilities) of $21.6 million.  After the end of the third quarter LIORC paid a dividend on October 26, 2021 of $2.10 per share or $134.4 million. The net royalty from IOC was received by LIORC on the same date, maintaining the Corporation's strong cash balance.

Respectfully submitted on behalf of the Directors of the Corporation,

John F. Tuer
President and Chief Executive Officer
November 4, 2021

Management's Discussion and Analysis

The following discussion and analysis should be read in conjunction with the Management's Discussion and Analysis section of Labrador Iron Ore Royalty Corporation's ("LIORC" or the "Corporation") 2020 Annual Report, and the financial statements and notes contained therein and the September 30, 2021 interim condensed consolidated financial statements.

Overview of the Business

The Corporation's revenues are entirely dependent on the operations of 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 first quarter sales of IOC are traditionally adversely affected by the general winter operating conditions and are usually 15% – 20% of the annual volume, with the balance spread fairly evenly throughout the other three quarters. 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.

Financial Highlights 

 The higher revenue, net income and equity earnings achieved in the third quarter of 2021 as compared to 2020 were mainly due to higher iron ore prices, partly offset by lower sales of CFS. The third quarter of 2021 sales tonnage (pellets and CFS) were lower by 10% mainly due to lower CFS production. CFS sales tonnage was 22% lower and pellet sales tonnage was consistent with the same quarter last year.  However, the lower sales tonnage was more than offset by an increase in the realized sales price of pellets and CFS, resulting in royalty income of $74.2 million for the quarter as compared to $52.4 million for the same period in 2020. Third quarter 2021 cash flow from operations was $137.3 million or $2.15 per share compared to $11.1 million or $0.17 per share for the same period in 2020. LIORC received an IOC dividend in the third quarter of 2021 in the amount of $85.8 million or $1.34 per share. Equity earnings from IOC amounted to $60.5 million or $0.95 per share in the third quarter of 2021 compared to $34.9 million or $0.55 per share for the same period in 2020.

Operating Highlights

IOC sells CFS based on the 65% Fe index.  In the third quarter of 2021, the 65% Fe index averaged US$190 per tonne, a 47% increase over the average of US$129 per tonne in the third quarter of 2020, and an 18% decrease over the average of US$233 in the second quarter of 2021. Iron ore prices decreased from the prior quarter, as the demand for seaborne iron ore from China weakened as a result of government efforts to curb steel production growth in China. The monthly pellet premium averaged US$77 per tonne in the third quarter of 2021, up substantially from an average of US$29 in the same quarter of 2020, which had been negatively impacted by a reduction in demand from European steel producers due to COVID-19.

Based on sales as reported for the LIORC Royalty, the overall average price realized by IOC for CFS and pellets, FOB Sept-Îles, was approximately C$247 per tonne in the third quarter of 2021, compared to approximately C$162 per tonne in the third quarter of 2020 and C$275 per tonne in the second quarter of 2021. The increase in the average realized price FOB Sept-Îles in 2021 was a result of higher CFS prices and higher pellet premiums.

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 $2.15 for the quarter (2020 - $0.17).

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 International Financial Reporting Standards ("IFRS"). The Directors believe that adjusted cash flow is a useful analytical measure as it better reflects cash available for dividends to shareholders.

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

Liquidity and Capital Resources

The Corporation had $110.7 million in cash as at September 30, 2021 (December 31, 2020 - $106.1 million) with total current assets of $188.6 million (December 31, 2020 - $164.4 million). The Corporation had working capital of $21.6 million as at September 30, 2021 (December 31, 2020 - $31.0 million). The Corporation's operating cash flow was $137.3 million and the dividend paid during the quarter was $112 million, resulting in cash balances increasing by $25.3 million during the third quarter of 2021. In September, the Directors of the Corporation declared the third quarter dividend of $134.4 million that was paid on October 26, 2021.

Cash balances consist of deposits in Canadian dollars with Canadian chartered banks. Amounts 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, 2024 with provision for annual one-year extensions.  No amount is currently drawn under this facility (2020 – nil) leaving $30.0 million available to provide for any capital required by IOC or requirements of the Corporation.

John F. Tuer
President and Chief Executive Officer
Toronto, Ontario
November 4, 2021

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 indigenous groups, natural disasters, severe weather conditions and public health crises, changes affecting IOC's customers, competition from other iron ore producers, estimates of reserves and resources, government regulation and taxation and cybersecurity.  A discussion of these factors is contained in LIORC's annual information form dated March 4, 2021 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.

Notice:
The following unaudited interim condensed consolidated financial statements of the Corporation have been prepared by and are the responsibility of the Corporation's management. The Corporation's independent auditor has not reviewed these interim financial statements.

The complete consolidated financial statements for the third quarter ended September 30, 2021, including the notes thereto, are posted on sedar.com and labradorironore.com

SOURCE Labrador Iron Ore Royalty Corporation

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