Labrador Iron Ore Royalty Corporation (TSX: LIF) announced its operation and cash flow results for the first quarter ended March 31, 2023.

Financial Performance

In the first quarter of 2023, LIORC’s financial results were negatively impacted by lower sales of pellets and lower average realized concentrate and pellet prices. Royalty revenue for the first quarter of 2023 of $46.5 million was 13% lower than the first quarter of 2022 due to lower sales tonnages of pellets and lower average realized concentrate and pellet prices and 4% lower than the fourth quarter of 2022 due to lower pellet premiums and lower CFS sales tonnages, partly offset by higher iron ore prices. Equity earnings from Iron Ore Company of Canada (“IOC”) were $21.8 million in the first quarter of 2023 compared to $40.4 million in the first quarter of 2022 and $19.7 million in the fourth quarter of 2022. Net income per share for the first quarter of 2023 was $0.68 per share, which was a 31% decrease over the same period in 2022 and a 3% decrease over the fourth quarter of 2022. The adjusted cash flow per share for the first quarter of 2023 was $0.41 per share, which was 13% lower than in the same period in 2022 and 37% lower than the fourth quarter of 2022, as LIORC received a dividend in the amount of $15.4 million from IOC in the fourth quarter of 2022. While adjusted cash flow is not a recognized measure under International Financial Reporting Standards (“IFRS”), the Directors believe that it is a useful analytical measure as it better reflects cash available for dividends to shareholders.

Concerns about the outlook for global steel demand continued to negatively impact iron ore prices in the first quarter of 2023. According to the World Steel Association, global crude steel production was flat in the first quarter of 2023 compared to the first quarter of 2022. Crude steel production in China was 6% higher, offset by crude steel production outside of China, which decreased 7%. Iron ore prices did improve from the lows experienced in the second half of 2022, as China eased its zero COVID-19 policy of strict lockdowns. However, ongoing concerns about China’s weakened property sector and global recessionary concerns outside of China offset some of the expected gains.

IOC sells concentrate for sale 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 first quarter of 2023, the 65% Fe index averaged US$140 per tonne, a 26% increase over the prior quarter, but an 18% decrease over the average of US$170 per tonne in the first quarter of 2022. The monthly Atlantic Blast Furnace 65% Fe pellet premium index as quoted by Platts (the “pellet premium”) averaged US$46 per tonne in the first quarter of 2023, down substantially from an average of US$67 in the same quarter of 2022, as steel producers in Europe, who have been traditional buyers of iron ore pellets, reduced production, and as lower steel margins caused other producers to substitute higher quality pellets with less expensive lower quality iron ore. Overall, as a result of lower prices and a change in the product mix (higher CFS sales and lower pellet sales), based on sales as reported for the LIORC royalty, the average price realized by IOC for CFS and pellets, FOB Sept-Îles, was approximately US$136 per tonne in the first quarter of 2023, compared to approximately US$173 per tonne in the first quarter of 2022.

Iron Ore Company of Canada Operations

Operations

IOC concentrate production in the first quarter of 2023 of 4.6 million tonnes was 6% higher than the same quarter of 2022, and 3% lower than the fourth quarter of 2022. Concentrate production in the first quarter of 2023 was negatively affected in February by an adverse weather event, frozen material in the mine, ore delivery system reliability and Mill 13 feeder repairs. IOC saleable production (CFS plus pellets) of 4.3 million tonnes in the first quarter of 2023 was 5% higher than the same quarter of 2022. Pellet production of 2.2 million tonnes was 11% lower than the corresponding quarter in 2022, mainly due a lack of feed at certain times from the concentrator (driven by the adverse weather event) and plant reliability due to issues in the loadout/screenhouse and filtering and balling. CFS production of 2.1 million tonnes was 29% higher than the same quarter of 2022 mainly due to the lower production of pellets.

Sales as Reported for the LIORC Royalty

Total iron ore sales tonnage by IOC (CFS plus pellets) of 3.7 million tonnes in the first quarter of 2023 was 2% higher than the total sales tonnage for the same period in 2022, and 8% lower than the fourth quarter of 2022. IOC sales tonnage was negatively affected by inventory availability, vessel arrival delays due to weather, maintenance overruns, and equipment reliability issues. Pellet sales tonnages were 19% lower than the same quarter of 2022 and 1% higher than the fourth quarter of 2022. CFS sales tonnages were 47% higher than the same quarter of 2022 and 16% lower than the fourth quarter of 2022.

Outlook

Rio Tinto’s 2023 guidance for IOC’s saleable production (CFS plus pellets) remains at 17.9 million to 19.6 million tonnes. This compares to 17.6 million tonnes of saleable production in 2022. IOC continues to focus on upgrading its capital assets through increased capital expenditures. As reported in the 2022 Annual Report, IOC’s capital expenditures for 2023 are forecasted to be $534 million, up from $460 million in 2022 and $498 million in 2021. These capital expenditure initiatives will benefit LIORC as both an equity holder and a royalty holder.

IOC’s hourly employees are represented by three unions. At December 31, 2022, the United Steelworkers represented approximately 1,576 employees at Labrador City and 374 at Sept-Îles, the United Transportation Union represented approximately 102 employees mostly based at Sept-Îles and the Marine Guild represented 4 employees at Sept-Îles. A five year collective agreement with the USW came into effect as of March 1, 2018 and was in effect until February 28, 2023. Negotiations began in November 2022 and in April 2023 the USW employees ratified new five year collective bargaining agreements, avoiding any work interruptions and providing IOC with a motivated, stable workforce. The agreement with the UTU came into effect on March 1, 2019 and will remain in effect until February 29, 2024. The agreement with the Marine Guild came into effect on September 1, 2019 and will remain in effect until August 31, 2024.

There remains some uncertainty regarding the outlook for seaborne iron ore. The economic health of the property markets in China remains a significant concern, as China accounts for over 70% of the global seaborne iron ore demand. Also, declines in global steel production due to recessionary concerns may also impact future iron ore prices. Since the end of the first quarter, iron ore prices have continued to trend lower. In April 2023, the average price of the 65% Fe index was US$131 per tonne, or 7% lower than the average of the 65% Fe index for the first quarter of 2023. However, current prices are still materially higher than iron ore prices experienced in the second half of 2022, and LIORC remains well positioned to continue to benefit from royalty revenues and expected future dividends from IOC in the current iron ore pricing environment.

LIORC has no debt and at March 31, 2023 had positive net working capital (current assets less current liabilities) of $23 million, which included the first quarter net royalty payment received from IOC on April 25, 2023 and the LIORC dividend in the amount of $0.50 per share paid to shareholders on the next day.

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 2022 Annual Report, and the financial statements and notes contained therein and the March 31, 2023 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 lower revenue, net income and equity earnings from IOC achieved in the first quarter of 2023 as compared to 2022 were mainly due to lower iron ore prices and pellet premiums and an adverse change in product mix of sales (less pellets and more CFS). The first quarter of 2023 sales tonnages (CFS plus pellets) were higher by 2%. While CFS sales tonnages were 47% higher than the same quarter in 2022, pellet sales were 19% lower, predominantly due to inventory availability, vessel arrival delays due to weather, maintenance overruns, and equipment reliability issues.

The lower pellets sales tonnages and a decrease in the average realized sales price of pellets and CFS, resulted in royalty income of $46.5 million for the quarter as compared to $53.7 million for the same period in 2022. First quarter 2023 cash flow from operations was $19.5 million or $0.30 per share compared to $4.1 million or $0.06 per share for the same period in 2022. Equity earnings from IOC amounted to $21.8 million or $0.34 per share in the first quarter of 2023 compared to $40.4 million or $0.63 per share for the same period in 2022.

Operating Highlights

IOC sells CFS based on the 65% Fe index. In the first quarter of 2023, the 65% Fe index averaged US$140 per tonne, an 18% decrease over the average of US$170 per tonne in the first quarter of 2022. Iron ore prices improved from the lows experienced in the second half of 2022, as China eased its zero COVID-19 policy of strict lockdowns. However, ongoing concerns about the China’s weakened property sector and global recessionary concerns outside of China offset some of the expected gains. The monthly pellet premium averaged US$46 per tonne in the first quarter of 2023, down substantially from an average of US$67 in the same quarter of 2022, as steel producers in Europe, who have been traditional buyers of iron ore pellets, reduced production, and as lower steel margins caused other producers to substitute higher quality pellets with less expensive lower quality iron ore.

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 US$136 per tonne in the first quarter of 2023 compared to US$173 per tonne in the first quarter of 2022. The decrease in the average realized price FOB Sept-Îles in 2023 was a result of lower CFS prices, lower pellet premiums and a change in the product mix (higher CFS sales and lower pellet sales).

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 $0.30 for the quarter (2022 – $0.06).

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 dividends to shareholders.

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

Liquidity and Capital Resources

The Corporation had $14.6 million in cash as at March 31, 2023 (December 31, 2022 – $39.9 million) with total current assets of $65.1 million (December 31, 2022 – $83.0 million). The Corporation had working capital of $23.1 million as at March 31, 2022 (December 31, 2022 – $28.9 million). The Corporation’s operating cash flow was $19.5 million and the dividend paid during the quarter was $44.8 million, resulting in cash balances decreasing by $25.3 million during the first quarter of 2023.

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 19, 2025 with provision for annual one-year extensions. No amount is currently drawn under this facility (2022 – nil) leaving $30.0 million available to provide for any capital required by IOC or requirements of the Corporation.