Labrador Iron Ore Royalty Corporation (“LIORC”) (TSX: LIF) announced today its operation and cash flow results for the second quarter ended June 30, 2020.
Royalty revenue for the second quarter of 2020 amounted to $46.2 million compared to $52.6 million for the second quarter of 2019. Net income was $48.9 million or $0.76 per share for the second quarter of 2020 compared to $61.1 million or $0.95 per share for the same period in 2019. Cash flow from operations for the second quarter was $37.6 million or $0.58 per share compared to $47.8 million or $0.75 per share for the same period in 2019. The Corporation received no dividend from IOC in the second quarter of 2020 compared to $25.4 million or $0.40 per share for the same period in 2019. Equity earnings from Iron Ore Company of Canada (“IOC”) amounted to $28.7 million or $0.45 per share in the second quarter of 2020 compared to $24.7 million or $0.39 per share in the first quarter of 2020 and $33.9 million or $0.53 per share in the second quarter of 2019.
Royalty revenue and net income for the second quarter of 2020 were lower than the second quarter of 2019, predominantly as a result of lower iron ore prices and a change in IOC’s product mix which was beneficial to IOC’s earnings, but lowered IOC’s revenue from which the LIORC royalty is calculated. While prices for concentrate remained strong in the second quarter, both concentrate and pellet prices were lower in the second quarter of 2020 compared to the second quarter of 2019. The average price for the Platts index for 62% Fe Iron Ore, CFR China (“62% Fe index”) decreased 7% to US$93 per tonne in the second quarter of 2020, compared to the average price of US$100 per tonne in the second quarter of 2019. The Atlantic Basin blast furnace pellet premium, as reported by Platts, averaged US$30 per tonne in the second quarter of 2020, a 55% decrease over the second quarter of 2019. Total IOC’s sales for calculating the royalty to LIORC (concentrate for sale (“CFS”) plus pellets) of 4.6 million tonnes were 1% higher in the second quarter of 2020 compared to the same period in 2019. However, while CFS sales of 2.4 million tonnes were 10% higher than in the same period in 2019, pellet sales in the second quarter of 2020 of 2.2 million tonnes were 7% lower than in the second quarter of 2019. Cash flow from operations in the second quarter of 2020 was lower than in the second quarter of 2019 largely because IOC elected not to pay a shareholder dividend in the second quarter of 2020 due to the global economic uncertainty created by the COVID-19 pandemic. While equity earnings from IOC in the second quarter of 2020 were lower than in the second quarter of 2019, mainly due to lower iron ore prices, equity earnings from IOC were higher than in the first quarter of 2020, due to higher iron ore prices and lower operating costs. IOC’s operating costs were lower in the second quarter of 2020 because of the reduction in pellet production and as a result of operational changes made to deal with COVID-19 that limited the number of contractors on site and reduced overtime costs. IOC also benefitted from lower fuel costs in April and May.
LIORC’s results for the three months and six months ended June 30 are summarized below:
| (in millions except per share information) | 3 Months EndedJun. 30, 2020 | 3 Months EndedJun. 30, 2019 | 6 Months EndedJun. 30, 2020 | 6 Months EndedJun. 30, 2019 | |
| (Unaudited) | |||||
| Revenue | $46.7 | $53.3 | $95.0 | $92.5 | |
| Cash flow from operations | $37.6 | $47.8 | $48.3 | $72.8 | |
| Operating cash flow per share | $0.58 | $0.75 | $0.75 | $1.14 | |
| Net income | $48.9 | $61.1 | $95.5 | $100.4 | |
| Net income per share | $0.76 | $0.95 | $1.49 | $1.57 |
Iron Ore Company of Canada Operations
Production
During the second quarter, IOC’s mining, processing, rail and shipping operations continued to operate safely within the COVID-19 guidelines of both the Quebec and Newfoundland and Labrador governments. Despite the inclusion of social distancing protocols and limitations placed on certain employee and contractor movements, total concentrate production in the second quarter of 2020 of 4.8 million tonnes was 7% higher than the second quarter of 2019 and 3% higher than the first quarter of 2020. The total material moved was lower in the second quarter of 2020 than the second quarter of 2019, mainly driven by the absence of development contractors impacting waste movement and a lack of haul truck operators. However, this was more than offset by a lower strip ratio. Concentrate production in the second quarter of 2019, was also adversely affected by a flooding incident.
During the second quarter of 2020, total saleable production (CFS plus pellets) of 4.7 million tonnes was 9% higher than the second quarter of 2019. During the second quarter of 2020, IOC optimised its product mix to match market demand, by temporarily suspending two pellet machines from operation in order to increase production of CFS. As a result, CFS production in the second quarter of 2020 of 2.6 million tonnes was 28% higher than in the second quarter of 2019 and 65% higher than the first quarter of 2020. Pellet production in the second quarter of 2020 of 2.1 million tonnes was 7% lower than the second quarter of 2019 and 24% lower than the first quarter of 2020.
Sales as Reported for the LIORC Royalty
Total iron ore sales tonnage by IOC (CFS plus pellets) of 4.6 million tonnes in the second quarter of 2020 was 1% higher compared to the same period in 2019. In the second quarter of 2020 CFS tonnage sold by IOC was 10% higher than in the same period in 2019 and pellet sales tonnage was 7% lower than in the second quarter of 2019, mainly as a result of the strategic change in product mix by IOC.
IOC sells CFS based on the Platts index for 65% Fe Iron Ore, CFR China (“65% Fe index”). In the second quarter of 2020 the average price for the 65% Fe index was US$108 per tonne, a 6% decrease from the average price in the second quarter of 2019 and a 5% increase from the first quarter of 2020. Overall, prices for iron ore concentrate remained historically strong in the second quarter of 2020, due to continuing demand from China, the largest importer of iron ore, offsetting weaker demand outside of China. In the first half of 2020, China imported 547 million tonnes of iron ore, up 9.6% over the same period in 2019. In addition, during the second quarter iron ore prices benefited from ongoing supply concerns regarding future Brazilian production as a result of COVID-19 disruptions. In the second quarter the 65% Fe index traded at an average premium of 16% to the 62% Fe index. This was the same average premium as in the first quarter of 2020 and similar to the 15% average premium in the second quarter of 2019.
The COVID-19 pandemic continued to negatively affect the demand for iron ore outside of China. As a result, in the second quarter of 2020 there was reduced demand for pellets in various markets across Europe and North America. The Atlantic Basin blast furnace pellet premium, as reported by Platts, averaged US$30 per tonne in the second quarter of 2020, a 55% decrease over the second quarter of 2019 and 3% higher than the first quarter of 2020. The average pellet price realized by IOC in the first half of 2020 was US$117 per tonne, a 17% decrease from the average realized price of US$141 per tonne in the first half of 2019.
A change in product mix and lower iron ore prices, and in particular lower pellet premiums, resulted in royalty revenue for LIORC in the second quarter of 2020 decreasing 12% compared to the royalty revenue in the second quarter of 2019.
A summary of IOC’s sales for calculating the royalty to LIORC in millions of tonnes is as follows:
| 3 Months Ended Jun. 30, 2020 | 3 Months Ended Jun. 30, 2019 | 6 Months Ended Jun. 30, 2020 | 6 Months Ended Jun. 30, 2019 | YearEndedDec. 31,2019 | |
| Pellets | 2.25 | 2.42 | 5.27 | 5.13 | 9.62 |
| Concentrates(1) | 2.36 | 2.14 | 4.04 | 2.97 | 7.51 |
| Total(2) | 4.61 | 4.57 | 9.31 | 8.10 | 17.14 |
| (1) | Excludes third party ore sales. |
| (2) | Totals may not add up due to rounding. |
Outlook
IOC continues to effectively operate its mining, processing, rail and shipping operations safely during the COVID-19 pandemic. IOC production and sales volumes remain strong despite the additional challenges presented by COVID-19, and Rio Tinto has recently reaffirmed its 2020 guidance for IOC’s saleable production of CFS and pellets at between 17.9 and 20.4 million tonnes.
Capital expenditures at IOC for 2020 which were originally forecasted to be approximately $350 million, are now projected to be approximately $270 million. The $80 million reduction in the capital expenditure forecast is due to the deferral of certain development projects, mainly related to COVID-19 protocol restrictions on bringing contractors and consultants on-site during the second quarter, as well as a delay in the finalization of the third-party service contract that is a prerequisite to increasing the haulage capacity of Québec North Shore and Labrador Railway.
Since June 30, the 65% Fe index has consistently been above its average price during the second quarter of 2020. However, it is anticipated that the economic impact from the COVID-19 pandemic will continue to cause both demand and supply disruptions to the seaborne iron ore market. While the outlook for China steel production in the second half of 2020 remains positive, it is unclear whether iron ore demand strength from China will be enough to offset the expected continued weakness of steel producers in Europe and North America. In addition, while steel prices benefited in the second quarter from fears that there would be supply constraints from Brazil, those fears were never fully realized, and recently Brazilian miner Vale reconfirmed its original production guidance, albeit at the lower end of its 310 to 330 million tonne range.
In such an uncertain economic environment, IOC’s ability to optimize its production mix to meet changing market demands is a clear advantage. At the end of the first quarter of 2020, IOC halted production of two pellet machines in order to focus on meeting the demand for CFS. Recently, the Atlantic pellet market has shown some improvement in demand and, as a result, IOC brought back on-line one of the two idled pellet lines.
IOC remains well positioned to benefit from its royalty and equity investments in IOC given strong iron ore market conditions and current production levels. In the first half of 2020, LIORC paid a total of $0.75 per share in dividends to shareholders from cash received from its IOC royalty. In addition, while IOC decided not to declare a shareholder dividend in the first half of 2020, LIORC’s share of equity earnings in IOC was $53.4 million. LIORC continues to maintain a strong balance sheet with no debt and positive working capital (current assets minus current liabilities) of $29.4 million as at June 30, 2020.