Mr. John Tuer reports

LABRADOR IRON ORE ROYALTY CORPORATION - RESULTS FOR THE FIRST QUARTER ENDED MARCH 31, 2023

Labrador Iron Ore Royalty Corp. has released its operation and cash flow results for the first quarter ended March 31, 2023.

Financial performance

In the first quarter of 2023, Labrador Iron Ore'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 per cent lower than the first quarter of 2022 due to lower sales tonnages of pellets and lower average realized concentrate and pellet prices and 4 per cent lower than the fourth quarter of 2022 due to lower pellet premiums and lower concentrate for sale 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 with $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 68 cents per share, which was a 31-per cent decrease over the same period in 2022 and a 3-per-cent decrease over the fourth quarter of 2022. The adjusted cash flow per share for the first quarter of 2023 was 41 cents per share, which was 13 per cent lower than in the same period in 2022 and 37 per cent lower than the fourth quarter of 2022, as Labrador Iron Ore 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 with the first quarter of 2022. Crude steel production in China was 6 per cent higher, offset by crude steel production outside of China, which decreased 7 per cent. 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, continuing 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 (CFS) based on the Platts index for 65 per cent iron, CFR China. 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-per-cent-less ore per equivalent volume than dry ore. In the first quarter of 2023, the 65-per-cent-iron index averaged $140 (U.S.) per tonne, a 26-per-cent increase over the prior quarter, but an 18-per-cent decrease over the average of $170 (U.S.) per tonne in the first quarter of 2022. The monthly Atlantic blast furnace 65-per-cent-iron pellet premium index as quoted by Platts averaged $46 (U.S.) per tonne in the first quarter of 2023, down substantially from an average of $67 (U.S.) in the same quarter of 2022, as steel producers in Europe, which 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. Over all, 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 Labrador Iron Ore royalty, the average price realized by IOC for CFS and pellets, FOB Sept-Iles, was approximately $136 (U.S.) per tonne in the first quarter of 2023, compared with approximately $173 (U.S.) 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 per cent higher than the same quarter of 2022 and 3 per cent 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 per cent higher than the same quarter of 2022. Pellet production of 2.2 million tonnes was 11 per cent 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 per cent higher than the same quarter of 2022 mainly due to the lower production of pellets.

Sales as reported for the Labrador Iron Ore royalty

Total iron ore sales tonnage by IOC (CFS plus pellets) of 3.7 million tonnes in the first quarter of 2023 was 2 per cent higher than the total sales tonnage for the same period in 2022 and 8 per cent 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 per cent lower than the same quarter of 2022 and 1 per cent higher than the fourth quarter of 2022. CFS sales tonnages were 47 per cent higher than the same quarter of 2022 and 16 per cent 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 with 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 Labrador Iron Ore as both an equity holder and a royalty holder.

IOC's hourly employees are represented by three unions. At Dec. 31, 2022, the United Steelworkers (USW) represented approximately 1,576 employees at Labrador City and 374 at Sept-Iles, the United Transportation Union (UTU) represented approximately 102 employees mostly based at Sept-Iles, and the Marine Guild represented four employees at Sept-Iles. A five-year collective agreement with the USW came into effect as of March 1, 2018, and was in effect until Feb. 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 work force. The agreement with the UTU came into effect on March 1, 2019, and will remain in effect until Feb. 29, 2024. The agreement with the Marine Guild came into effect on Sept. 1, 2019, and will remain in effect until Aug. 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 per cent 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-per-cent-iron index was $131 (U.S.) per tonne, or 7 per cent lower than the average of the 65-per-cent-iron 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 Labrador Iron Ore remains well positioned to continue to benefit from royalty revenues and expected future dividends from IOC in the current iron ore pricing environment.

Labrador Iron Ore 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 Labrador Iron Ore dividend in the amount of 50 cents per share paid to shareholders on the next day.

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-per-cent 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 per cent to 20 per cent 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 with 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 per cent. While CFS sales tonnages were 47 per cent higher than the same quarter in 2022, pellet sales were 19 per cent 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 with $53.7-million for the same period in 2022. First quarter 2023 cash flow from operations was $19.5-million or 30 cents per share compared with $4.1-million or six cents per share for the same period in 2022. Equity earnings from IOC amounted to $21.8-million or 34 cents per share in the first quarter of 2023 compared with $40.4-million or 63 cents per share for the same period in 2022.

Operating highlights

IOC sells CFS based on the 65-per-cent-iron index. In the first quarter of 2023, the 65-per-cent-iron index averaged $140 (U.S.) per tonne, an 18-per-cent decrease over the average of $170 (U.S.) 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, continuing 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 $46 (U.S.) per tonne in the first quarter of 2023, down substantially from an average of $67 (U.S.) in the same quarter of 2022, as steel producers in Europe, which 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 Labrador Iron Ore royalty, the overall average price realized by IOC for CFS and pellets, FOB Sept-Iles, was approximately $136 (U.S.) per tonne in the first quarter of 2023 compared with $173 (U.S.) per tonne in the first quarter of 2022. The decrease in the average realized price FOB Sept-Iles 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).

Liquidity and capital resources

The corporation had $14.6-million in cash as at March 31, 2023 (Dec. 31, 2022: $39.9-million), with total current assets of $65.1-million (Dec. 31, 2022: $83.0-million). The corporation had working capital of $23.1-million as at March 31, 2022 (Dec. 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-per-cent royalty, 10-cent commission per tonne and dividends from its 15.10-per-cent 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 Sept. 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.

We seek Safe Harbor.