Mr. John Tuer reports

LABRADOR IRON ORE ROYALTY CORPORATION - 2023 RESULTS OF OPERATIONS

Labrador Iron Ore Royalty Corp. has released the results of its operations for the year ended Dec. 31, 2023.

To the holders of common shares of Labrador Iron:

The directors of Labrador Iron present the annual report for the year ended Dec. 31, 2023.

86 years in Labrador West

Labrador Iron has been involved in Labrador West for 86 years. Under a statutory agreement with Newfoundland made in 1938, a predecessor company, Labrador Mining and Exploration Ltd., was granted extensive exploration and mining rights in Labrador West. LM&E found the iron orebodies 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 sublets the leases to IOC and IOC, with major steel companies as original shareholders, and built the infrastructure, mine, railway and port. Under the sublease, Labrador Iron receives a 7-per-cent gross overriding royalty on iron ore products produced and sold by IOC.

Financial performance

In 2023, Labrador Iron's financial results were negatively impacted by lower iron ore prices and lower pellet premiums, as well as a less advantageous product mix (lower volumes of pellet sales and higher volumes of concentrate for sale sales). Net income per share for the year ended Dec. 31, 2023, was $2.91 per share, which was a 30-per-cent decrease over 2022. The cash flow from operations per share for 2023 was $2.38 per share, which was 17 per cent lower than in 2022 due to lower royalty revenues and decreased dividends from IOC. IOC dividends decreased as a result of lower earnings at IOC and a decision by IOC to pay lower shareholder dividends to retain a higher cash balance due in part to expectations of higher capital expenditure needs going forward. In 2023, IOC paid dividends to its shareholders totalling $250-million (U.S.) and had a year-end net working capital balance of $345.8-million (U.S.), compared with dividends of $345-million (U.S.) and a year-end net working capital balance of $274.7-million (U.S.) in 2022.

In December, 2023, steel production in China, which had seen 1.5-per-cent growth year to date, dropped 15 per cent relative to December, 2022. As a result, global steel production ended the year flat relative to 2022, and 5 per cent lower than 2021, when the market experienced record prices for iron ore. On the supply side, three producers, Rio Tinto, BHP and Vale, account for over half the world's volume of seaborne iron ore. The combined production of iron ore in calendar 2023 by these producers was 907 million tonnes, an increase of 2.4 per cent over calendar 2022.

IOC sells 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 2023, the average price for the 65 per cent Fe index was $132 (U.S.) per tonne, a decrease of 5 per cent year over year. The 65 per cent Fe index continued to be quite volatile throughout the year, starting the year at $131 (U.S.) per tonne and trading as low as $110 (U.S.) per tonne in May, before ending the year at $151 (U.S.) per tonne.

In addition to the reduction in iron ore prices, pellet premiums dropped as steel producers, faced with tightening profit margins, substituted high-quality pellets with cheaper, lower-quality iron feed.

The monthly Atlantic Blast Furnace 65 per cent Fe pellet premium index as quoted by Platts averaged $45 (U.S.) per tonne in 2023, a decrease of 38 per cent from 2022.

Rio Tinto disclosed that IOC achieved an average realized price for pellets, FOB Sept-Iles, of approximately $155 (U.S.) per tonne, a decrease of 18 per cent year over year. Based on sales as reported for the Labrador Iron royalty, the overall average price realized by IOC for CFS and pellets, FOB Sept-Iles, was approximately $130 (U.S.) per tonne in 2023, a decrease of 15 per cent year over year. The decrease in the average realized price, FOB Sept-Iles, in 2023, was a result of lower CFS and pellet prices.

Iron Ore Company of Canada operations

Operations

Total concentrate production in 2023 was 17.7 million tonnes. This was 7 per cent lower than 2022. While concentrate production was 5 per cent higher in the fourth quarter of 2023 compared with the fourth quarter of 2022, this was not enough to offset the lower concentrate production in the third quarter due to unexpected equipment failures with the thickener rake drive and the overland delivery system conveyor belt and the lower concentrate production in the second quarter due to the impact of the forest fires.

The IOC saleable production (CFS plus pellets) of 16.5 million tonnes in 2023 was 6 per cent lower than 2022 and was 8 per cent lower than the low end of the range of Rio Tinto's original annual guidance of 17.9 million to 19.6 million tonnes, due to extended plant downtime in the second and third quarters, as a result of the equipment failures and forest fires referred to above. Saleable production in the fourth quarter of 4.6 million tonnes was 7 per cent higher than the fourth quarter of 2022. In 2023, CFS production of 8.2 million tonnes was 3 per cent higher than 2022, mainly due to less concentrate being diverted to make pellets. Pellet production in 2023 of 8.3 million tonnes was 14 per cent lower than 2022, partly as a result of lack of feed, as well as an increase in the duration of the induration machine 3 rebuild.

Despite the forest fires that limited rail service in the second quarter of 2023, third party iron ore haulage by the Quebec North Shore and Labrador Railway Company Inc. of 17.7 million tonnes in 2023 was 21 per cent higher than in 2022 and 38 per cent higher than in 2021, predominantly due to increased shipments of iron ore from Champion Iron Ltd.

Sales as reported for the Labrador Iron royalty

Total iron ore sales tonnage by IOC (CFS plus pellets) of 16.3 million tonnes in 2023 was 1 per cent lower than the total sales tonnage in 2022, predominantly due to inventory availability in both 2023 and 2022.

Capital expenditures

Capital expenditures for IOC were $362-million (U.S.) in 2023, or 2 per cent lower than 2022. Capital expenditures in 2023 were 11 per cent lower than the $407-million (U.S.) that IOC had originally forecasted, mainly due to the decision by IOC to defer certain capital projects, including the rebuild of shovel 101 at the mine and culvert replacements along the QNS&L line, and delays in the development of the mine wireless network, the execution of the mill 11 fine circuit redesign project to increase recovery yield, and the replacement of existing heavy fuel oil steam capacity with an electric boiler to reduce carbon emissions.

Outlook

Rio Tinto's 2024 guidance for IOC's saleable production tonnage (CFS plus pellets) is 16.7 million to 19.6 million tonnes. This compares with 16.5 million tonnes of saleable production in 2023.

Despite continuing lower pellet premiums, it is expected that IOC will continue to focus on maximizing pellet production in 2023.

The capital expenditures for 2024 at IOC are forecasted by IOC to be approximately $431-million (U.S.). The 2024 forecast includes approximately $80-million (U.S.) of growth and development projects. Significant development capital expenditure projects include the redesign of the mill 11 fine circuit and the replacement of existing heavy fuel oil steam capacity with an electric boiler, which projects were previously scheduled for 2023 but delayed. Significant sustaining capital expenditure projects include the track replacement program at QNS&L to ensure the safe and efficient operation of the increased rail traffic.

In September, IOC announced a major donation of $4-million over two years to the Cegep de Sept-Iles in Quebec, Canada, for the construction of its new pavilion for training, research and innovation in the railway, industrial maintenance, and energy intelligence industries. The new partnership will strengthen Sept-Iles' position as a centre of excellence for specialized training in railway operations and provide local indigenous communities with additional training and employment opportunities.

IOC's operator, Rio Tinto, continues to be committed to reaching net-zero emissions by 2050 and is targeting a 15-per-cent reduction in Scope 1 and 2 emissions by 2025 and a 50-per-cent reduction by 2030 (1) (from a 2018 equity baseline). Approximately 70 per cent of IOC's current total greenhouse gas emissions come from pelletizing. In 2023, IOC began its pilot project to test the use of four new plasma torches in the pellet plant, which could potentially replace the use of bunker C fuel oil in the induration process. More immediately, IOC has initiated a project (expected to be completed in the first half of 2025) to install an electric boiler to displace emissions from the usage of the heavy fuel oil boilers, as well as instrumentation and fuel-efficient burners to further reduce heavy fuel oil consumption in the induration process. Through the Low Carbon Economy Fund, the government of Canada has awarded $18.1-million (or approximately 25 per cent of the expected total cost of the project) to IOC to support the project, which is expected to eliminate approximately 9 per cent of IOC's GHG emissions or a cumulative reduction of about 2.2 million tonnes of GHG emissions over the lifetime of the project.

Rio Tinto's approach to addressing Scope 3 emissions is to engage with its customers on climate change and work with them to develop the technologies to decarbonize. Steel production currently accounts for approximately 9 per cent of GHG emissions. Strategies to reduce steel production GHG emissions include optimizing the use of traditional blast furnaces through the use of higher-grade iron ore (such as that produced by IOC) and, more importantly, processing high-grade direct reduction iron ore pellets (such as those produced by IOC) for use as direct feed in electric arc furnaces. In regard to this second process, Rio Tinto has stated that it is studying the feasibility of building a hydrogen-based hot briquetted iron plant at IOC. The proposed plant would have access to high-grade direct reduction pellets from IOC and renewable electricity with the prospect of producing green hydrogen.

Despite continuing concerns regarding the global economy and the property sector in China in particular, the outlook for steel demand and for iron ore prices remains quite robust. Currently, the World Steel Association is forecasting a 1.9-per-cent increase in global steel production for 2024. Thus far in 2024 (January and February), the average price of the 65 per cent Fe index has been $142 (U.S.) per tonne, up from an average of $132 (U.S.) per tonne in 2023. However, the demand for pellets has remained weaker, and thus far in 2024 (January and February), the average pellet premium has averaged $40 (U.S.) per tonne compared with an annual average of $45 (U.S.) per tonne in 2023 and an annual average of $72 (U.S.) per tonne in 2022.

I would like to take this opportunity to thank our shareholders for their interest and support and my fellow directors for their guidance.

(1) Source: Rio Tinto climate change report, 2023.

Respectfully submitted on behalf of the directors of the corporation,

John F. Tuer,

President and chief executive officer

March 12, 2024

Corporate structure

Labrador Iron is a Canadian corporation formed to give effect to the conversion of the Labrador Iron Ore Royalty Income Fund into a corporation under a plan of arrangement completed on July 1, 2010. Labrador Iron is also the successor by amalgamation of a predecessor of Labrador Iron with Labrador Mining Company Ltd., formerly a wholly owned subsidiary of the fund, that occurred pursuant to the plan of arrangement.

Labrador Iron, directly and through its wholly owned subsidiary Hollinger-Hanna, holds a 15.10-per-cent equity interest in IOC and receives a 7-per-cent gross overriding royalty on all iron ore product produced, sold and shipped by IOC and a 10-cent-per-tonne commission on all iron ore products produced and sold by IOC. Generally, Labrador Iron pays cash dividends from the free cash flow generated from IOC to the maximum extent possible, subject to the maintenance of appropriate levels of working capital. Quarterly dividends are payable to all shareholders of record on the last business day of each calendar quarter and are paid on or after the 26th day of the following month.

Seven 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 and governance and human resources committees are composed of four independent directors.

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 and Labrador 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 2023 were eligible dividends under the Income Tax Act.

We seek Safe Harbor.