Canada Research Labrador Iron Ore Royalty Corp.

Transcription

Canada Research
Published by Raymond James Ltd.
Labrador Iron Ore Royalty Corp.
April 27, 2015
Company Report
LIF-TSX
Alex Terentiew MBA, P.Geo | 416.777.4912 | [email protected]
Mining | Iron Ore
Market Perform 3
C$13.00 target price
Resuming Coverage with MP3: Payout, Production, or Prices Something’s Got to Give
Recommendation
We are resuming coverage on Labrador Iron Ore Royalty Corp. (LIORC) with a Market
Perform rating and a C$13.00 target price. LIORC owns an impressive 7% gross royalty on
the Iron Ore Company of Canada (IOC), but the near-term upside appears limited as our
estimate for IOC to currently be cash flow negative heightens the risks of the mine
shutting down or an equity (cash) call on its shareholders (LIORC owns 15%) due to the
currently weak iron ore prices.
Analysis

By our estimates, IOC’s costs of production are above the price of iron ore, putting
pressure on both LIORC’s and IOC’s working capital and ability to sustain production.
If costs don’t come down sufficiently or iron ore prices don’t rise, we think the
probability of IOC stopping production before year-end, at least temporarily, is high.

Dividend is at risk in 2H15. In the next couple of years, we don’t expect any dividend
from IOC to support a special dividend from LIORC, with the $0.25/share regular
dividend at risk by year-end if iron ore prices fail to recover. LIORC’s undrawn C$50
mln credit facility could be used to support its dividend in the short-term, but we
don’t expect it to be relied upon for more than one or two quarters.

Production growth potential, but guidance may be aggressive. Despite IOC’s $2 bln
in capital invested and an 18% increase in the labour force over the past five years,
production has remained fairly constant. We model a gradual increase to 20 Mt by
2018, behind LIORC’s forecast of 20 Mt in 2016.

Iron ore prices are unlikely to rebound to their historic lofty highs anytime soon.
Significant global investment over the past decade, coupled with improving
operating efficiencies and weakening demand growth, are likely to keep iron ore
prices range bound for the next couple of years, eventually rising to our long-term
price forecast of $65/t as demand improves and some higher cost production closes.

Our report provides valuation sensitivities at various iron ore prices and multiples.
Valuation
Our C$13.00 target price is derived using a sum-of-the-parts (SOTP) valuation, valuing the
stake in IOC and its royalty on the mine separately. To value LIORC’s royalty, we apply a
1.0x multiple to our NAV estimate for the royalty, with LIORC’s 15% equity stake in IOC
valued using a 6.0x multiple to the mine’s long-term EBITDA at our 2016E iron ore price
of $55/t. See our Valuation & Recommendation section for more details.
EPS
Old
New
Old
New
2014A
2015E
2015E
2016E
2016E
1Q
Mar
C$0.42
UR
0.08
NA
0.12
2Q
Jun
C$0.55
UR
0.08
NA
0.12
3Q
Sep
C$0.46
UR
0.10
NA
0.12
4Q
Dec
C$0.15
UR
0.10
NA
0.12
Full
Year
C$1.56
UR
0.36
NA
0.46
Revenues
(mln)
C$117
UR
90
NA
95
Current Price ( Apr-23-15 )
Total Return to Target
52-Week Range
Suitability
old: UR
C$13.67
-5%
C$31.80 - C$10.81
High Risk
Old: Not Meaningful
Market Data
Market Capitalization (mln)
Current Net Debt (mln)
Enterprise Value (mln)
Shares Outstanding (mln, f.d.)
10 Day Avg Daily Volume (000s)
Dividend/Yield
Key Financial Metrics
2014A
P/E
8.8x
P/NAV
C$875
-C$35
C$840
64.0
633
C$2.05/15.7%
2015E
2016E
24.3x
52.9x
0.95x
EBITDA (mln)
Old
UR
UR
New
C$92
C$70
Fe Conc. (IOC production mln MT)
Old
UR
UR
New
6.0
6.3
Fe Pellet (IOC production mln MT)
Old
UR
UR
New
8.7
10.2
Fe Operating Cost (IOC US$/T)
Old
UR
UR
New
US$73.82
US$63.12
Dividend/share
Old
UR
UR
New
C$2.05
C$1.10
Iron Ore Fines (US$/tonne)
Old
UR
UR
New
US$97.28
US$56.12
NA
NA
C$74
NA
6.8
NA
11.1
NA
US$59.65
NA
C$0.50
NA
US$55.00
Company Description
Labrador Iron Ore Royalty Corp. holds a 15.1% equity
interest in the Iron Ore Company of Canada (IOC) and
receives a 7% gross royalty and $0.10/tonne
commission on all iron ore products produced by IOC.
NAV
NA
C$14.32
NA
NA
Source: Raymond James Ltd., Thomson One
Please read domestic and foreign disclosure/risk information beginning on page 19 and Analyst Certification on page 18.
Raymond James Ltd. | 2100 – 925 West Georgia Street | Vancouver BC Canada V6C 3L2
old: Under Review
Canada Research | Page 2 of 23
Table of Contents
Investment Overview........................................................................................................................................... 3
Company Overview.............................................................................................................................................. 5
Valuation & Recommendation ............................................................................................................................ 8
Financial Analysis & Outlook................................................................................................................................ 11
Risks ..................................................................................................................................................................... 13
Appendix 1: Management & Board of Directors ................................................................................................. 14
Appendix 2: Financial Statements ....................................................................................................................... 15
Investment Overview
We are resuming coverage of Labrador Iron Ore Royalty Corp. (LIORC) with a C$13.00 target
price and a Market Perform rating. LIORC owns an impressive 7% gross royalty on the Iron Ore
Company of Canada (IOC), but our optimism is limited by the lack of clarity on IOC’s cost structure,
and the risks of an IOC shutdown or equity (cash) call on its shareholders due to currently weak
iron ore prices. Iron ore prices continue to weaken and by our estimates are below the operating
cost at the mine, which may put pressure on both LIORC’s and IOC’s working capital and ability of
LIORC to maintain its dividend.
Production growth potential, but guidance may be aggressive. IOC has struggled to hit its
operating target for the past two years, despite $2 bln in CapEx invested and an 18% increase in
work force over the past five years. As such, we are hesitant to assume LIORC’s 2016E target of 20
Mt of concentrate production is achieved (14.9 Mt realized in 2014), and assume a more gradual
ramp-up to 20 Mt by 2018.
Dividend is at risk in 2H15. With our forecast for a negative cash margin, we don’t expect any
dividend from IOC in the next couple of years to support a special dividend from LIORC, with the
$0.25/share regular dividend at risk by year-end should iron ore prices fail to recover. LIORC has
an undrawn $50 mln LOC that could be used to support its dividend for the short-term, but we
don’t expect it to be relied upon for more than one or two quarters.
Something’s got to give. We estimate that costs have to come down, or iron ore prices have to
rise, to put IOC back into a cash flow positive position. If neither happens, we think the probability
of IOC stopping production before year-end, at least temporarily, is high.
Where can more upside be found? Given the lack of operating cost transparency for IOC, we
acknowledge that we have less certainty in our estimate for the value of LIORC’s 15% equity stake
than we do for the value of LIORC’s royalty. Should IOC be able to reduce both operating and
capital costs beyond our forecasts, additional valuation upside may materialize, although at only
13% of our NAV estimate, the upside appears limited. Upside may also be realized if the mine is
able to operate close to its 23 Mtpa capacity, with our estimates only assuming a maximum
output of 20.4 Mtpa is reached by 2018.
Iron ore prices are unlikely to rebound to their historic lofty highs anytime soon. Given the
massive investments made by miners over the past decade in expanding primarily Australian and
Brazilian production, coupled with slowing demand in the world’s largest iron ore consumer
China, we forecast iron ore prices to stay in the current range for the next couple of years, rising
to $65/t in the long-term (2019E+) as demand improves and some higher cost production closes.
Failure of a significant amount of higher-cost global production to close, increasing production
from lower cost producers, and softening demand all pose risks to iron ore prices.
Our C$13.00 target price is derived using a sum-of-the-parts (SOTP) methodology. We also
looked at valuation methods using the dividend discount model, NAV at various iron ore prices,
and implied share price that would be required to maintain a dividend yield of 5.6%, which
approximates the average yield over the past four years. Results from each of these valuation
methods, with sensitivities at various discount rates, iron ore prices, valuation multiples, and
yields are presented in the Valuation & Recommendation section of this report.
Exhibit 1: Summary Comparable Table
Company Name
Price
($)
Target
Price
Stock
Rating
Target
Return
Mkt Cap
($mln)
P/CF
2015E
2016E
EV/EBITDA
2015E
2016E
Base Metal Companies
Capstone Mining Corp.
Copper Mountain Mining Corp.
First Quantum Minerals Ltd.
HudBay Minerals, Inc.
Lundin Mining Corporation
Nevsun Resources Ltd.
Taseko Mines Ltd.
Teck Resources Limited
Trevali Mining Corp.
Average
C$1.32
C$1.09
C$16.55
C$10.81
C$5.25
C$4.59
C$0.87
C$16.41
C$1.09
$2.25
$1.90
$21.00
$13.00
$8.00
$5.25
$1.50
$20.00
$1.60
OP2
OP2
OP2
OP2
SB1
OP2
MP3
MP3
OP2
70%
74%
27%
20%
52%
14%
72%
22%
47%
44%
$504
$129
$9,938
$2,498
$3,770
$916
$194
$9,454
$307
8.7x
2.7x
8.0x
7.6x
4.2x
4.7x
4.0x
4.4x
9.6x
6.0x
2.1x
1.5x
4.8x
5.6x
4.2x
13.6x
2.5x
3.9x
3.4x
4.6x
7.8x
7.5x
11.8x
10.1x
4.7x
2.2x
7.7x
6.3x
9.2x
7.5x
2.6x
3.9x
6.0x
5.4x
4.9x
8.4x
3.7x
5.5x
3.9x
4.9x
C$13.67
$13.00
MP3
-5%
$875
32.4x
25.8x
12.0x
11.4x
Source: Capital IQ, Raymond James Ltd.
NAVPS
($)
$2.46
$4.03
$21.38
$14.17
$5.62
$4.24
$3.01
$20.67
$1.28
$14.32
P/NAV
(x)
Analyst
0.44x
0.27x
0.64x
0.76x
0.77x
0.89x
0.29x
0.79x
0.85x
0.63x
AT
AT
AT
AT
AT
AT
AT
AT
AT
0.95x
AT
Exhibit 2: LIORC Operating and Financial Summary
Rating:
6-12 Mth Target
Projected Return:
MP3
C$ 13.00
-5%
(LIF-T)
NAVPS
YR-END:
RAYMOND JAMES LTD. RESEARCH
Analyst: Alex Terentiew 416-777-4912
Investment Thesis
Reporting Currency: C$
LIORC has a high quality royalty on the Iron Ore Company of Canada, but in our view a lack of
clarity on the mine's cost structure and a risk of an IOC shutdown or equity (cash) call on its
shareholders due to weak iron ore prices create an elevated level of risk and temper our
enthusiasm. Iron ore prices continues to weaken and by our estimates are below the operating
cost at the mine, which may put pressure on both LIORC’s and IOC’s working capital and ability of
LIORC to maintain its dividend.
Market Statistics
Share Price
Key Attributes:
- IOC has a long history of operating success, with a large reserve to support production for
another 25 years.
- With the exception of taxes and low G&A costs, LIORC has few operating costs, creating a simple
pass-through vehicle to pay dividends.
Key Concerns:
- With the fall in iron ore prices, we estimate the IOC's costs are above its sales, resulting in a cash
drain on the company. As such, we believe there is a risk that IOC may close (at least temporarily)
or an equity call may be made on IOC's shareholders (LIORC owns 15%).
- Current iron ore prices may force LIORC to cut its dividend in 2H15.
- Significant global investment in iron ore and waning demand may keep the price of the
commodity lower for longer.
Reserves
M&I Resource
Inferred Resources
Ore
(Mt)
1,389
2,001
705
Fe
(%)
38.2%
37.9%
37.3%
Total Resources
Mine
RJL Est. Mine Life
2,706
IOC
25 years
37.8%
IOC Reserves & Resources
LOM Operating Summary
LOM Avg.
7.6
12.4
20.1
$60.4
$66.1
$68.6
$150.0
25
Concentr
ate, 38%
Operating Summary
Fe Concentrate (Mt)
Fe Pellets (Mt)
Op Cost (incl. royalty) (US$/t)
All-in Costs (US$/t)
Avg. Realized Price (RJL est, US$/t)
Total CapEx (mln C$)
2014A
6.0
8.7
$73.8
$90.2
$107.4
$187
2015E
6.3
10.2
$63.1
$71.1
$60.5
$150
2016E
6.8
11.1
$59.6
$66.4
$59.4
$150
2017E
7.1
11.5
$60.0
$66.5
$64.5
$150
2018E
7.8
12.6
$60.2
$66.3
$67.6
$150
$100
20
$80
15
$60
10
$40
5
$20
0
$0
2015E
Fe Concentrate (Mt)
2016E
2017E
Fe Pellets (Mt)
2018E
Operating Costs (US$/t, incl. royalty)
Production (Mt)
Production Profile
25
2014A
Shares Basic (mln)
64.0
$ 31.80-10.81
Shares Fully Diluted (mln)
64.0
Market Cap. (mln)
C$ 13.67
$874.9
Adj. Shares used in NAV calc (mln)
64.0
Enterprise Value (mln)
$839.9
4-Wk. Avg. Daily Vol. ('000)
603
Fiscal YE
Dec. 31
TTM Div Yield (%)
15.0%
52 Week High/Low
Financial Metrics
Cash ($mln)
Op Cost (incl. royalty) (US$/t)
$150
$20
$100
$10
$50
$0
Dec-13 Jun-14
Iron Ore
2016E
-8.4
-6.5
0.0
0.0
0.0
0.0
0.0
29.2
24.6
32.6
-4.4
-2.5
Current ratio (x)
2.0
1.4
2.2
0.8
0.9
Total Debt ($mln)
0.0
0.0
0.0
0.0
0.0
544.5
583.3
577.7
537.0
534.7
Common Equity ($mln)
Price/book (x)
1.6x
1.5x
1.5x
1.6x
1.6x
Debt/(Debt + Equity) (%)
0.0%
0.0%
0.0%
0.0%
0.0%
ROE (%)
24.2%
26.2%
17.2%
4.2%
5.5%
ROIC (%)
9.3%
9.2%
9.0%
8.8%
9.3%
2012A
130
170
210
1.00
2013A
136
177
159
0.97
2014A
97
141
126
0.90
2015E
56
91
110
0.80
2016E
55
90
114
0.80
Revenue ($mln)
G&A ($mln)
Depreciation ($mln)
Newfoundland Royalty Taxes ($mln)
Equity Earnings in IOC ($mln)
Other Expenses ($mln)
Earnings before Tax & other ($mln)
Tax Expense ($mln)
Adj. Net Earnings (loss) ($mln)
Adj. EPS ($/share)
124
2
5
24
59
0
128
29
99
1.55
139
3
5
28
82
0
186
38
148
2.31
117
2
4
23
41
0
128
24
100
1.56
90
2
4
18
(36)
0
29
6
23
0.36
95
2
4
19
(32)
0
38
8
30
0.46
Dividends paid ($/share)
1.03
1.50
2.05
1.10
0.50
51
0
(66)
115
0
(96)
114
0
(131)
27
0
(70)
34
0
(32)
0.66
20.7x
27
0
1.80
7.6x
53
0
1.77
7.7x
35
0
0.42
32.4x
(8)
0
0.53
25.8x
(7)
0
CFPS (C$) (oper., pre-W/C adj)
P/CF (x)
YE Cash Balance ($mln)
Total Debt (mln$)
Valuation
IOC Equity
IOC Selling Commission
IOC Royalty
Minesite NAV
C$ mln
119
19
784
922
Cash and cash equivalents
Debt obligations
Corporate G&A
Other
9
0
(14)
(0)
Net Asset Value (8%)
917
Valuation Measures
Price / NAVPS
$/share
% of minesite NAV
1.87
13%
0.29
2%
12.25
85%
14.41
100%
0.14
0.00
(0.22)
(0.00)
14.32
Current
0.95x
6.0x Multiple to LIORC share of IOC EBITDA at 2016E iron ore price
1.0x Multiple to IOC Royalty at 2016E iron ore price
Sum of the Parts Valuation
Dec-14
Indexed Return (Dec.31,2009 =
1.0)
$200
$30
Jun-13
LIF
2015E
35.0
$0.0
$12.5
$12.5
Target Price C$:
Iron Ore price (US/lt)
LIF share price (C$)
$40
Dec-12
2014A
52.6
C$ 13.00
Indexed Return (LIF, Iron Ore, TSX)
$250
Jun-12
2013A
26.9
Working capital ($mln)
Relative Performance (LIF vs. Iron Ore)
$50
$0
Dec-11
2012A
ST Investments ($mln)
Adj. Operating Cash Flow ($mln)
Investing Cash Flow ($mln)
Financing Cash Flow ($mln)
Pellets,
62%
*All-in costs include OpEx, CapEx, taxes, royalties
**$35/t pellet premium assumed
24-Apr-15
Earnings/Cash Flow
RJL Iron Ore Forecast US$/t (62%)
RJL Fe Pellets Forecast US$/t
RJL Coking Coal Forecast US$/t
USD/CAD
LOM Product Breakdown
IOC
Pellet Concentrate (Mt)
Pellets (Mt)
Total (Mt)
Op. Cash Cost (US$/t)
All-in Cash Costs (US$/t)*
Avg. Realized Price (US$/t)**
Annual CapEx (mln$)
Estimated Mine Life (years)
[email protected]
$14.32
Dec. 31
2
1.8
1.6
1.4
1.2
1
0.8
0.6
0.4
Dec-09
Dec-10
Dec-11
Iron Ore
LIF
Dec-12
TSX
Dec-13
Dec-14
Source: Labrador Iron Ore Royalty Corp., Capital IQ, Bloomberg, Raymond James Ltd.
Company Overview
Labrador Iron Ore Royalty Corp. (LIORC) holds mining leases and licenses covering approximately
18,200 hectares of land near Labrador City, and the Iron Ore Company of Canada (IOC) has leased
certain portions of these lands for its iron ore mining operations. In exchange for these leases, IOC
pays a 7% gross revenue royalty on all sales of iron ore products produced, sold, and delivered to
customers from these lands. LIORC also owns a 15.1% equity interest in IOC and is entitled to a 10
cent/tonne commission fee on all iron ore products produced, sold, and shipped. Rio Tinto is the
majority owner and operator with 58.72%, with Mitsubishi Corp. owning the remaining 26.18%.
LIORC makes distributions to shareholders from its net income to the maximum extent possible,
subject to maintaining adequate working capital. As of December 31, 2014, the company had $35
million in cash, a working capital balance of $33 million and a $50 mln undrawn revolving credit
facility (term ending September 18, 2017). LIORC currently has 64 million shares outstanding.
Management and directors own approximately 55,000 common shares, representing ~0.1% of the
shares outstanding.
We expect production to gradually increase, but achieving the full potential of IOC is doubtful.
Although the expansion to 23 Mtpa was only completed in 2Q14, IOC has produced below its
capacity for the past few years (IOC was expanded to 22 Mtpa in 2013, up from 18 Mtpa), with
production ranging from 13-16 Mtpa. In March, LIORC stated that it expects production to reach
20 Mt in 2016, although given the mine’s historic performance, we forecast production to reach a
maximum of 20.4 Mtpa in 2018, with that rate maintained thereafter. With additional rail and
port capacity, expansions beyond 23 Mtpa have been contemplated, but with the drop in iron
ore’s price, we do not anticipate any expansion to occur.
Our 2015E production forecast is 16.5 Mt (38% concentrate and 62% pellets), an increase of 12%
over 2014. We forecast growth in production to continue through 2018E as IOC realizes the
benefits of its expansion program and our outlook for the estimated remaining 25-year mine life is
annual average production of 20.4 Mtpa (62% pellets – 12.6 Mtpa, and 40% concentrate – 7.8
Mtpa). Our forecasts for IOC’s production and operating costs are shown in Exhibit 3.
Exhibit 3: We Expect Production to Rise, but at a Slower Pace than LIORC Expects
24
90%
80%
20
60%
50%
12
40%
8
30%
% Production Pellets
Production (Mt)
70%
16
20%
4
10%
0
0%
2008 2009 2010 2011 2012 2013 2014 2015E 2016E 2017E 2018E 2019E 2020E
Concentrate
Pellets
% Pellets
Source: Labrador Iron Ore Royalty Corp., Raymond James Ltd.
Operating costs remain uncertain. Rio Tinto and LIORC do not disclose IOC’s operating costs, but
rather provide revenue, EBITDA, net earnings, depreciation and CapEx, leaving room for
assumptions to be made on the mine’s operating cost structure. Using this data, our best
estimates suggest operating costs (inclusive of the royalties to LIORC) have been in the low $70s/t
over the past two years, a cost structure we see as unsustainable.
Costs have to come down, or iron ore prices go up, for IOC to remain a viable operation. We
again highlight that cost disclosure on IOC is vague, and therefore our estimate of the mine’s
operating cost may in fact be too high. Nonetheless, our analysis suggests that at current iron ore
prices, the mine is losing money on a cash basis. Therefore, the ability (or willingness) of IOC to
continue operating with its current plan is a significant risk we highlight for LIORC, as its sole
source of revenue could be in jeopardy. In the following paragraphs we discuss our view and
estimates on the mine cost structure in more detail.
Inefficiencies have likely crept into the operation. Despite investing C$2.2 bln in the mine over
the past five years and growing IOC’s labour force by 18% in 5 years, and 37% since 2006 (from
1,885 employees in 2006, to 2,580 in 2014), IOC’s production has remained generally flat. With
iron ore prices falling and at the lowest levels since 2008, we forecast cost pressures to generate
negative margins, which may necessitate either a reduction in workforce or a temporary closure
of the mine. The union’s current collective agreement was reached with the United Steelworkers
of America on March 9, 2012 and has a six-year term (2018).
800
18
700
17
600
16
500
15
400
14
300
200
189
194
208
203
218
236
262
262
258
13
12
100
11
0
Total Feed Concentrate Production (Mt)
CapEx (mln C$) and # IOC Employees (x10)
Exhibit 4: Production Has Failed to Keep Up with Investment
10
2006
2007
2008
IOC Employees (x10)
2009
2010
2011
CapEx (C$ mln)
2012
2013
2014
Production (Mt)
Source: Labrador Iron Ore Royalty Corp., Bloomberg, Raymond James Ltd.
A shutdown has occurred before. In 2009, IOC idled some pellet production and then shut down
its Carol Lake operations from July 7 to August 10, 2009 in order to balance inventories with
demand.
Cost improvements, however, are expected to materialize in 2015. In 3Q14, a new CEO was
appointed to IOC, a move we believe may have been driven by the underperformance we noted
above. In addition, oil/fuel prices have declined, which have reduced operating and
transportations costs. The decline in the value of the Canadian dollar we expect will also help
cushion margin deterioration. With the expansion to 23 Mtpa now complete and iron ore prices
down, we also expect management to diligently focus on fully utilizing the spare capacity and
reducing costs where possible. We model a 13% reduction in operating costs over the course of
2015 (-15% including the royalty), bringing our estimate of costs down to $60/t by 2H15.
We estimate a life-of-mine average all-in cost per tonne of US$66. Our $66/t estimate includes
$60/t in operating costs (inclusive of the 7% royalty), with sustaining CapEx of C$150 mln/year and
taxes (when payable) adding the remainder.
Actions that could be taken to further reduce costs and keep IOC afloat
While iron ore prices have fallen, we don’t think IOC is doomed to continue with negative
margins, but rather believe options to get its cost structure lower are available, including:
Buy back some (or all) of the royalty from LIORC. At 7% of gross revenues (and the $0.10/t
commission), LIORC imparts a significant cost burden on IOC when iron ore prices are low
($5/t at our long-term iron ore price of $65/t). If some of the royalty is purchased by IOC to
reduce its cost structure and allow continued operation, LIORC would still be left with a
valuable royalty, but also a significant cash balance that could either be returned to
shareholders, or used to pursue other growth opportunities (if shareholders at the annual
shareholder meeting in May approve a motion to allow the company to make acquisitions). If
the royalty is too onerous and inhibits continued production, LIORC’s best option to realize
further cash flow could be to trim its royalty.
Maximizing pellet production. With 62% of sales in the form of pellets, which command a
higher price in the market (~$35/t), increasing pellet sales may provide a bit more breathing
room, assuming IOC’s customers remain willing to pay the premium that is needed to offset
IOC’s cost of pelletizing. In 2014, IOC sold 8.2 Mt of pellets, below the 10 Mt capacity. A fifth
pelletizing line is being refurbished, which would bring pelletizing capacity to 12.5 Mt in
2016E.
Reduction in the workforce. A 37% increase in the workforce since 2006 has not been
matched with increased production, a situation we think may lend itself to a significant
rationalization in the mine’s labour force.
Adjust operating procedures. We suspect that minor adjustments to current operating
procedures should be able to provide additional cost savings.
Weakening CAD, fuel prices and other input costs may help more than we forecast. Our
15% assumed decrease in operating costs may be conservative if declining input costs, a
reduction in labour, and opportunities to improve operating procedures are greater than we
expect.
Exhibit 5: We Estimate IOC to be Underwater at Current Iron Ore Prices
$180
$160
$140
US$/tonne
$120
$100
$80
$60
$40
$20
$0
2011
2012
2013
Op. Costs
2014
2015E
2016E
All-in Costs
2017E
2018E
2019E
2020E
Avg. Realized Price
Proposal to permit investment in metal or mineral royalties to be voted on by shareholders on
May 28, 2015. As per LIORC’s March 9, 2015 press release, the company will ask shareholders at
its May 28 Annual Meeting for approval to allow future investment in royalties and issue shares
(up to 20% dilution) to finance such investments. While some shareholders may want LIORC to
take advantage of low commodity prices to buy new royalties and diversify its cash flow away
from IOC, we suspect that income distribution, and not growth, is a top reason many of LIORC’s
shareholders have a stake in the company. Also, for growth to become a new focus for the
company, we think some new management and Board members may be required, potentially
making shareholder approval a challenge.
Our cash flow estimates are based on a 2015 iron ore price forecast of US$56/t, with a longterm forecast of US$65/t. Given the massive investments made over the past decade in
expanding primarily Australian and Brazilian production, coupled with slowing demand in the
world’s largest iron ore consumer China, we forecast iron ore prices to stay in the current range
for the next couple of years, rising to $65/t in the long-term (2019E+) as demand improves and
some higher cost production closes. We think it is important to take currency rates into
consideration when estimating long-term iron ore prices, given that the majority of iron ore
production occurs in countries where the local currency has weakened. With this in mind, real
long-term prices could justifiably be higher, but the AUD and CAD (and oil prices), for example,
would be higher in such a situation, offsetting some of the benefit of higher prices to producers.
Exhibit 6: Raymond James Ltd. Iron Ore Price Forecasts
Iron Ore Fines (USD/t)
Iron Ore Pellets (USD/t)
USD/CAD
2014
$97.3
$141.3
0.90
2015E
$56.1
$91.1
0.80
2016E
$55.0
$90.0
0.80
2017E
$60.0
$95.0
0.80
2018E
$63.0
$98.0
0.80
2019E
$65.0
$100.0
0.80
Source: Bloomberg, Raymond James Ltd.
Valuation & Recommendation
We have chosen to value Labrador Iron Ore Royalty Corp. using a sum-of-the-parts
methodology, valuing its stake in IOC and its royalty on the mine separately, with each of the
two components carrying different cash flow potential and risks. We have, in addition, estimated
a value for the company using alternative methods and conducted several sensitivity analyses
(P/NAV at various iron ore prices, DDM, valuation based on implied yield), the results of which we
discuss in more detail throughout this section.
As we have noted, we estimate the costs of production at IOC to be above the current iron ore
price, creating an unsustainable situation. Without a significant cost reduction or rise in iron ore
prices, we believe there is a risk that IOC may stop production, at least temporarily, reducing the
company’s cash flow and hence our valuation estimates. Our IOC production cost estimates are
derived from the limited data provided by IOC’s majority owner and operator, Rio Tinto, and
LIORC. Our valuation assumes continued production.
To value LIORC’s 7% royalty on IOC, we apply a 1.0x multiple to our NAV estimate for the royalty
at an 8% discount rate. With regards to LIORC’s 15% equity stake in IOC, we apply a 6.0x multiple
to the mine’s long-term EBITDA at our 2016E iron ore price of $55/t. Our long-term EBITDA
estimates reflect our forecast for IOC to produce at an annualized rate of 20.4 Mtpa, with the 6.0x
multiple in-line with the EV/EBITDA multiple the large, global diversified miners currently trade at,
namely Rio Tinto and BHP Billiton.
Sum-of-the-Parts Valuation
In Exhibit 7 below, we provide a sensitivity of our estimated SOTP valuations at various iron ore
prices for IOC’s EBITDA, and discount rates for the royalty’s NAV. With our operating cost
estimate for IOC of $60/t, we calculate that IOC is EBITDA negative at current iron ore prices, with
our valuation therefore currently relying on the value of the royalty. At our long-term iron ore
price of $65/t, however, we estimate a SOTP value of $16/share ($3.35 for the equity + $12.46 for
the royalty).
Exhibit 7: SOTP Valuation at Various Iron Ore Prices and Valuation Multiples
Multiple
Normalized, LT EBITDA
4.0
5.0
6.0
7.0
8.0
$40
$0.00
$0.00
$0.00
$0.00
$0.00
$45
$0.00
$0.00
$0.00
$0.00
$0.00
Iron Ore Fines Price ($/t)*
$50
$55
$60
$65
$0.00
$0.00
$1.09
$2.23
$0.00
$0.00
$1.36
$2.79
$0.00
$0.00
$1.63
$3.35
$0.00
$0.00
$1.90
$3.91
$0.00
$0.00
$2.17
$4.47
$70
$3.38
$4.23
$5.07
$5.92
$6.76
$75
$4.53
$5.66
$6.79
$7.92
$9.06
Discount Rate
8%
9%
$9.97
$9.15
$11.21
$10.30
$12.46
$11.44
$13.70
$12.59
$14.95
$13.73
11%
$7.82
$8.80
$9.78
$10.76
$11.73
12%
$7.27
$8.18
$9.09
$10.00
$10.91
IOC Royalty
Multiple
5%
6%
7%
0.8
$13.24
$11.98
$10.90
0.9
$14.89
$13.48
$12.26
1.0
$16.55
$14.98
$13.63
1.1
$18.20
$16.48
$14.99
1.2
$19.86
$17.97
$16.35
*consistent pellet premium of $35/t assumed
10%
$8.44
$9.50
$10.56
$11.61
$12.67
Source: Raymond James Ltd.
Net Asset Value
We estimate a net asset value for LIORC of C$14.32 at an 8% discount rate. As shown in Exhibit 8,
LIORC’s 7% royalty on IOC accounts for 85% of our minesite NAV estimate.
Exhibit 8: LIORC’s Net Asset Value Breakdown
Net Asset Value (C$ millions)
Assets
Mining Assets (after taxes)
IOC Equity
IOC Selling Commission
IOC Royalty
Minesite NAV
Discount Rate
5%
8%
198 $
119 $
25 $
19 $
1,044 $
784 $
1,267 $
922 $
$
$
$
$
0%
488
44
1,875
2,406
$
$
$
$
Total Other Assets
$
-
$
-
$
-
Total Assets
$
2,406
$
1,267
$
Corporate Adjustments
Assets
Debt and Obligations
Debt obligations
Corporate G&A
Total Corporate Adjustments
$
$
$
$
$
Net Asset Value
Total net asset value
Shares Outstanding (mln)
NAVPS
9
(31)
(22)
$
2,384
64.0
37.25
$
$
$
$
$
$
9
(18)
(10)
10%
85
16
663
764
$
$
$
$
12%
36
14
570
620
$
-
$
-
922
$
764
$
620
$
$
$
$
$
9
(14)
(6)
$
$
$
$
$
9
(12)
(4)
$
$
$
$
$
9
(11)
(2)
$
1,257
$
917
$
761
$
618
$
19.65
$
14.32
$
11.89
$
9.65
Our net asset value estimate is derived using a discounted cash flow (DCF) analysis of IOC on an
after-tax basis, discounted at a rate of 8%. We then make NAV adjustments to include cash on
hand and corporate G&A expenses. Our DCF estimate is derived using company projections, past
operating results, and includes estimates based on our own expectations.
Relative to the base metal miners under coverage at Raymond James Ltd., LIORC trades at a
substantial premium on P/CF, more modest premium on EV/EBITDA, and in-line with the larger,
more diversified companies on a P/NAV. LIORC’s P/CF multiple is, however, closer to that of the
precious metals royalty companies, which have historically traded at premium valuations.
Exhibit 9: Valuation is a Mix of Both Base Metal Companies and Precious Metals Royalty Companies
Rep.
Currency
Price
($)
Base Metal Companies
Copper Mountain Mining Corp.
Taseko Mines Ltd.
Trevali Mining Corp.
Average
USD
CAD
USD
CAD
USD
USD
CAD
CAD
CAD
C$1.32
C$1.09
C$16.55
C$10.81
C$5.25
C$4.59
C$0.87
C$16.41
C$1.09
CAD
Precious Metals Royalties
Franco-Nevada
Royal Gold
Sandstorm Gold
Silver Wheaton
AT = Alex Terentiew; PR = Phil Russo
USD
USD
USD
USD
Company Name
Target
Price
Stock
Rating
Target
Return
Mkt Cap
($mln)
$2.25
$1.90
$21.00
$13.00
$8.00
$5.25
$1.50
$20.00
$1.60
OP2
OP2
OP2
OP2
SB1
OP2
MP3
MP3
OP2
70%
74%
27%
20%
52%
14%
72%
22%
47%
44%
$504
$129
$9,938
$2,498
$3,770
$916
$194
$9,454
$307
$600
$541
$14,953
$3,417
$4,311
$454
$448
$16,096
$380
8.7x
2.7x
8.0x
7.6x
4.2x
4.7x
4.0x
4.4x
9.6x
6.0x
2.1x
1.5x
4.8x
5.6x
4.2x
13.6x
2.5x
3.9x
3.4x
4.6x
7.8x
7.5x
11.8x
10.1x
4.7x
2.2x
7.7x
6.3x
9.2x
7.5x
2.6x
3.9x
6.0x
5.4x
4.9x
8.4x
3.7x
5.5x
3.9x
4.9x
C$13.67
$13.00
MP3
-5%
$875
$840
32.4x
25.8x
12.0x
11.4x
US$50.31
US$64.06
C$4.36
US$19.35
$58.00
$94.00
$5.75
$30.00
MP3
OP2
MP3
OP2
15%
47%
32%
55%
$7,868
$4,176
$421
$7,812
$8,460
$3,799
$331
$8,502
25.2x
23.9x
10.6x
16.5x
25.6x
19.1x
10.3x
13.5x
24.9x
19.6x
8.7x
18.1x
25.0x
14.5x
8.3x
14.6x
Source: Capital IQ, Raymond James Ltd.
EV
($mln)
P/CF
2015E
2016E
EV/EBITDA
2015E
2016E
NAVPS
($)
$2.46
$4.03
$21.38
$14.17
$5.62
$4.24
$3.01
$20.67
$1.28
$14.32
$26.17
$45.63
$3.69
$14.06
P/NAV
(x)
Analyst
0.44x
0.27x
0.64x
0.76x
0.77x
0.89x
0.29x
0.79x
0.85x
0.63x
AT
AT
AT
AT
AT
AT
AT
AT
AT
0.95x
AT
2.11x
1.46x
0.97x
1.33x
PR
PR
PR
PR
Valuing LIORC at an 8% discount rate and various iron ore prices and P/NAV multiples, our
estimates of potential values are tabulated in Exhibit 10. We note that in the table, NAVPS include
the value of the royalty and the 15% stake in IOC, and are calculated assuming the iron ore noted
begins today and extends to perpetuity.
Exhibit 10: NAV Valuation Sensitivity at Varying Iron Ore Prices
Multiple
$40
$45
$50
$55
$60
$65
0.8
-$2.97
$0.24
$3.45
$6.65
$9.79
$12.79
0.9
-$3.35
$0.27
$3.88
$7.48
$11.02
$14.39
1.0
-$3.72
$0.30
$4.31
$8.31
$12.24
$15.99
1.1
-$4.09
$0.33
$4.75
$9.14
$13.46
$17.59
1.2
-$4.46
$0.36
$5.18
$9.97
$14.69
$19.19
$70
$15.05
$16.93
$18.81
$20.70
$22.58
$75
$17.25
$19.41
$21.56
$23.72
$25.88
Dividend Discount Model
On a dividend discount model (DDM) basis, we estimate that LIORC’s shares could be worth a low
of $6, if valued using the current price of $50/t as we assume LIORC’s dividends will be reduced to
offset the decline in iron ore prices and the company’s cash flow. Upside, however, of up to
$15/share is possible using our long-term price of $65/t. Our calculation is based on a discount
rate of 8%, 0% long-term growth rate (beyond 20 Mtpa, we don’t anticipate any growth), and a
long-term cash flow payout ratio of about 95%. Exhibit 11 shows the sensitivity of our DDM to
various discount rates and iron ore prices.
Exhibit 11: Dividend Discount Model Valuation Sensitivity
Discount Rate
$70
$27.54
$18.36
$13.77
$11.02
$9.18
$75
$34.98
$23.32
$17.49
$13.99
$11.66
Discount Rate
Dividend Discount Model - NTM Dividend
$40
$45
$50
$55
$60
$65
4% $0.00
$0.00
$12.50
$18.75
$25.00
$25.00
6% $0.00
$0.00
$8.33
$12.50
$16.67
$16.67
8% $0.00
$0.00
$6.25
$9.38
$12.50
$12.50
10% $0.00
$0.00
$5.00
$7.50
$10.00
$10.00
12% $0.00
$0.00
$4.17
$6.25
$8.33
$8.33
Dividend Discount Model - LT Normalized, 95% payout
$40
$45
$50
$55
$60
$65
4% $0.00
$0.00
$7.38
$14.87
$22.38
$29.70
6% $0.00
$0.00
$4.92
$9.91
$14.92
$19.80
8% $0.00
$0.00
$3.69
$7.43
$11.19
$14.85
10% $0.00
$0.00
$2.95
$5.95
$8.95
$11.88
12% $0.00
$0.00
$2.46
$4.96
$7.46
$9.90
$70
$35.13
$23.42
$17.56
$14.05
$11.71
$75
$40.41
$26.94
$20.21
$16.16
$13.47
Valuation based on Implied Yield
If we assume that many of LIORC’s investors own shares for the purpose of collecting a dividend,
and that these investors find its average yield of 5.6% over the past four years to be appropriate,
then we can estimate what share price would be required to generate a particular yield. Our
estimated dividend yields in the table below are calculated using a forecasted long-term run rate
of 20 Mtpa and a 95% payout from cash flow.
Exhibit 12: Valuation Assuming Historic Dividend Yield is Maintained
LIF share price (C$)
$3
$4
$5
$6
$7
$8
$9
$10
$11
$12
$13
$14
$15
$16
$17
$18
$19
$20
$21
$22
$40
-13.4%
-10.1%
-8.1%
-6.7%
-5.8%
-5.0%
-4.5%
-4.0%
-3.7%
-3.4%
-3.1%
-2.9%
-2.7%
-2.5%
-2.4%
-2.2%
-2.1%
-2.0%
-1.9%
-1.8%
$45
-0.8%
-0.6%
-0.5%
-0.4%
-0.3%
-0.3%
-0.3%
-0.2%
-0.2%
-0.2%
-0.2%
-0.2%
-0.2%
-0.1%
-0.1%
-0.1%
-0.1%
-0.1%
-0.1%
-0.1%
$50
$55
$60
$65
10.0%
20.0%
30.0%
39.7%
7.5%
15.0%
22.5%
29.8%
6.0%
12.0%
18.0%
23.8%
5.0%
10.0%
15.0%
19.9%
4.3%
8.6%
12.8%
17.0%
3.7%
7.5%
11.2%
14.9%
3.3%
6.7%
10.0%
13.2%
3.0%
6.0%
9.0%
11.9%
2.7%
5.4%
8.2%
10.8%
2.5%
5.0%
7.5%
9.9%
2.3%
4.6%
6.9%
9.2%
2.1%
4.3%
6.4%
8.5%
2.0%
4.0%
6.0%
7.9%
1.9%
3.7%
5.6%
7.4%
1.8%
3.5%
5.3%
7.0%
1.7%
3.3%
5.0%
6.6%
1.6%
3.2%
4.7%
6.3%
1.5%
3.0%
4.5%
6.0%
1.4%
2.9%
4.3%
5.7%
1.4%
2.7%
4.1%
5.4%
$70
46.9%
35.2%
28.2%
23.5%
20.1%
17.6%
15.6%
14.1%
12.8%
11.7%
10.8%
10.1%
9.4%
8.8%
8.3%
7.8%
7.4%
7.0%
6.7%
6.4%
$75
54.0%
40.5%
32.4%
27.0%
23.1%
20.2%
18.0%
16.2%
14.7%
13.5%
12.5%
11.6%
10.8%
10.1%
9.5%
9.0%
8.5%
8.1%
7.7%
7.4%
Financial Analysis & Outlook
LIORC’s share price has closely tracked the price of iron ore over the past few years, with a
correlation coefficient of 0.7. Given this relationship and with iron ore prices likely to remain
range bound over the couple of years, the upside potential to the company’s share price is
limited, in our view.
Indexed Return (Dec.31,2009 = 1.0)
Exhibit 13: A Close Correlation to the Price of Iron ore
2
1.8
1.6
1.4
1.2
1
0.8
0.6
0.4
Dec-09 Jun-10 Dec-10 Jun-11 Dec-11 Jun-12 Dec-12 Jun-13 Dec-13 Jun-14 Dec-14
Iron Ore
LIF
TSX
Note: Iron ore price adjusted for CAD exchange rates.
Source: Bloomberg, Capital IQ, Raymond James Ltd.
LIORC ended 2014 with C$35 mln of cash on hand and an undrawn C$50 mln credit facility.
Based on our iron ore price forecasts and assuming the current quarterly dividend of $0.25/share
is maintained, we forecast the company’s cash position to turn negative in 4Q15. With a $50 mln
credit facility, LIORC has the ability to borrow to keep its dividend unchanged. We think, however,
that such a measure will only be used temporarily, perhaps one or two quarters, with a reduction
to the dividend likely if iron ore prices do not improve.
We expect dividends to be reduced in 2016. Our forecasts for LIORC’s cash flow and dividends
per share on an annual basis are shown in Exhibit 14. Given the drop in iron ore prices, we expect
both items to decline in 2015, but forecast the annual dividend this year to remain over $1/share
as the 1Q dividend of $0.35 has already been paid and the 2Q dividend ($0.25) already declared.
In addition, with $35 mln in cash at year-end, we assume LIORC will continue to pay its regular
$0.25/share dividend, with a cash balance low of -$16 mln (1Q16E), prompting a drawdown on its
credit facility. Our dividend payment forecasts assume that no more than $20 mln is borrowed,
with the dividend reduced during periods of less cash to allow the balance sheet to rebuild.
Exhibit 14: We Assume a Dividend Reduction in 2016
$2.50
$2.00
$1.50
$1.00
$0.50
$0.00
2013
2014
2015E
2016E
CFPS
2017E
2018E
2019E
2020E
DPS
Management has noted that it could consider using its undrawn $50 mln LOC for a short period of
time to sustain its dividend, but we doubt that strategy would be maintained for more than 1-2
quarters. When in a positive cash position, we assume that nearly 100% of LIORC’s cash flow is
paid out to its shareholders.
Exhibit 15: Cash Position and Dividend Payment Forecasts
$60
$50
Million C$
$40
$30
$20
$10
$0
-$10
-$20
Adjusted Cash flow
Dividends paid
Note: Our estimates do not include a drawdown on LIORC’s $50 mln revolving credit facility.
Risks
Minority ownership and dilution risk – As a minority owner of IOC, LIORC is not in control of the
investment and operational decisions of IOC, although LIORC does hold two seats on the Board of
IOC. In December 2002, the company did not have the balance sheet strength to participate in a
financing by IOC and subsequently its equity interest in IOC was diluted to 15.1% from 18.93%.
LIORC currently has an undrawn C$50 million revolving senior secured credit facility, and we
understand the IOC itself has a credit facility, although the amount is not disclosed. Should IOC
continue to operate and generate negative cash flow, as per our operating cost forecasts, we see
a risk that an equity or cash call on LIORC could be made.
Lack of transparency in iron ore prices – Iron ore prices do not have the same degree of price
transparency as metals with exchange traded futures and options. Prices also differ depending on
the grade of the iron ore concentrate (typically 58% to 67% Fe), the freight charges associated
with the port of origination and the port of destination, the quality of the concentrate, and
market demand and premium for pellets. Most iron ore producers benchmark their sales prices to
those set by Vale, Rio Tinto, and BHP Billiton. Deviation from our price forecasts, the price
differential for the concentrate grade, and/or freight charges could result in materially different
performance.
Lack of transparency in operational performance – IOC’s majority owner, Rio Tinto, and LIORC
provide only limited operational data with respect to IOC’s operations. While quarterly production
volumes are disclosed, important mining datapoints such as head grades, recoveries, strip ratios,
operating costs are either not provided or are only released on an annual basis.
General risks experienced by mining companies – Mining operations are typically subject to a
number of risks, including: environmental compliance issues, personnel accidents,
metallurgical/other processing problems, ground or slope failures, flooding, fires, earthquakes,
rock bursts, equipment failures, and consultant errors. Interruptions to mining operations can
occur due to inclement weather conditions, road closures, port closures, inconsistent electricity or
water supply, and/or local protests.
Metal price uncertainty – Our cash flow estimates, ability of LIORC to pay a dividend, net asset
value estimate and target price are highly leveraged to our metal price forecasts. Deviation from
these forecasts could result in materially different performance.
Project and execution risk – Producing mines are continually expanding their operating reach,
which may introduce challenges with regards to obtaining adequate and timely financing,
receiving the required permits for progression of the exploration and development of the mines,
equipment availability, metallurgical/processing problems, and/or productivity issues. Other risks
that can arise include capital and operating cost inflation.
Currency fluctuation – A large proportion of the mine’s operating costs are sensitive to
fluctuations in the exchange rate between US dollars and Canadian dollars, while 100% of the
company’s iron ore revenue will be earned in US dollars. An increase in the value of the Canadian
dollar relative to the US dollar will have a negative impact on the company’s profit margin.
Appendix 1: Management & Board of Directors
Exhibit 16: LIORC’s Management & Board of Directors
Name
Title
Director/Officer
Background
Since
1995
Mr. William J. Corcoran is Non-Executive Independent Chairman of the Board of
Labrador Iron Ore Royalty Corp. He is Vice-Chairman of Jarislowsky Fraser Ltd.,
Investment Counsel, a registered investment counselling firm, since 2001. From 1991
to 2001, Mr. Corcoran was Vice Chairman of the Ontario Pension Board and prior to
that was a Managing Director of Scotia McLeod. He received a BA and a LLB from the
University of Toronto.
1995
Mr. Bone serves as President, CEO, and Director of Labrador Iron Ore Royalty Corp. and
has been CEO since the company's inception in 1995. Prior to that, Mr. Bone was VP
and Treasurer of Noranda Inc. He is a CPA and Chartered Accountant and has a BA from
the University of Toronto. He also serves as a Director of IOC.
1995
Mr. Thomas is Chief Financial Officer and Director of Labrador Iron Ore Royalty Corp.
He previously served as CFO of ShawCor Ltd. and Noranda Inc. He is also a director of
Gabriel Resources Ltd. Mr. Thomas is a Chartered Accountant and holds a BComm from
the University of Toronto.
1995
Mr. McCartney is EVP, Secretary, and Director of Labrador Iron Ore Royalty Corp. He is
Counsel and Former Chairman of McCarthy Tétrault LLP, Barristers and Solicitors. He is
a Director of Sparton Resources Inc. He holds a BComm and LLB from the University of
Toronto, and was called to the Bar in Ontario in 1966.
William J.
Corcoran
Chairman
Bruce C. Bone
President &
CEO
Alan R. Thomas
CFO &
Director
James C.
McCartney
EVP,
Secretary &
Director
Mark J. Fuller
Director
2014
Duncan. N.R.
Jackman
Director
2010
Paul H. Palmer
Director
1995
Sandra L. Rosch
Director
2014
Patricia M.
Volker
Director
2014
Donald J. Worth Director
1995
Mr. Fuller is the President & CEO of the Ontario Pension Board. He also serves as a
Director of IOC.
Mr. Jackman is Chairman, President and CEO of E-L Financial Corp., an investment and
insurance holding company. He has been a director of E-L Financial Corporation
Limited since 1997.
Mr. Palmer is a Chartered Accountant and a Fellow of the Institute. Mr. Palmer spent
most of his career as a senior financial officer of oil and gas exploration, development
and production companies and operating mining and exploration companies. He most
recently was Chief Financial and Administrative Officer of Norcen Energy Resources
Ltd.
Ms. Rosch has 31 years’ experience in financial restructuring, mergers and acquisitions
and financing transactions. She is President of Stonecrest Capital Inc. She was an
investment banker with Scotia Capital Inc. from 1994 to 2001. She received a MBA from
the University of Western Ontario and a B. Comm. from McMaster University.
Ms. Volker is Director, Public Accounting, Chartered Professional Accountants of
Ontario. She has served in various capacities in the accounting profession since 1997.
Ms. Volker is a CPA, CA, CMA and holds a B.Sc. from the University of Toronto.
Mr. Worth is a retired mining specialist and retired senior executive of Canadian
Imperial Bank of Commerce. He is involved with several professional associations
both in Canada and the United States. Mr. Worth holds a BSc in Mining Engineering and
a MSc degree in Mineral Economics from the University of Toronto.
LIORC is holding its Annual General Meeting on May 28, 2015.
Appendix 2: Financial Statements
Exhibit 17: LIORC’s Income Statement
INCOME STATEMENT (millions C$)
IOC royalties
2013A
2014A
2015E
2016E
2017E
$137.6
$115.7
$88.0
$93.0
$105.1
IOC commissions
$1.4
$1.4
$1.6
$1.8
$1.9
Finance income
$0.2
$0.4
$0.1
$0.0
$0.0
$139.3
$117.5
$89.8
$94.8
$107.0
Revenue
Depreciation and amortization
Gross profit
$4.7
$4.1
$3.8
$4.2
$4.4
$134.6
$113.3
$86.0
$90.7
$102.5
Operating expenses
General administration
Newfoundland royalty taxes
Total operating expenses
Earnings from operations
$2.8
$2.4
$2.5
$2.5
$2.5
$27.5
$23.1
$17.6
$18.6
$21.0
$30.4
$25.5
$20.1
$21.1
$23.5
$104.2
$87.8
$65.9
$69.5
$79.0
Other Income and Expenses
Finance expense
($0.4)
$0.0
$0.0
$0.0
$0.0
Equity earnings in IOC
$82.3
$40.6
($36.5)
($32.0)
($14.3)
Total other income (expenses)
Earnings (loss) before taxes and other items
Tax Expense
Attributable net earnings (loss)
Adjustments
$81.9
$40.6
($36.5)
($32.0)
($14.3)
$186.1
$128.4
$29.5
$37.6
$64.7
$38.3
$24.2
$6.2
$7.9
$13.6
$147.8
$104.1
$23.3
$29.7
$51.2
$0.0
$0.0
$0.0
$0.0
($4.1)
Adjusted net earnings (loss)
$147.8
$100.0
$23.3
$29.7
$51.2
EPS (FD & adjusted) C$/share
$2.31
$1.56
$0.36
$0.46
$0.80
Regular Dividends per share (C$/share)
$1.00
$1.00
$1.00
$0.50
$0.84
Special Dividends per share (C$/share)
$0.50
$1.05
$0.10
$0.00
$0.00
Total Dividends per share (C$/share)
$1.50
$2.05
$1.10
$0.50
$0.84
Weighted average number of FD shares O/S in period
64.0
64.0
64.0
64.0
64.0
Exhibit 18: LIORC’s Cash Flow Statement
CASH FLOW STATEMENT (millions C$)
2013A
2014A
2015E
2016E
2017E
Operating activities
Net Income (Loss)
$147.8
$104.1
$23.3
$29.7
$51.2
Total amortization
$4.7
$4.1
$3.8
$4.2
$4.4
$16.6
($11.0)
$0.0
$0.0
$0.0
($82.3)
($40.6)
$36.5
$32.0
$14.3
Deferred Taxes
Equity earnings in IOC
Common share dividend from IOC
$40.0
$48.1
($36.5)
($32.0)
($14.3)
Operating cash flow
Change in non-cash working capital
$126.9
$104.8
$27.0
$33.9
$55.6
$8.8
$0.0
$0.0
$0.0
Cash provided (used) from operating activities
$121.7
$113.5
$27.0
$33.9
$55.6
($6.279)
$0.029
$0.000
$0.000
$0.000
$115.412 $113.571
$27.040
$33.871
$55.590
Adjustments
Adjusted Cash flow
($5.2)
Investing activities
Capex
$0.0
$0.0
$0.0
$0.0
$0.0
Cash provided (used) from investing activities
$0.0
$0.0
$0.0
$0.0
$0.0
Financing activities
Dividends paid
($96.0)
($131.2)
($70.4)
($32.0)
($53.5)
Cash provided (used) in financing activities
($96.0)
($131.2)
($70.4)
($32.0)
($53.5)
$25.7
($17.7)
($43.4)
$1.9
$2.1
$26.9
$52.6
$35.0
($8.4)
($6.5)
Increase (decrease) in cash
Cash balance (B.O.P.)
Cash balance (E.O.P.)
Adj. Cash Flow
Adj. CFPS
$52.6
$35.0
($8.4)
($6.5)
($4.4)
$115.4
$113.6
$27.0
$33.9
$55.6
$1.80
$1.77
$0.42
$0.53
$0.87
Exhibit 19: LIORC’s Balance Sheet
BALANCE SHEET (millions C$)
2013A
2014A
2015E
2016E
2017E
Assets
Current Assets
$52.6
Accounts receivable
$35.8
$24.9
$24.9
$24.9
$24.9
$0.0
$0.5
$0.5
$0.5
$0.5
$0.0
$0.0
$0.0
$0.0
$0.0
$88.4
$60.3
$16.9
$18.8
$20.9
IOC royalty and commission interests
$279.6
$275.4
$271.7
$267.5
$263.1
Investment in IOC
Other LT assets
$407.6
$395.3
$395.3
$395.3
$395.3
$0.0
$0.0
$0.0
$0.0
$0.0
Total long-term assets
$687.2
$670.7
$666.9
$662.8
$658.3
Total Assets
$775.6
$731.0
$683.9
$681.6
$679.3
Accounts payable and accrued liabilities
$7.5
$5.3
$5.3
$5.3
$5.3
Current portion of LT debt instruments & capital leases
Short-term debt
$0.0
$0.0
$0.0
$0.0
$0.0
$0.0
$0.0
$0.0
$0.0
$0.0
$48.0
$22.4
$16.0
$16.0
$16.0
Income and resource taxes payable
$8.3
$0.0
$0.0
$0.0
$0.0
Other current liabilities
$0.0
$0.0
$0.0
$0.0
$0.0
$63.8
$27.7
$21.3
$21.3
$21.3
Income taxes recoverable
Other current assets
Total Current Assets
$35.0
-$8.4
-$6.5
-$4.4
Long term Assets
Liabilities and Shareholders' Equity
Current liabilities
Dividend payable
Total current liabilities
Long Term Liabilities
Long Term Debt (inc. capital leases)
Deferred income and resources tax liabilities
Other LT liabilities
$0.0
$0.0
$0.0
$0.0
$0.0
$128.5
$125.6
$125.6
$125.6
$125.6
$0.0
$0.0
$0.0
$0.0
$0.0
Total long-term liabilities
$128.5
$125.6
$125.6
$125.6
$125.6
Total liabilities
$192.3
$153.3
$146.9
$146.9
$146.9
$0.0
$0.0
$0.0
$0.0
$0.0
$317.7
$317.7
$317.7
$317.7
$317.7
($11.7)
($11.7)
($11.7)
($11.7)
Non Controlling Interest
Shareholder's equity
Share capital
Accumulated OCI
($7.6)
Retained earnings (deficit)
$273.2
$271.8
$231.0
$228.7
$226.4
Total shareholder's equity
$583.3
$577.7
$537.0
$534.7
$532.4
Total liabilities and shareholder's equity
$775.6
$731.0
$683.9
$681.6
$679.3
Note: We expect our forecast for LIORC’s negative cash balance to be offset by a drawdown on its
$50 mln credit facility.
Company Citations
Company Name
Copper Mountain Mining
Franco-Nevada Corp.
Royal Gold Inc.
Sandstorm Gold Ltd.
Silver Wheaton
Taseko Mines Ltd.
Trevali Mining Corporation
Ticker
CS
CUM
FM
FNV
HBM
LUN
NSU
RGLD
SSL
SLW
TKO
TCK.B
TV
Exchange
TSX
TSX
TSX
NYSE
TSX
TSX
TSX
NASDAQ
TSX
NYSE
TSX
TSX
TSX
Currency
C$
C$
C$
US$
C$
C$
C$
US$
C$
US$
C$
C$
C$
Closing Price
1.28
1.07
16.05
49.41
10.19
5.01
4.46
62.24
4.32
19.05
0.84
15.74
1.08
RJ Rating
2
2
2
3
2
1
2
2
3
2
3
3
2
RJ Entity
RJ LTD.
RJ LTD.
RJ LTD.
RJ LTD.
RJ LTD.
RJ LTD.
RJ LTD.
RJ LTD.
RJ LTD.
RJ LTD.
RJ LTD.
RJ LTD.
RJ LTD.
Notes: Prices are as of the most recent close on the indicated exchange and may not be in US$. See Disclosure section for rating definitions.
Stocks that do not trade on a U.S. national exchange may not be registered for sale in all U.S. states. NC=not covered.
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RATINGS AND DEFINITIONS
Raymond James Ltd. (Canada) definitions: Strong Buy (SB1) The stock is expected to appreciate and produce a total return of at least
15% and outperform the S&P/TSX Composite Index over the next six months. Outperform (MO2) The stock is expected to appreciate and
outperform the S&P/TSX Composite Index over the next twelve months. Market Perform (MP3) The stock is expected to perform
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six to twelve months and should be sold.
Raymond James & Associates (U.S.) definitions: Strong Buy (SB1) Expected to appreciate, produce a total return of at least 15%, and
outperform the S&P 500 over the next six to 12 months. For higher yielding and more conservative equities, such as REITs and certain
MLPs, a total return of at least 15% is expected to be realized over the next 12 months. Outperform (MO2) Expected to appreciate and
outperform the S&P 500 over the next 12-18 months. For higher yielding and more conservative equities, such as REITs and certain MLPs,
an Outperform rating is used for securities where we are comfortable with the relative safety of the dividend and expect a total return
modestly exceeding the dividend yield over the next 12-18 months. Market Perform (MP3) Expected to perform generally in line with the
S&P 500 over the next 12 months. Underperform (MU4) Expected to underperform the S&P 500 or its sector over the next six to 12
months and should be sold. Suspended (S) The rating and price target have been suspended temporarily. This action may be due to
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Raymond James Latin American rating definitions: Strong Buy (SB1) Expected to appreciate and produce a total return of at least 25.0%
over the next twelve months. Outperform (MO2) Expected to appreciate and produce a total return of between 15.0% and 25.0% over
the next twelve months. Market Perform (MP3) Expected to perform in line with the underlying country index. Underperform (MU4)
Expected to underperform the underlying country index. Suspended (S) The rating and price target have been suspended temporarily.
This action may be due to market events that made coverage impracticable, or to comply with applicable regulations or firm policies in
certain circumstances, including when Raymond James may be providing investment banking services to the company. The previous
rating and price target are no longer in effect for this security and should not be relied upon.
Raymond James Europe rating definitions rating definitions: Strong Buy (1) Expected to appreciate, produce a total return of at least
15%, and outperform the Stoxx 600 over the next 6 to 12 months. Outperform (2) Expected to appreciate and outperform the Stoxx 600
over the next 12 months. Market Perform (3) Expected to perform generally in line with the Stoxx 600 over the next 12 months.
Underperform (4) Expected to underperform the Stoxx 600 or its sector over the next 6 to 12 months. Suspended (S) The rating and
target price have been suspended temporarily. This action may be due to market events that made coverage impracticable, or to comply
with applicable regulations or firm policies in certain circumstances, including when Raymond James may be providing investment
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In transacting in any security, investors should be aware that other securities in the Raymond James research coverage universe might
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investments.
Suitability Categories (SR): Total Return (TR) Lower risk equities possessing dividend yields above that of the S&P 500 and greater
stability of principal. Growth (G) Low to average risk equities with sound financials, more consistent earnings growth, at least a small
dividend, and the potential for long-term price appreciation. Aggressive Growth (AG)
Medium or higher risk equities of companies in
fast growing and competitive industries, with less predictable earnings and acceptable, but possibly more leveraged balance sheets. High
Risk (HR) Companies with less predictable earnings (or losses), rapidly changing market dynamics, financial and competitive issues,
higher price volatility (beta), and risk of principal. Venture Risk (VR) Companies with a short or unprofitable operating history, limited or
less predictable revenues, very high risk associated with success, and a substantial risk of principal.
RATING DISTRIBUTIONS
Coverage Universe Rating Distribution*
RJL
RJA
RJ LatAm RJ Europe
Strong Buy and Outperform (Buy)
65%
54%
50%
Market Perform (Hold)
33%
40%
Underperform (Sell)
2%
6%
Investment Banking Distribution
RJL
RJA
RJ LatAm RJ Europe
47%
46%
24%
0%
0%
50%
28%
16%
10%
0%
0%
0%
25%
0%
2%
0%
0%
* Columns may not add to 100% due to rounding.
RAYMOND JAMES RELATIONSHIP DISCLOSURES
Raymond James Ltd. or its affiliates expects to receive or intends to seek compensation for investment banking services from all
companies under research coverage within the next three months.
Company Name
Disclosure
Raymond James Ltd - the analyst and/or associate has viewed the material operations of Capstone
Company Name
Disclosure
Mining Corp.
Raymond James Ltd - within the last 12 months, Capstone Mining Corp. has paid for all or a material
portion of the travel costs associated with a site visit by the analyst and/or associate.
Copper Mountain Mining
Raymond James Ltd. has received compensation for investment banking services within the last 12
months with respect to Copper Mountain Mining.
Raymond James Ltd - the analyst and/or associate has viewed the material operations of First
Quantum Minerals Ltd.
Raymond James Ltd - within the last 12 months, First Quantum Minerals Ltd. has paid for all or a
material portion of the travel costs associated with a site visit by the analyst and/or associate.
Raymond James Ltd - the analyst and/or associate has viewed the material operations of HudBay
Minerals, Inc.
Raymond James Ltd - within the last 12 months, HudBay Minerals, Inc. has paid for all or a material
months with respect to HudBay Minerals, Inc.
Raymond James Ltd. makes a market in the securities of HudBay Minerals, Inc.
Raymond James Ltd - the analyst and/or associate has viewed the material operations of Lundin
Mining Corporation.
Raymond James Ltd - within the last 12 months, Lundin Mining Corporation has paid for all or a
material portion of the travel costs associated with a site visit by the analyst and/or associate.
Raymond James Ltd. makes a market in the securities of Lundin Mining Corporation.
Royal Gold Inc.
Raymond James Ltd - the analyst and/or associate has viewed the material operations of Royal Gold
Inc.
Sandstorm Gold Ltd.
Raymond James Ltd - the analyst and/or associate has viewed the material operations of Sandstorm
Gold Ltd.
Silver Wheaton
Raymond James Ltd. has managed or co-managed a public offering of securities within the last 12
months with respect to Silver Wheaton.
Raymond James Ltd. has provided investment banking services within the last 12 months with respect
to Silver Wheaton.
Taseko Mines Ltd.
Raymond James Ltd - the analyst and/or associate has viewed the material operations of Taseko
Mines Ltd.
Raymond James Ltd - the analyst and/or associate has viewed the material operations of Teck
Resources Limited.
Raymond James Ltd - within the last 12 months, Teck Resources Limited has paid for all or a material
Trevali Mining Corporation
months with respect to Trevali Mining Corporation.
STOCK CHARTS, TARGET PRICES, AND VALUATION METHODOLOGIES
Valuation Methodology: The Raymond James methodology for assigning ratings and target prices includes a number of qualitative and
quantitative factors including an assessment of industry size, structure, business trends and overall attractiveness; management
effectiveness; competition; visibility; financial condition, and expected total return, among other factors. These factors are subject to
change depending on overall economic conditions or industry- or company-specific occurrences.
Target Prices: The information below indicates our target price and rating changes for LIF stock over the past three years.
Valuation Methodology: We value Labrador Iron Ore Royalty Corp. using a sum-of-the-parts methodology, valuing the stake in the
Iron Ore Company of Canada based on EBITDA, and the royalty on the mine based on our NAV estimate.
RISK FACTORS
General Risk Factors: Following are some general risk factors that pertain to the projected target prices included on Raymond James
research: (1) Industry fundamentals with respect to customer demand or product / service pricing could change and adversely impact
expected revenues and earnings; (2) Issues relating to major competitors or market shares or new product expectations could change
investor attitudes toward the sector or this stock; (3) Unforeseen developments with respect to the management, financial condition or
accounting policies or practices could alter the prospective valuation.
Risks - Labrador Iron Ore Royalty Corp.
Mining companies are subject to a range of risks, including, but not limited to: environmental risk, political risk, operational risk, financial
risk, hedging risk, commodity price fluctuation risk, and currency risk. Any difference between our metal price forecasts and realized
metal prices will likely have an impact on our earnings and valuation estimates for the mining companies in our research coverage
universe. The operation of mines and mills is complex and is exposed to a number of risks, most of which are beyond the company’s
control. These include: environmental compliance issues; personal accidents; metallurgical/other processing problems; unexpected rock
formations; ground or slope failures; flooding or fires; earthquakes; rock bursts; equipment failures; consultant errors and, interruption
due to inclement, weather conditions, road closures, and/or local protests. Other risks include, but are not limited to: uncertainties
surrounding reclamation costs; aging equipment and facilities which could lead to increased costs; strikes; and, transportation
disruptions.
Additional Risk and Disclosure information, as well as more information on the Raymond James rating system and suitability
categories, is available for Raymond James at rjcapitalmarkets.com/Disclosures/index and for Raymond James Limited at
www.raymondjames.ca/researchdisclosures.
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Canada Research Labrador Iron Ore Royalty Corp.

Transcription

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