Labrador Iron Ore Royalty Corporation (LIORC) is a Canadian investment company that holds interests in Iron Ore Company of Canada (IOC), a leading North American producer and exporter of premium iron ore pellets and high-grade concentrate. LIORC holds a 15.10% equity interest in IOC and receives a 7% gross overriding royalty and a 10 cent per tonne commission on all iron ore products produced, sold, and shipped by IOC.

Generally, LIORC pays cash dividends from its net income to the maximum extent possible, subject to the maintenance of appropriate levels of working capital. Since its inception, the Company has paid out 98% of its standardized cash flow. LIORC holds certain mining leases and mining licenses covering approximately 18,200 hectares of land near Labrador City. IOC has leased certain portions of these lands from which it currently mines iron ore.

In return, IOC pays LIORC a 7% gross overriding royalty on all sales of iron ore products produced from these lands. A 20% tax on the royalty is payable to the Government of Newfoundland and Labrador. IOC is one of Canada's largest iron ore producers, operating a mine, concentrator, and pellet plant in Labrador City, Newfoundland, and Labrador, and is among the top five producers of seaborne iron ore pellets in the world. It has been producing and processing iron ore since 1954. IOC is well situated to serve the various markets throughout the world from its year-round port facilities at Sept-Îles, Québec.

China accounts for over 50% of global steel production and over 70% of seaborne iron ore demand. Steel production in China remained strong during the early phases of COVID. More recently, authorities in China have curbed steel production to reduce emissions and lower input prices, including iron ore prices, Steel production in the rest of the world has rebounded from the lows experienced last year due to COVID. IOC can produce 23 million tonnes of concentrate and 12.5 million tonnes of pellets. Total IOC sales tonnages for 2021 were 17.0 million tonnes, down from 18.6 million tonnes a year ago, as IOC experienced various operational challenges, including labor and equipment availability issues that impacted product feed and IOC’s 2021 sales of pellets were 10.0 million tonnes, as compared to 10.2 million tonnes a year ago.

2022 guidance for IOC’s saleable production (CFS plus pellets) remains at 17.0 million to 18.7 million tonnes. This compares to 16.6 million tonnes of saleable production in 2021. As reported in the 2021 Annual Report, IOC has ambitious capital expenditure plans to continue renewing the asset infrastructure and to improve the production results at IOC. These initiatives will be of benefit to LIORC as both an equity holder and a royalty holder.

There are several issues affecting the outlook for the seaborne iron ore market. The current COVID-19 crisis in China is negatively impacting China’s economic outlook as a result of the widespread lock-downs being imposed as part of China’s zero COVID-19 strategies. There also remains significant uncertainty regarding the economic health of the property markets in China. In addition, China recently announced that as part of its efforts to improve the decarbonization of the steel industry, it will ensure that crude steel production in 2022 does not exceed 2021 levels.

Finally, the war in Ukraine has resulted in the disruption of some traditional sources of iron ore supply. It is unclear as to the longer-term effects that these events will have on the market. However, despite these uncertainties, seaborne iron ore prices remain attractive from a historical perspective. Since the end of the first quarter, iron ore prices have strengthened.

In April 2022, the average price of the 65% Fe index was US$175 per tonne, or 2% higher than the average of the 65% Fe index for the first quarter of 2022. The pellet premium for April was US$82 per tonne compared to the average of US$67 per tonne in the first quarter of 2022. To put these prices in a longer-term historical context, the average of the 65% Fe index and the pellet premium over the five years ending December 31, 2021, were $118 and $50, respectively. As a result, we remain positive about the outlook for IOC, and LIORC remains well-positioned to continue to benefit from the current iron ore pricing environment through royalty revenues and expected future dividends from IOC.

The LIORC cash balance on March 31, 2022, stood at $13.5 million before LIORC dividends payable on April 26, 2022, of $0.50 per share or $32.0 million. The net royalty from IOC was received by LIORC on the same date, maintaining the Corporation’s strong cash balance.