Labrador Iron Ore Royalty Corporation (TSX: LIF) is a Canadian corporation which generates all of its revenue from its equity investment in Iron Ore Company of Canada, (IOC) and its IOC royalty and commission interests.  

Investment Rationale:

• An income play: The company has a strong history of consistent dividend payment, backed by stable cash flows. During 9MFY21, the company paid a total dividend of CAD 291.200 million, considerably higher than CAD 118.400 million in pcp. The above is impressive as most of the companies are lowering their dividend distribution in order to retain their liquidity. Notably, the LIF stock carries a handsome dividend yield of ~22.275% on an annualized basis, which looks attractive considering the ongoing interest rate scenario.

Five-year dividend distribution (Source: REFINITIV)

• Industry beating margin profile: The company commands a higher profit margin than its peers, which indicates higher operational efficiencies and is a key positive. Notably, in Q3FY21, the group reported gross margin and EBITDA margin of 80.1% and 79.3%, respectively, higher than the industry median of 50% and 38.8%, respectively. Moreover, the operating margin stood at 77.3% during the quarter, higher than the industry median of 27%.

• Healthy balance sheet with strong cash flow generation: The company has is a virtually-debt free firm, and hence, has higher financial flexibility. Moreover, the group reported a higher cash flow of CAD 850 million in 9MFY21, as compared to CAD 59.351 million in pcp, driven by higher net income. The above would expect to support the company’s overall liquidity.

• Ownership in Iron Ore Company of Canada: LIF holds a 15.1% stake in Iron Ore Company of Canada (IOC), which is a Leading Producer of Premium Iron Ore Pellets and High-Grade Concentrate. Moreover, IOC has a large, high-quality resource with a long mine life of ~24 years as per its current reserves. Notably, LIF holds 7% top-line royalty in IOC and earns 10 cents/tonnes of commission on all IOC sales. IOC has the capacity to produce 23 million tonnes of concentrate and 12.5 million tonnes of pellets.

Source: Company Presentation

• Improved operating metrics: For 9MFY21, IOC sold 12.40 million tonnes of iron ores compared to 13.96 million tonnes of iron ore in pcp. The above includes 7.08 tonnes of pellets and 5.32 million tonnes of Concentrate for sale (CFS). Notably, 65% Fe index during the period stood at USD 205/ tonne jumped from USD 114/tonne in pcp. The average price for pellet premium stood at USD 62/ tonne, as compared to USD 29/tonne in pcp. The above has resulted in higher income and cash flows for IOC, which is worth mentioning.

• Bullish Technical: On a daily chart, the LIF stock retained its short term trend line and closed above it, which indicates a bullish technical outlook. Additionally, the stock also closed above its 20-days and 50-days SMA, which also suggests a positive momentum.

Technical Price Chart (as on December 13, 2021). Source: REFINITIV, Analysis by Kalkine Group

Q3FY21 Financial Highlights:

• LIF announced its quarterly result, wherein the company posted its revenue of CAD 705 million, as compared to CAD 52.860 million in pcp, driven by higher income from IOC royalties due to higher iron ore prices and pellet premiums, partially offset by lower volumes of concentrate for sale.
• Total expenses surged to CAD 931 million, from CAD 12.839 million in pcp, due to an increase in Newfoundland royalty taxes, partially offset by lower administrative expenses.
• Net income for the period jumped to CAD 104.763 million, significantly higher than CAD 57.728 million in pcp.

Q3FY21  Income Statement Highlights (Source: Company Report)

Risks: Volatility in the international commodity prices might dampen the company’s revenue and cash flows. Recently, authorities in China have curbed steel production in order to reduce emissions and lower input prices, which resulted in a slide in the international iron ore price, and the continuation of the above trend might dampen the overall performance of the company.

Top-10 Shareholders

Top ten shareholders of the company together hold approximately 17.30% stake, BlackRock Institutional Trust Company, N.A., BlackRock Investment Management (UK) Ltd. are the major shareholders in the company with an outstanding position of 5.68% and 2.40%, respectively.

Source: REFINITIV, Analysis by Kalkine Group

Valuation Methodology (Illustrative): EV to EBITDA based

Note: Premium (discount) is based on our assessment of the company’s growth drivers, economic moat, competitive advantage, stock’s current and historical multiple against peer group average/median and investment risks 

Stock Recommendation:

Steel production in the rest of the world has rebounded from the lows experienced last year due to COVID19, while the continuation of the above trend is likely to support the improved iron ore prices in the coming days. Apart from CAD 110.7 million of available cash balance in Q3FY21, the company has an additional available of CAD 30 million of revolving credit facility, which is likely to support the company’s working capital and other corporate needs. We have valued the stock using the EV to EBITDA based relative valuation method and have arrived at a double-digit upside (in percentage terms). For the said purposes, we have considered peers like Cameco Corp, Teck Resources Ltd etc. Considering the aforesaid facts, we recommend a ‘Buy’ rating on the stock of LIF at the last closing price of CAD 37.71 on December 13, 2021.

*Depending upon the risk tolerance, investors may consider unwinding their positions in a respective stock once the estimated target price is reached.

Technical Analysis Summary

One-Year Technical Price Chart (as on December 13, 2021). Source: REFINITIV, Analysis by Kalkine Group

*The reference data in this report has been partly sourced from REFINITIV.

*Recommendation is valid on December 14, 2021 price as well.

Disclaimer

The advice given by Kalkine Canada Advisory Services Inc. and provided on this website is general information only and it does not take into account your investment objectives, financial situation and the particular needs of any particular person. You should therefore consider whether the advice is appropriate to your investment objectives, financial situation and needs before acting upon it. You should seek advice from a financial adviser, stockbroker or other professional (including taxation and legal advice) as necessary before acting on any advice. Not all investments are appropriate for all people. The website www.kalkine.ca is published by Kalkine Canada Advisory Services Inc. The link to our Terms & Conditions has been provided please go through them. On the date of publishing this report (mentioned on the website), employees and/or associates of Kalkine do not hold positions in any of the stocks covered on the website. These stocks can change any time and readers of the reports should not consider these stocks as advice or recommendations later.