Company overview

Labrador Iron Ore Royalty Corporation (TSX: LIF) is a Canada-based investment company. The Company owns interest in Iron Ore Company of Canada (IOC), a North American producer and exporter of iron ore pellets and high-grade concentrate, which is located in the Labrador City, Newfoundland and Labrador. The Company, through its subsidiary, Hollinger-Hanna Limited (Hollinger-Hanna), holds approximately 15.10% equity interest in IOC. It holds approximately 7% overriding royalty on all iron ore products produced, sold, delivered and shipped by IOC.

Investment Rationale

Strong underlying commodity price: Iron ore prices have recovered approximately 42.5% from 52w low of USD 84.5/t recorded in November 2021. The recent surge in the iron prices will have positive impact on the Labrador Iron Ore financial health as company’s underlying commodity is Iron ore. Iron ore remained close to an over two-month high of $122 a tonne hit on December 21st, amid hopes for an easing of steel production controls in top steel producer China after the Beijing 2022 Olympics next month. Hence, outlook for iron ore prices looks promising in 2022.

An Income Play: LIF shares are yielding significantly higher at the last traded price. At the last traded price LIF is offering a lucrative dividend yield of 11.94% which is gigantically higher amid a lower interest rate environment. Moreover, the company has track record of consistent dividend distribution over the past two decades. Therefore, positive movement in the underlying commodity prices and a lucrative dividend yield the company is offering will keep LIF shares in the street’s limelight.

Dividend history. Source: REFINITIV, Analysis by Kalkine Group

No balance sheet risk: The company is completely debt free with net cash in the balance sheet, implies that investors are not exposed to any balance sheet and company is funding its growth through internal accruals. This reflects strong competitive advantage LIF shareholders are having over the competition, as industry median Debt/Equity ratio as of September 30, 2021, stood at 0.23x, where LIF Debt/Equity is 0x.

Generating higher return on shareholders’ money: The company’s 5-year average Return on Equity stood at 37.08%, whereas peer’s average ROE in the same period stood at 15.5%. This gives a greater competitive edge to the LIF shareholders against the peers.

Industry leading margin profile: The company reported Gross margin in the quarter just gone by stood at 80.1% significantly higher compared to industry median of 50.2%, EBITDA margin in the same period stood at 79.3% vs. industry median of 41% and operating margin of 77.3% against the industry median of 27%, respectively. This reflects that the company has strong competitive moat against the competition.

Technical strength: At the last closing LIF shares above crucial short-term support levels of 21-day, 50-day and 100-day SMAs, a bullish indicator. Also, 21-day SMA and 50-day SMA are moving higher another positive indicator. Further, the leading momentum indicator, the Moving Average Convergence Divergence (MACD) is rising, with positive spread between short-length 12-day EMA and long-length 26-day SMA, and MACD oscillator hovering above 9-day SMA signal line, bullish indicator. Also, the 14-day RSI hovering in a neutral zone with bullish bias at 56.79. 

Technical chart (as on January 10, 2022). Source: REFINITIV, Analysis by Kalkine Group 

Risk Associated: Primarily the company is exposed to any adverse move in the iron prices. Further, the risk associated to investment are exposed to lower iron ore production output, production restriction on site on the back of the increase in COVID-19 cases, labour shortage, supply chain issues (both in domestic as well as abroad), steel production restriction imposed by Chines government, forex risk and other macro-economic risks.

Financial Highlights: Q3FY21

Source: Company Filing, Analysis by Kalkine Group

• Revenue up 41% on a YoY: During the three months under consideration, the company reported a revenue growth of 41% primarily on the back of higher underlying commodity prices on YoY basis. However, revenue was partially offset by lower volumes of concentrate for sales. Total iron ore sales tonnage by IOC) of 4.2 million tonnes in the third quarter of 2021 was 10% lower on a YoY basis.
• Solid bottom line performance: In the Q3FY21, the company’s reported net income surged by 82% against the comparable period of the previous financial year. This was driven by higher royalty income earned during the quarter and cost prudency maintained the management.
• Significant jump in CFO: During the quarter, the company’s reported cash flow from operation nudged by 1137% to CAD 137.3 million against CAD 11.1 million reported in the same period of the previous financial year.
• Solid growth in Dividend declared: In the Q3FY21 the board of LIF has declared a dividend of CAD 2.10/share compared to CAD 0.40/share declared in the same period of the previous financial year, primarily on the back of significant growth in Cash flow from operations
• Maintained balance sheet strength: As of September 30, 2021, the company had no debt, and total current assets of CAD 665 million and total current liabilities of CAD 517 million

Top-10 Shareholders

Top-10 shareholders together holds approximately 18.25% stake in the company with BlackRock Institutional Trust Company, N.A.  and Mackenzie Financial Corporation are the major shareholders holding approximately 5.72% and 2.61% stake in the company. Institutional ownership in the company stood at 24.38%.

Source: REFINITIV, Analysis by Kalkine Group

Valuation methodology (illustrative): Price-to-Cash Flow based valuation

Source: REFINITIV, Analysis by Kalkine Group 

Stock recommendation

The company has built upon strong fundamentals with industry leading margin profile, and debt free balance sheet, giving its shareholders a competitive advantage. Moreover, the company is offering a lucrative dividend yield of 11.94% and track record of dividend distribution over the past two decade, which positioned LIF shares well for growth as well as income seeking investors.

Also, the underlying commodity has recovered significantly from recent lows and expected to remain firm and elevated as demand for iron ore is picking up after China started cooling off restriction imposed on steel production. Also, steel production is expected to be higher in 2022 given influx of infrastructure projects across the globe is scheduled to be rolled out in 2022. Energy transition in Europe will also contribute significantly in steel demand. Hence, a higher steel demand will lead to a higher demand for iron ore.

Further, on daily price chart, LIF shares are hovering in bullish zone, with stock trading above crucial short-term support levels of 21-day and 50-day, 100-day SMAs, and MACD is rising and hovering above 9-day SMA signal line, a bullish indicator and 14-day RSI hovering in neutral zone with bullish bias.

However, any adverse move in the underlying commodity prices could have a weigh on the over performance of the company and its share price as well.

Hence, based on the above rationale we recommend a “Buy” rating on LIF stock at the closing price of CAD 38.53 (as on January 10, 2022)

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

Technical Summary

1-Year price chart (as on January 10, 2022). Source: REFINITIV, Analysis by Kalkine Group

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

*Recommendation is valid on January 11, 2022, price as well.

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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.