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 solid history of consistent dividend payment, backed by stable cash flow generation. During 9MFY21, the group distributed a total dividend of CAD 291.2 million, fairly higher than CAD 118.4 million in pcp. This is impressive as most of the companies are lowering their dividend distribution to retain their liquidity. Notably, the LIF stock carries a handsome dividend yield of ~11.058% on an annualized basis, which looks lucrative considering the ongoing interest rate scenario.

Five-year dividend distribution (Source: REFINITIV)

• Stake in IOC: The group owns a 15.1% stake in Iron Ore Company of Canada (IOC), a leading producer of high quality, low impurity iron ore products (65% Fe) and higher-margin iron-ore pellets. 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.

• Positive Macros: The operations of the company is directly correlated to the international iron ore prices. During a major part of FY21, we saw an upsurge in the international iron ore prices, supported by robust demand across the Globe, especially from China. However, at the end of 2021, commodity prices remained volatile due to a change in demand from China. In 2022, the commodity prices have recovered from their recent lows, and the demand is likely to remain stable, driven by the resume of construction activities across the Globe, including China. This is expected to support the commodity price and would likely result in improved realization prices.

• Robust Profitability margins: The company commands a higher profit margin than the industry median, 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 39.8%, respectively. Moreover, the operating margin stood at 77.3% in Q3FY21, significantly higher than the industry median of 27%.

• Reported strong performance metrics: For 9MFY21, IOC sold 12.40 million tonnes of iron ores compared to 13.96 million tonnes of iron ore in pcp. This includes 7.08 tonnes of pellets and 5.32 million tonnes of Concentrate for sale (CFS). Notably, 65% Fe index during the period (9MFY21) stood at USD 205/ tonne, surged from USD 114/ tonne in pcp. The average price for pellet premium stood at USD 62/ tonne versus USD 29/tonne in pcp. This has resulted in higher income (CAD 219.6 million v/s CAD 147.8 million in pcp) and an increase in cash flows (CAD 295.8 million v/s CAD 59.3 million in pcp) for IOC, which is worth mentioning.

• Stock Closed above crucial SMAs: On a daily chart, the LIF stock retained above its long-term trend line since March 2021, and has taken multiple support at that zone. This indicates an accumulation of the stock at the lower level, which is a positive signal. Notably, the stock also closed above its 50-days and 100-days simple moving averages, which also indicates a bullish pattern.         

Technical Price Chart (as on February 07, 2022). Source: REFINITIV, Analysis by Kalkine Group 

Risks associated with the Business:

Volatility in 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. 

Q3FY21 Financial Highlights:

Q3FY21 Income Statement Highlights (Source: Company Report)

• Strong top-line growth: LIF announced its quarterly result, wherein the company posted its revenue of CAD 7 million, as compared to CAD 52.8 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.

• Higher Expenses: In Q3FY21, the company’s total expenses surged to CAD 9 million from CAD 12.8 million in pcp due to an increase in Newfoundland royalty taxes, partially offset by lower administrative expenses. Income before income taxes stood at CAD 118.2 million, considerably higher than CAD 74.9 million in pcp.

• Elevated bottom-line: Net income for the period jumped to CAD 104.7 million, significantly higher than CAD 57.7 million in pcp. This was primarily due to the above-mentioned facts coupled with a fall in income taxes (CAD 13.5 million v/s CAD 17.1 million in pcp).

Top-10 Shareholders

Top ten shareholders of the company together hold approximately 17.57% stake, BlackRock Institutional Trust Company, N.A., BlackRock Investment Management (UK) Ltd. are the major shareholders in the company with an outstanding position of 5.73% and 2.44%, respectively.

Source: REFINITIV, Analysis by Kalkine Group 

 Valuation Methodology (Illustrative): EV to EBITDA

Analysis by Kalkine Group

*% Premium/(Discount) is based on our assessment of the company’s NTM trading multiple after considering its key growth drivers, economic moat, stock's historical trading multiples versus peer average/median, and investment risks.

Stock Recommendation:

Iron Ore Company of Canada (IOC) have a large, high-quality resource with a long mine life of ~25 years, which is a key positive and indicates stability in performance. 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 Nexa Resources SA, Wheaton Precious Metals Corp etc. Considering the aforesaid facts, we recommend a ‘Buy’ rating on the stock of LIF at the closing price of CAD 41.6 on February 07, 2022.

One-Year Technical Price Chart (as on February 07, 2022). Analysis by Kalkine Group

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

*Recommendation is valid on February 08, 2022, price as well. 

Technical Analysis Summary

Technical Indicators Defined: -

Support: A level where-in the stock prices tend to find support if they are falling, and downtrend may take a pause backed by demand or buying interest. 

Resistance: A level where-in the stock prices tend to find resistance when they are rising, and uptrend may take a pause due to profit booking or selling interest. 

Stop-loss: It is a level to protect further losses in case of unfavourable movement in the stock prices 

Note 1: The reference data in this report has been partly sourced from REFINITIV. 

Note 2: Investment decision should be made depending on the investors’ appetite on upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the Valuation has been achieved and subject to the factors discussed above.

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Disclaimer

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