Solid Fundamentals, Expects Higher Chinese Demand: Labrador Iron Ore Royalty Corporation (TSX: LIF) is a Canadian corporation, which generates its revenue from its equity investment in Iron Ore Company of Canada. The company holds a 15.10% equity interest in IOC and receives a 7% gross overriding royalty. The group also enjoys a commission on all IOC’s iron ore products which is 10% per tonne.

The group recently received the renewal of lease from the Ministry of Natural Resources for all 12 of LIORC's mines. The mining lease is renewed for a period of 30 years. The company is scheduled to hold its General Meeting on May 14, 2020.

FY19 Financial Highlights: IOC came up with decent full-year results, wherein the company reported total revenue of CAD 178.26 million, representing a healthy increase from CAD 130.87 million in FY18. The increase was driven by exuberant growth in IOC royalties, while income from IOC commissions grew at a decent pace. During the year production of Iron Ore increased to 17.14 million tons as compared to 15.10 million tones in FY18. Income before equity earnings and income taxes stood at CAD 133.84 million, as compared to CAD 96.42 million in the previous financial period, thanks to higher revenue and well supported by lower amortization and administrative expenses, while an increase in the Newfoundland royalty taxes remained a drag. Net income for the year stood at CAD 205.34 million, as compared to CAD 128.48 million in FY18.

FY19 Income Statement Highlights (Source: Company Reports)

Valuation Methodology (Illustrative): Price/Cash Flow based approach

Note: All forecasted figures and peers have been taken from Thomson Reuters, NTM-Next Twelve Months

Stock recommendation: The stock of LIF has delivered a healthy return of ~18% in the last one month, outperforming the index by ~12% and currently trading at a price of CAD 19.72 with a market capitalization of ~CAD 1.265 billion as on 24 April 2020 market close. Demand for Iron Ore is increasing primarily driven by China. We expect a steady recovery in the coming quarters and the company is well place to take advantage of additional demand, which would lead to meet its production guidance for FY20. Though the stock recovered in the past month, it is still down by ~29% in the last one year, which presents a good entry point. We have valued the stock using P/CF-based relative valuation method and consider companies such as Cameco Corp (TSX: CCO), First Quantum Minerals Ltd (TSX: FM), Lundin Mining Corp (TSX: LUN) etc. as peer group and arrived at a target price offering lower double-digit upside potential (in % terms). Given the Company’s strong business and attractive dividend yield of about 5%, we recommend a ‘Buy’ rating on the stock at the closing market price of CAD 19.72 as on April 24, 2020.

LIF Daily Price Chart (Source: Thomson Reuters)

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