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

Why Should Investors Book Profit? 

• Decline in Adjusted cash flow: In Q4 2021, the company reported decline in its adjusted cash flow to CAD 81.6 million against CAD 116.4 million in pcp.

• Weak liquidity profile: In FY21, the company's current ratio was 1.29x compared to the industry median of 2.51x. This lower ratio against the industry indicates that the company's short-term obligations are growing faster than its resources to cover them, which is not a good indication.

• Higher average collection period: LIF is having a higher average Accounts Receivable day of 70.7 days, against the industry median of 32.0 days. A higher average collection period indicates that the organization is collecting its payments at a slower pace. This may create a difficulty for the company to have enough cash on hand to meet their financial obligations.

• Stretched valuations: LIF shares are available at an NTM EV/Sales multiple of 14.9x compared to the Sector (Basic Materials) median of 1.7x and on NTM Price/ Cash Flow multiple its trading at 14.2x against a respected sector median of 4.8x. This implies that the shares are overvalued against the industry. The stock is overvalued on many valuation multiples. Higher valuations against an industry draws a caution line.
  

Valuation Methodology (Illustrative): EV to EBITDA

Analysis by Kalkine Group 

Stock recommendation

The company reported outstanding FY 2021 results, which benefitted from increased iron ore prices and pellet premiums, which were somewhat offset by decreased concentrate quantities for sale. However, its adjusted cash flow fell to CAD 81.6 million in the fourth quarter of FY 2021, compared to CAD 116.4 million in the previous corresponding quarter. As the world economy recovered from the COVID-19 lock-downs of 2020, global steel production increased in 2021. This resulted in increasing demand for seaborne iron ore from China and the rest of the globe.

Furthermore, iron ore prices were volatile throughout the year. When compared to an industry median, the company's liquidity ratio is on the lower range, suggesting a negative liquidity profile. Furthermore, its average A/R days are on the higher side when compared to the industry median, which may make it harder for the company to meet its financial responsibilities. Along these lines, the LIF stock is trading at stretched valuations across various criteria. Hence, based on the above rationales and valuation, we recommend a “Sell” rating on the stock at the closing price of CAD 49.91 on March 11, 2022.

One-Year Technical Price Chart (as on March 11, 2022). Source: REFINITIV, Analysis by Kalkine Group

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

Disclaimer

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