DBRS Comments on Labrador Iron Ore Royalty Income Fund Conversion to a Corporate

DBRS notes that on March 3, 2010, Labrador Iron Ore Royalty Income Fund (Labrador or the Fund) announced that it intends to ask its unitholders to approve the conversion of the Fund to a corporation in response to the 2007 Canadian federal government tax legislation that, beginning in 2011, will tax certain publicly traded trusts on the “non-portfolio earnings” distributed to its unitholders at a rate similar to the combined federal and provincial corporate tax rates. While today’s announcement does no affect the Fund’s STA-3 (low) stability rating, DBRS plans to discontinue the rating upon the Fund’s conversion to a corporation.

The announcement was made when the Fund released its results for 2009, which reflected a difficult year, although iron ore market conditions showed ongoing improvements throughout the last half of the year.

The impact of the economic downturn in late 2008 and early 2009 on the operations of Iron Ore Company of Canada (IOC; the source of income for the Fund) was a collapse in demand for pellets from its traditional European and North American customers. IOC reduced production and turned to short-term markets in China to fill its order book. Sales to China were focused on lower-margin concentrates rather than pellets, and prices in the spot market in Q1 2009 were well below contract prices for the Company’s more traditional markets. The strengthening Canadian dollar in 2009 also squeezed margins. By year-end 2009, IOC’s business had returned to a more normal emphasis on pellets and on sales to European and North American markets, although contract prices for pellets and concentrate dropped 48% and 30%, respectively, during the year.

The impact on the Fund was a 53% reduction in revenue in 2009 from record revenues in 2008 and a drop in distributions to unitholders to $2.00 per unit (all ordinary distributions) for the year versus $4.85 per unit in 2008, which included $3.00 per unit of special distributions in addition to the $1.85 per unit of ordinary distributions. The Fund retained $6.2 million on its balance sheet at the end of 2009 and has no external debt outstanding.

The outlook for 2010 is brighter, with a significant increase in iron ore prices expected and continued improvement in IOC’s customer base, allowing capacity iron ore production and pellet sales. This has been foreshadowed by a step-up in quarterly distributions from $0.50 per unit in the fourth quarter of 2009 to $0.75 per unit (including $0.25 per-unit special distribution) for the first quarter of 2010.

Notes:
All figures are in Canadian dollars unless otherwise noted.

The applicable methodology is Rating Mining, which can be found on our website under Methodologies.

This is a Corporate (Natural Resources) rating.