DBRS Comments on Labrador Iron Ore Royalty Income Fund Expansion of IOC Operations

DBRS notes that Labrador Iron Ore Royalty Income Fund (the Fund) announced today that the Iron Ore Company of Canada (IOC) will resume the expansion of its mining operations to increase annual production approximately 20% to 22 million tonnes by 2012. The project is expected to cost $435 million, which will likely be financed by IOC. Once in place, the expansion of IOC’s operations can be expected to increase the Fund’s revenue. DBRS views this as a positive development for the Fund, both from the perspective that it indicates a solid recovery is occurring in the iron ore business and that higher output by IOC will support higher income for the Fund over the longer term, although IOC’s capacity to pay dividends may be reduced during the construction phase. The resumption of the expansion at IOC is not expected to change the general characteristics of the Fund; hence, the Fund’s stability rating remains unchanged at STA-3 (low).

The announcement of the IOC expansion indicates that shareholders have approved the production expansion to 22 million tonnes as the first phase of a three-phase program to eventually expand to 26 million tonnes. The expansion program was initially approved in March 2008, but it was suspended later that same year as the global financial crisis hit the iron ore industry and financial markets worldwide.

It remains noteworthy that the Fund 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. Accordingly, DBRS plans to discontinue the Fund’s stability rating upon conversion to a corporation.

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.