Should You Buy Labrador Iron Ore Royalty Company?

How much is a royalty worth? It depends who you ask.

| More on:
The Motley Fool
You’re reading a free article with opinions that may differ from The Motley Fool’s premium investing services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn more

In Canadian Business Magazine’s newest issue, they reveal the five “hottest stocks to buy right now”. Four of them had total returns greater than 40% last year, which may mean the best time to buy them has already passed. But one stood out, perhaps because it returned only 2.6% in 2013: Labrador Iron Ore Royalty Corporation (TSX:LIF). The company has been the subject of fierce debates, activist investors, and takeover rumours in the past year.

LIORC’s revenues and earnings come entirely from the Iron Ore Company of Canada (IOC), which mines iron ore from the Labrador trough. LIORC owns a 15.1% stake in the IOC, but also owns a 7% royalty on IOC’s sales.

Last year Waratah Advisors, a Toronto-based activist hedge fund, made the case that LIORC should pursue various “strategic alternatives”, including selling its 15.1% stake in the IOC. The argument was that LIORC was undervalued due to its confusing structure – divesting the equity stake in the IOC would allow the royalty piece to trade on its own merits. Royalty companies at the time had extremely rich valuations, and Waratah was arguing that LIORC’s royalty would be no different.

Canada’s largest royalty companies are Franco Nevada (TSX:FNV) and Silver Wheaton (TSX:SLW). The two companies sign royalty deals in gold and silver respectively. They have given investors an excellent way to gain exposure to precious metals and thus trade at very high multiples.

These high multiples are understandable. There are many investors who are afraid for the world economy, want to diversify their portfolio, or who simply want some exposure to precious metals. Franco and Silver Wheaton offer that opportunity without the risk of seeing dramatic cost over-runs, which have come far too frequently from the miners themselves.

But how many people are demanding a royalty for iron ore? Unlike precious metals, iron ore is very dependent on the health of the economy. Concerns about a property bubble in China affect steel and iron ore more than any other major commodity. A bet on iron ore does not provide the kind of diversification that precious metals do.

Making matters worse, the major iron ore players have been planning $250 billion worth of mine expansions, threatening to create a serious supply glut. Well-known hedge fund manager David Einhorn established a short position in iron ore in late 2012, referring to the commodity as a “bubble”.

This all makes LIORC a very interesting pick for Canadian Business’s hotlist. Perhaps LIORC’s 5.9% dividend yield plays a part. But as any investor knows, it is impossible to get a 5.9% yield without taking some noticeable risk.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Benjamin Sinclair has no positions in any of the stocks mentioned in this article.

More on Investing

A solar cell panel generates power in a country mountain landscape.
Top TSX Stocks

3 TSX Stocks You Can Hold for the Next 3 Decades

While the market faces significant headwinds, it's crucial to ensure that you can commit to the TSX stocks you're holding…

Read more »

energy oil gas
Dividend Stocks

2 High-Yield Energy Stocks to Buy as Recession Approaches

Energy stocks such as TC Energy and Canadian Natural Resources allow investors to generate income even in recessionary times.

Read more »

green power renewable energy
Dividend Stocks

3 Top Dividend Stocks to Drive Your Passive Income

These three high-yielding, safe dividend stocks could boost your passive income.

Read more »

Dial moving from 4G to 5G
Tech Stocks

TFSA Investors: 2 Canadian Stocks With Unbelievable Staying Power 

Amid economic uncertainty, investors look for stocks that can thrive in any crisis and grow long term. Here are two…

Read more »

protect, safe, trust
Dividend Stocks

TFSA Wealth: How to Earn $363 in Monthly Passive Income for Life

Canadian investors can harness the power of the TFSA to generate steady tax-free passive income for decades.

Read more »

Canadian Dollars
Dividend Stocks

TFSA Millionaire: How to Turn $40,000 Into $1.2 Million for Retirement

Here's how TFSA investors are using the power of compounding to buy top Canadian dividend stocks to build retirement wealth.

Read more »

potted green plant grows up in arrow shape
Stocks for Beginners

3 Superb Income and Growth Stocks for Every Portfolio

The market is full of superb income and growth stocks, but not all belong in your portfolio. Here are three…

Read more »

stock market
Stocks for Beginners

Worried About Stagflation? 2 Canadian Stocks for All Market Cycles 

Stagflation delays economic recovery. You can keep your portfolio stagflation ready with these Canadian stocks that are suitable for all…

Read more »