Labrador Iron Ore Royalty Corporation: Look Where Most Investors Are Not Looking

Opportunity: Labrador Iron Ore Royalty Corporation’s (TSX:LIF) stock has doubled, and it provides a healthy dividend.

Karen Thomas, MSc, CFA

Karen is a stock market enthusiast focused on uncovering those stocks that she believes the market has mispriced. She does this through fundamental and quantitative analysis of companies and their industries, as well as a study of future opportunities and trends. She holds a Masters degree in Finance, the CFA designation, and has over 20 years of experience in the investment management industry. Having worked at a major pension fund, as well as two leading mutual fund firms as an analyst and portfolio manager, she has solid investing expertise which she aims to share with her readers.

Published February 2, 2017 12:22 pm EST

When we as investors begin to look into companies that are not widely covered and that seem boring or obscure, we might be surprised at what we find. We can find some real gems that can provide us with real opportunity to make good returns.

This is kind of the case with Labrador Iron Ore Royalty Corporation (TSX: LIF), and despite the fact that the stock has done exceptionally well in the last year, in my view, it is still a great addition to the portfolios of investors who are looking for a nice dividend yield, security of the dividend, and capital appreciation.

The stock has been on a tear in the last year, as iron ore has strengthened coming off its lows in 2015, and I see no reason why this upward trajectory should stop. And, as would be expected, Labrador Iron has rallied off strength in iron ore prices; its stock has doubled in the last year in line with the increase in the commodity.

The price of iron ore has almost doubled since the beginning of 2016 and currently stands at approximately $80 per tonne. This compares to lows of approximately $40 per tonne back in 2015 and, in its heyday, highs of over $180 per tonne.

As a reminder, Labrador Iron’s income is entirely dependent on Iron Ore Company of Canada (IOC), of which it owns a 15.1% interest in, it owns mining leases and licenses covering 18,200 hectares of land near Labrador City, from which it collects a 7% royalty, and receives a $0.10-per tonne commission on the product sold by IOC.

These are key points that form the bullish case for Labrador Iron.

Labrador Iron continues to receive a premium on it pellets sold — a reflection of its high-quality ore. In the third quarter of 2016, Labrador Iron received a +30% premium over the spot price for its pellets.

Although the dividend yield has come down in recent months due to the capital appreciation of the stock, it still stands at an attractive 5.2%. This compares to a +8% yield earlier this year.

Costs continue to come down, and production is on an upward trend. After a 20% decrease in unit costs in 2015, 2016 will see costs remain relatively flat. Production is expected to show an increase of 5% in 2016 and will exceed 20 million tonnes in 2017.

The company will be reporting its year-end 2016 results on March 2. The company is expected to see a continued decrease in unit costs, and significantly higher iron ore prices should be realized. Stay tuned.