Labrador Iron Ore Royalty Corporation Is Perfect for Income-Seeking Investors

Labrador Iron Ore Royalty Corporation (TSX:LIF) shareholders ride through the iron ore storm unscathed.

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 May 8, 2017 1:29 pm EDT

Iron ore futures were on the rise, and then they weren’t. China was going to be a healthy source of demand as imports to China increased dramatically, but then China’s tightening measures placed a stop on steel production and, consequently, iron ore demand.

These have pretty much been the headlines since I started following Labrador Iron Ore Royalty Corporation (TSX: LIF) back in the spring of 2015. If we’d stayed away from the stock, we would have missed out on a 7% dividend yield and a +30% capital appreciation of the stock. And since then, the dividend has been raised, and the current yield now stands at 11.5%.

Back then, I was attracted to the contrarian bet on the company for the following reasons.

First, the dividend yield provided a good backstop and form of security.

Second, although the company is involved in the very cyclical iron ore industry, the fact that its revenue is in the form of royalty income and that it does not take on any of the operational risks and expenses directly mitigates the risk inherent in the business.

Furthermore, the royalty that Labrador Iron Ore Royalty collects from Iron Ore Company of Canada (IOC) is “off the top,” so it’s not dependent on IOC being profitable. This means that a lot has to happen before Labrador Iron Ore Royalty’s income is jeopardized.

Labrador Iron Ore Royalty owns a 15.1% interest in OIC, and it owns mining leases and licences 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.

So, the price of iron ore has increased nicely since the beginning of 2016 and currently stands at approximately $65 per tonne. In February, the commodity was trading at almost $95 per tonne, but it has since come down as fundamentals deteriorated in the form of increasing supply and signs of weakening demand. This compares to lows of approximately $40 per tonne back in 2015 and highs of over $180 per tonne.

Production at IOC has been exceeding expectations, and costs have been coming down nicely; the company’s all-in sustaining costs are currently at US$36.41 per tonne — all this at an operation which produces high-quality iron ore that commands a premium in the marketplace.

It is for these reasons that I’m still bullish on the company for income-seeking investors.