Labrador Trough Iron Ore - Anglesey Mining plc
Equity Research Industry Report
March 2011
Labrador Trough Iron Ore A Race to Grow
Jackie Przybylowski, P.Eng., MBA – 416-863-2852 (Scotia Capital Inc. - Canada)
Materials – Metals & Mining Research
For Reg AC Certification and important disclosures see Appendix A of this report. Analysts employed by non-U.S. affiliates are not registered/qualified as research analysts with FINRA in the U.S.
Labrador Trough Iron Ore
March 2011
Labrador Iron Mines Holdings Limited (LIM-T) Mar 11, 2011: Rating: Risk: IBES EPS 2011E IBES EPS 2012E
$13.80 1-Sector Outperform Caution Warranted $-0.06 $1.38
1-Yr Target: 1-Yr ROR: 2-Yr Target: 2-Yr ROR: Div. (Curr.): Yield
$20.00 44.9% $20.00 44.9% $0.00 0.0%
Capitalization Shares O/S (M) Total Value ($M) Float O/S (M) Float Value ($M)
43.6 601.1 21.7 299.5
Valuation: 0.9x NAV (8%) Key Risks to Target: Commodity price, operating, and technical risks, environmental and legal risks Qtly Adj EPS (FD) (Next Release: Jul-11) Y/E MARCH-31 Jun Sep 2010A $-0.01A $-0.01A 2011E $-0.01A $-0.02A 2012E $-0.03 $0.51 2013E $0.27 $0.43
Dec $0.06A $-0.03A $0.08 $0.06
Mar $-0.01A $-0.03 $-0.03 $-0.03
Year $0.03A $-0.09 $0.53 $0.73
P/E n.a. n.a. 24.6x. 17.9x
Qtly CFPS (FD) 2010A 2011E 2012E 2013E
Dec $-0.02A $-0.02A $0.08 $0.07
Mar $-0.02A $-0.02 $-0.02 $-0.02
Year $-0.06A $-0.09 $0.56 $0.76
P/CF n.a. n.a. 23.5x 17.2x
Jun $-0.00A $-0.02A $-0.02 $0.28
Sep $-0.02A $-0.02A $0.52 $0.44
Regular Voting Note: Historical price multiple calculations use FYE price. Source: Reuters; company reports; Scotia Capital estimates.
LIM Be Nimble, LIM Be Quick INVESTMENT HIGHLIGHTS
The phased approach is low risk and quick to build. Labrador Iron Mines Holdings Limited (Labrador Iron Mines, or LIM) plans to start commissioning and mining activities as early as April 2011, weather permitting. Production will start with a small and moveable beneficiation plant, which is quicker and less expensive to build than a larger, centralized processing complex. The phased approach is also flexible, and will permit the company to expand production as required in the future. • Labrador Iron Mines offers high sensitivity to iron ore prices owing to its relatively high operating costs and expected near-term sales. High sensitivity to iron ore prices is attractive in the current strong iron ore commodity price environment. • A likely acquisition target. Management has strategically protected the acquisition potential of the company as Labrador Iron Mines has no partners or offtake agreements, and has not signed any longterm supply contracts. Independence ensures that all of Labrador Iron Mines’ future production would be available to a potential acquirer. • We have initiated coverage on the common shares of Labrador Iron Mines with a 1-Sector Outperform rating and a one-year target price of $20.00 per share, which implies a 45% rate of return. Our Labrador Iron Mines target price is based on a 0.9x multiple to our 8% discount rate NAV. Labrador Iron Mines is currently trading at 0.6x P/NAV. We expect that demonstration of successful production will close the gap between the current share price and our target value. •
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Labrador Iron Mines Holdings Limited
March 2011
Summary and Investment Recommendation We have initiated coverage on the common shares of Labrador Iron Mines Holdings Limited (Labrador Iron Mines) with a 1-Sector Outperform rating. Our one-year target price is $20.00 per share, which implies a 45% rate of return. Our Labrador Iron Mines target price is based on a 0.9x multiple to our 8% discount rate NAV. Labrador Iron Mines is currently trading at 0.6x P/NAV (see Exhibit 2.1), which is the lowest among the iron ore-focused equities in our coverage universe. We expect that demonstration of successful production at Labrador Iron Mines’ DSO project will close the gap between the current share price and our target value. Labrador Iron Mines offers high sensitivity to iron ore prices. High sensitivity to iron ore prices is attractive in the current strong iron ore commodity price environment. Among all iron ore-focused equities in our coverage universe, development-stage equities New Millennium and Labrador Iron Mines are most sensitive to iron ore prices. We estimate that a 10% change in the iron ore commodity price will impact Labrador Iron Mines’ fiscal 2012E EPS by 42%, fiscal 2012E CFPS by 40%, and NAV (8%) by 39%. The phased approach is low risk and quick to build. Labrador Iron Mines plans to start commissioning and mining activities as early as April 2011, weather permitting. Labrador Iron Mines plans to develop its 20 DSO deposits according to a phased approach. The company will mine the deposits in four stages, based on the deposits’ relative proximity to existing infrastructure. The phased approach will enable LIM to start production with a smaller beneficiation plant, which is less expensive to build and requires a shorter time for development and construction than would a larger, centralized processing complex. The phased approach is also flexible, and will permit the company to expand production as required in the future. Labrador Iron Mines could be a strategic acquisition target. We believe that the company is an attractive takeover target for steel producers seeking to secure supplies of key raw materials and to control input costs. In addition, management has strategically protected the acquisition potential of the company, as Labrador Iron Mines has no partners or offtake agreements, and has not signed any long-term supply contracts. Independence ensures that all of Labrador Iron Mines’ future production would be available to a potential acquirer. In our view, the most likely acquirer is Tata Steel, which already owns an 80% stake in the neighbouring New Millennium DSO project. Our target price implies a value in line with historical transactions. Our one-year target price of $20 per share and Labrador Iron Mines’ 151 Mt resource estimate (includes non-NI 43-101 compliant resources) implies a takeover transaction multiple of 5.8x, which is in line with the comparable transactions. Exhibit 2.1: Bulk Commodities Coverage Universe – Comparative Valuation Analysis (Calendar-Year Basis) Price 11-Mar-11 Coal Grande Cache Coal C$9.17 Western Coal C$11.67 Average, coal-focused equities Iron Ore Labrador Iron Mines C$13.80 Labrador Iron Ore Royalty Corp. C$71.22 New Millennium C$3.86 Average, iron ore-focused equities Average, bulk commodity coverage universe 1 2
Rating 1
One Year Target Price
Rate of Return
1-SO 2-SP
C$ 14.00 C$ 12.80
1-SO 2-SP 3-SU
C$ 20.00 C$ 84.00 C$ 4.75
Market Cap (M)
P/NAV
52.7% 9.7%
C$ 943 C$ 3,320
44.9% 20.8% 23.1%
C$ 601 C$ 2,279 C$ 571
1-SO = 1-Sector Outperform; 2-SP = 2-Sector Perform; 3-SU = 3-Sector Underperform P/E, P/CF, and EV/EBITDA multiples are capped at 30x
Source: Reuters; Scotia Capital estimates.
28
P/E 2
P/CF 2
EV/EBITDA 2
2011E
2012E
2011E
2012E
2011E
2012E
0.5 0.7 0.6
9.8 5.8 7.8
8.7 7.2 7.9
5.8 4.6 5.2
5.2 5.4 5.3
6.1 4.0 5.0
5.4 4.8 5.1
0.6 0.8 0.6 0.7 0.7
25.9 17.3 n.m. 21.6 13.3
18.9 11.7 n.m. 15.3 10.9
24.8 23.2 n.m. 24.0 12.7
18.1 28.0 n.m. 23.0 12.4
16.9 25.3 n.m. 21.1 11.5
12.4 20.9 n.m. 16.7 9.7
Labrador Trough Iron Ore
March 2011
Capital Markets Profile Labrador Iron Mines Holdings Limited is listed on the TSX under the symbol “LIM.” The company was originally listed under the symbol “LIR” following its December 2007 IPO but changed ticker symbols in March 2009. Labrador Iron Mines has approximately 44.0 million shares outstanding and a free float of approximately 21.7 million shares. The average daily trading volume over the past 200 days is approximately 190,000 shares. Exhibit 2.2 shows Labrador Iron Mines’ share price history since its IPO in late 2007 relative to the S&P/TSX Canadian Mining Index, and the iron ore benchmark settlement price for Carajas fines. Parent company Anglesey Mining Plc is LIM’s largest shareholder, with approximately 17.8 million shares or 41% of LIM’s shares outstanding. Two executive members of the LIM board are also executive members of the Anglesey board. Besides its ownership stake in Labrador Iron Mines, Anglesey Mining also owns the Parys Mountain copper-lead-zinc deposit in Wales. Ownership by institutions and insiders is significant. Institutional ownership represents approximately 23% of Labrador Iron Mines’ shareholder base, according to Reuters estimates. As at February 1, 2011, Labrador Iron Mines’ management held approximately 2.6 million shares or 6% of shares outstanding, including Chairman & CEO John Kearney, who holds approximately 1.6 million shares or 4% of shares outstanding, and Director & Executive Vice-President Terence McKillen, who holds approximately 0.8 million shares or 2% of shares outstanding. Labrador Iron Mines has raised approximately $88 million to fund the development of the Schefferville DSO project. The company last accessed the markets in March 2010 when it raised $35 million through the issue of $30 million in common shares and $5 million in flow-through shares on a bought deal basis at a price of $5.55 per treasury common share and $6.65 per flow-through share. The proceeds were used for exploration and development of the company’s mineral projects and for general corporate and working capital purposes. Previously, LIM raised approximately $53 million at its December 2007 IPO. Exhibit 2.2: Labrador Iron Mines Share Price History Relative to the S&P/TSX Canadian Mining Index and the Carajas Fines Benchmark Price $10.00
$180
$9.00
September 2010: Agreement with 1400 Quebec Innu to eliminate blockade
Carajas Fines benchmark price (U.S. cents/dmtu)
May 2010: Permit for railway received
$8.00
$140
$7.00
$120
$100
$80
$60
$40
$20
$0
LIM share price (C$)
Iron Ore Contract Price (US¢/dmtu)
LIM share price (C$) $160
March 2010: C$35 million bought deal financing
1000
$6.00
800
May 2008: LIM signs MOU agreement with Innu nation, files project registration application
$5.00
600
December 2007: LIM commenced trading on Toronto Stock Exchange
$4.00
$3.00
400
July 2010: Approval to commence construction of mining facilities
$2.00
200
November 2009: EIS accepted for Schefferville area project
$1.00
December 2009: Acquisition of additional 50 Mt DSO ore
$0.00
0 J
A
J
S D M J
2000
2001
S D M J 2002
S D M J 2003
S D M J 2004
S D M J 2005
Source: Reuters; company reports; AME Mineral Economics; Scotia Capital.
29
1200
S&P/TSX Canadian Mining Index
S&P/TSX Canadian Mining Index
$200
S D M J 2006
S D M J 2007
S D M J 2008
S D M J 2009
S D M J 2010
S D
Labrador Iron Mines Holdings Limited
March 2011
Corporate Profile Labrador Iron Mines is a development-stage company whose primary asset is its 100%-owned Schefferville project, located in western Labrador and northeastern Quebec. The project comprises 20 DSO deposits. The Iron Ore Company of Canada previously held Labrador leases and mined adjacent DSO deposits from 1954 to 1982. Labrador Iron Mines’ DSO deposits are in close proximity to New Millennium’s DSO assets. In October 2009, Labrador Iron Mines and New Millennium agreed to exchange certain mineral licences, which eliminated any fragmented ownership of mining rights in the Schefferville area and will enable both companies to separately explore, develop, and mine their respective DSO deposits. Labrador Iron Mines benefits from historical infrastructure in Schefferville. IOC developed the direct shipping iron ore reserves in the Schefferville region in the 1950s and, in one of the largest industrial undertakings in the world at the time, IOC built rail, port, and power infrastructure to connect Schefferville to the Sept-Îles shipping terminals and to the existing regional electrical power grid. A phased approach to development means lower capex, shorter construction time, and lower risk. Labrador Iron Mines plans to develop its 20 DSO deposits according to a phased approach. The company will mine the deposits in four stages, based on the deposits’ relative proximity to existing infrastructure. The phased approach will enable Labrador Iron Mines to start production with a smaller beneficiation plant, which is less expensive to build and requires a shorter time for development and construction than would a larger, centralized processing complex. The phased approach is also flexible, and will permit the company to expand production as required in the future.
Estimated capital intensity (C$ millions ÷ Production capacity (Mtpa))
Exhibit 2.3: Labrador Iron Mines’ DSO Project Enjoys Significantly Lower Capital Intensity Than Comparable Projects 250
200
150
100
50
0 Labrador Iron Mines DSO phase 1A
Source: Company reports; Scotia Capital estimates.
30
New Millennium DSO phase 1
Baffinland Mary River
Labrador Trough Iron Ore
March 2011
Low initial capital costs relative to other projects… Labrador Iron Mines’ phased development approach, its plan to rely on contract mining, and its access to existing infrastructure have reduced the cost to develop the project’s infrastructure, mines, mills, and auxiliary services. As illustrated in Exhibit 2.3, we estimate the initial capital costs of the project are significantly lower than the costs of other iron ore development projects in the Labrador Trough area relative to the anticipated long-run annual production capacities of the projects (as were estimated in the projects’ respective pre-construction technical reports). ... Low capital costs are offset by higher operating costs. The offset to low initial capital intensity is anticipated higher ongoing operating costs. Because Labrador Iron Mines will rely on contract labour to operate the mine and mill and to maintain equipment and facilities, and because it will contract the rail and port transportation of its ore, we estimate that Labrador Iron Mines’ operating costs will be higher than the operating costs of other iron ore development projects in the Labrador Trough area (illustrated in Exhibit 2.4, as the operating costs were estimated in the projects’ respective pre-construction technical reports). Labrador Iron Mines’ fiscal year begins April 1. The quarter ended December 31, 2010, is Labrador Iron Mines’ Q3/F11. Exhibit 2.4: Operating Costs Are High Relative to Other Projects $60
Estimated operating unit cost (C$/tonne)
$50
$40
$30
$20
$10
$0 Labrador Iron Mines DSO phase 1A
New Millennium DSO phase 1
Baffinland Mary River
Source: Company reports; Scotia Capital estimates.
MAINTAINING INDEPENDENCE
Labrador Iron Mines has strategically positioned itself as a future takeover target. Unlike many of the iron ore developers and early-stage producers in the Labrador Trough, Labrador Iron Mines is not obligated to supply iron ore to any one buyer under any long-term agreement. The company has no partners or offtake agreements, and has not signed any long-term supply contracts. Independence ensures that all of Labrador Iron Mines’ future production would be available to a potential acquirer.
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Labrador Iron Mines Holdings Limited
March 2011
Labrador Iron Mines could be a strategic acquisition target. We believe that the company is an attractive takeover target for steel producers seeking to secure supplies of key raw materials and to control input costs. In our view, a likely acquirer is Tata Steel, strategic partner with neighbouring New Millennium. Other potential buyers could include Wuhan Iron & Steel, ArcelorMittal, AK Steel, US Steel, or a diversified miner with exposure to bulk commodities. We expect that steel producers such as Wuhan, ArcelorMittal, AK Steel, and US Steel will continue the general trend of vertical integration among steelmakers in order to control input costs and to secure supply of key steelmaking raw materials. Labrador Iron Mines could be an attractive acquisition target to a diversified miner with exposure to bulk commodities that is seeking to increase exposure to the commodity or seeking to protect its market share (and pricing power) against vertical integration of steel producers. Tata Steel is the most likely acquirer. Given the close proximity of Labrador Iron Mines to New Millennium, we believe the combination of the two companies would produce significant cost synergies. Tata Steel, New Millennium’s strategic partner and majority owner of the NML DSO project, has recently reached an agreement to acquire a 64% ownership stake in NML’s taconite projects, and could also acquire Labrador Iron Mines and combine the two operations. However, we do not believe that Tata would likely move to acquire Labrador Iron Mines until a feasibility study on New Millennium’s LabMag and KéMag taconite deposits is completed, in order for Tata Steel to fully evaluate and compare its alternatives. We expect a feasibility study on NML’s taconite deposits will be completed by late 2011.
32
Labrador Trough Iron Ore
March 2011
Valuation and Analysis METHODOLOGY AND ASSUMPTIONS
Our primary valuation approach for Labrador Iron Mines is P/NAV, with our NAV based on a discounted cash flow analysis and using the USD/CAD exchange rate and iron ore price assumptions summarized in Exhibit 1.22. This approach is consistent with our coverage universe. We believe that P/NAV is the most appropriate metric for Labrador Iron Mines because it takes into account capital structure (through the deduction of liabilities in the NAV calculation) and captures the value for assets with long lives and for projects that are not currently in production but are likely to become producing assets at a future date. Exhibit 2.5: Labrador Iron Mines Net Asset Value 8%
10%
Primary Assets (after taxes) (C$ millions) DSO (100%) Total primary assets (C$ millions)
$979 $979
$820 $820
Corporate Adjustments (C$ millions) Net cash Reclamation and Mine Closure Obligations Corporate G&A Total corporate adjustments (C$ millions)
$20 ($1) ($20) ($1)
$20 ($1) ($17) $2
Our estimated NAV is $22.45 per share. We have assumed an 8% discount rate is applied to Labrador Iron Mines’ primary mining assets, which is consistent with the majority of companies in our coverage universe. Labrador Iron Mines’ NAV is based exclusively on the iron ore assets it holds in the Schefferville, Quebec, region (see Exhibit 2.5).
We apply a 0.9x multiple to our 8% discount rate to arrive at our one-year target price of $978 $822 $20.00 per share, which implies a 45% rate of $22.45 $18.88 return. This multiple is above the 0.8x P/NAV Source: Scotia Capital estimates. applied to New Millennium but below the 1.0x P/NAV applied to Labrador Iron Ore Royalty Corp. (LIORC). We believe that Labrador Iron Mines is a lower-risk investment relative to New Millennium because its project is nearly fully funded and close to production (compared with New Millennium, which is a development-stage company and will be required to raise additional capital to fund project development, in our view). We also believe that Labrador Iron Mines is a higher-risk investment relative to Labrador Iron Ore Royalty Corp., which receives steady royalty and commission revenues from the Iron Ore Company of Canada. LIORC also participates in strong iron ore commodity markets and capacity expansion at IOC through its 15.1% equity interest. Net Asset Value TOTAL NAV (C$ millions) NAVPS (C$/share)
Labrador Iron Mines is currently trading at 0.6x P/NAV (see Exhibit 2.1), which is the lowest among the iron ore-focused equities in our coverage universe. We expect that demonstration of successful production at Labrador Iron Mines’ DSO project will close the gap between the current share price and our target value. RECENT ACQUISITIONS ARE IN LINE WITH OUR TARGET
Our target price implies a value in line with historical transactions. Our one-year target price of $20 per share and Labrador Iron Mines’ 151 Mt Resource estimate (includes non-NI 43-101 compliant resources) implies a takeover transaction multiple of 5.8x, which is in line with the comparable transactions.
33
Labrador Iron Mines Holdings Limited
March 2011
Recently announced acquisitions of Baffinland Iron Mines and Consolidated Thompson Iron Mines bookend the expected takeover value for Labrador Iron Mines, in our view. Relative to Labrador Iron Mines’ Schefferville DSO project, Baffinland Iron Mines’ flagship Mary River asset is a more capitalintensive, earlier-stage development project while development of Consolidated Thompson’s flagship Bloom Lake mine was less capital-intensive. As is illustrated in Exhibit 1.25, historical transactions have valued comparable iron ore assets at between 1.4x and 6.4x NI 43-101 compliant resources. We believe that the implied 5.8x transaction multiple for Labrador Iron Mines is justified, as Labrador Iron Mines’ status as a near-term producer and its near-term minimal capital spending requirements are more in line with Consolidated Thompson’s status as a producer rather than Baffinland Iron Mines’ status as a development story with significant capex required to develop the Mary River mine and infrastructure. HIGH SENSITIVITY TO IRON ORE PRICES
Exhibit 2.6: Sensitivity to a 10% Change in Iron Ore Prices and the USD/CAD Exchange Rate
% Change in parameter for a 10% change in: Iron ore price
US$/C$
41.7%
-37.9%
2012E CFPS
40.0%
-36.4%
NAVPS
39.1%
-35.5%
2012E EPS
Source: Scotia Capital estimates.
Labrador Iron Mines offers high leverage to iron ore prices. High sensitivity to iron ore prices is attractive in the current strong iron ore commodity price environment. As illustrated in Exhibit 1.26, on a net asset value basis Labrador Iron Mines is most sensitive to iron ore prices for the same $1,000 investment because of high expected operating cash costs and due to its expected near-term production and sales.
Labrador Iron Mines’ financial performance will be largely driven by the iron ore price. As illustrated in Exhibit 2.6, we estimate that a 10% increase in the price of iron ore will impact Labrador Iron Mines’ fiscal 2012E EPS by 42%, fiscal 2012E CFPS by 40%, and NAV (8%) by 39%. Labrador Iron Mines is also sensitive to changes in the USD/CAD exchange rate. Iron ore prices are typically settled in U.S. dollars, while most of the company’s operating costs are incurred in Canadian dollars, as all of its operations are based in the provinces of Quebec and Newfoundland and Labrador. We estimate that a 10% increase in the USD/CAD exchange rate will reduce Labrador Iron Mines’ fiscal 2012E EPS by 38%, fiscal 2012E CFPS by 36%, and NAV (8%) by 36%.
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Labrador Trough Iron Ore
March 2011
Operations Profile Labrador Iron Mines’ Schefferville project comprises 20 DSO deposits (see Exhibit 2.7), which contain over 150 Mt total reserves (25 Mt NI 43-101 compliant estimates and 125 Mt historical). The company plans to mine all deposits using conventional open-pit mining methods. Exhibit 2.7: Phased Mine Approach Starts with Centrally Located Deposits
Source: Company reports.
Contract workers improve operating flexibility, but at a cost. Mining, processing, and transportation will all be conducted by contract workers, which will afford Labrador Iron Mines operational flexibility and does not require the company to maintain equipment or to hold a significant inventory of spare equipment or parts. On the other hand, the reliance on contract workers will increase operating costs. As illustrated in Exhibit 2.4, we expect unit operating costs at the Labrador Iron Mines Schefferville DSO project will be higher than other comparable mining operations. A seasonal operation. We expect that Labrador Iron Mines will report minimal production and sales in the December through March period each year, as the company intends to operate approximately eight months of the year (April through November), with mining and processing operations halted during the coldest winter months. Although mining operations could continue year-round, the processing and shipping operations are not economic during winter months, as higher-moisture ore would freeze in the rail cars. Labrador Iron Mines does not plan to install expensive and energy-intensive ore dryers, which would facilitate shipping and sales during winter months. Labrador Iron Mines has developed a phased approach to mining its deposits. The Schefferville DSO project will be mined in four stages, based on the deposits’ relative proximity to existing infrastructure (see Exhibit 2.7):
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Labrador Iron Mines Holdings Limited
March 2011
• Stage 1A comprises the James, Redmond, and Houston deposits. Stage 1A includes the most centrally located deposits, which are closest to the town of Schefferville and to existing road, rail, and power infrastructure. In total, Stage 1A deposits contain about 30.5 Mt Measured & Indicated Resources.
Stage 1B includes the Denault, Star Creek, Malcolm, Gill, Knob Lake, Squaw Woolett, Ruth 8, and Lance Ridge deposits. In total, Stage 1B deposits contain about 20.9 Mt NI 43-101 compliant and historical (non-NI 43-101 compliant) resources.
•
• Stage 2 includes the Howse, Barney, and Fleming 9 deposits. In total, Stage 2 deposits contain about 37.1 Mt historical (non-NI 43-101 compliant) iron ore resources.
Stages 3 and 4 include the Sawyer, Astray, Kivivic, Eclipse, Partington, and Trough deposits. Significant additional infrastructure will be required to bring Stages 3 and 4 into production, which is not scheduled until 2020. In total, Stages 3 and 4 deposits contain about 69.6 Mt historical (non-NI 43-101 compliant) iron ore resources.
•
PROCESSING: A UNIQUE APPROACH FOR UNIQUE ASSETS
Labrador Iron Mines’ Schefferville DSO projects are each individually relatively small and are dispersed, as compared with the large and continuous ore bodies mined by IOC, Cliffs Natural Resources, ArcelorMittal, and Consolidated Thompson in the Labrador City/Wabush area. To overcome the challenges of long haulage distances and high transportation charges that would normally be associated with small and dispersed deposits, Labrador Iron Mines has devised a unique approach to ore processing – the construction of several small, moveable beneficiation plants. We believe the approach is well suited to the company’s unique assets. Beneficiation is a simple process. Due to the direct-shipping nature of the Schefferville ore, the processing of Labrador Iron Mines’ ore will require only crushing, washing, and screening. This is comparable to the processing required to prepare New Millennium’s direct ship ore. Labrador Iron Mines’ tailings will be relatively simple to treat, as no chemicals will be used in the beneficiation process. Labrador Iron Mines will construct moveable beneficiation plants in order to reduce hauling costs, which would be increasingly significant as the company progresses through its mine plan. Downtime required for relocation of the plant is short – Labrador Iron Mines estimates that complete relocation and reinstallation of the equipment would require approximately six to eight weeks. The Silver Yard beneficiation plant (as illustrated in Exhibit 2.8) is nearly fully constructed and will be completed before commissioning and operations are scheduled to begin in April 2011. The first plant is initially located at Silver Yard, approximately 1 km northeast of the James deposit. Silver Yard will process ores from the James, Gill, and Ruth 8 deposits. When these assets are depleted, the plant will be relocated to a subsequent mining area. Planned hydrosizer will improve recoveries. Labrador Iron Mines has plans to construct a hydrosizer and filter at Silver Yard in 2011. The hydrosizer will recover “ultra fines” from the residue, thus improving the iron recoveries of the operation. The hydrosizer is expected to start operations in 2012; until then, the company will stockpile ultra fines for future treatment.
36
Labrador Trough Iron Ore
March 2011
Exhibit 2.8: Silver Yard Beneficiation Plant (November 2010)
Source: Scotia Capital.
Scaleable production through the construction of additional processing facilities. Labrador Iron Mines’ plans to increase iron ore output will be facilitated through the construction of additional beneficiation plants, which will be strategically located to reduce overall hauling distances over the life of the deposits. The company plans to start construction on a 3 Mtpa beneficiation plant at its Redmond site in late 2012 for operation beginning in 2013. We estimate that the capital cost required to build the second plant is approximately $25 million, which is comparable to the $20 million cost to build the initial 2 Mtpa plant at Silver Yard. The second plant would service both the Redmond and Houston deposits. DSO production is effectively capped at 5-6 Mtpa. Labrador Iron Mines plans to increase production capacity to approximately 6 Mtpa with the addition of two additional beneficiation plants. We believe that the company is effectively constrained to this throughput level because of limited capacity on the rail lines, in particular the TSH Railway. We do not expect meaningful expansion of the TSH Railway, as expansion would require significant capital expenditures and is not economic at current and anticipated iron ore prices. Ramp-up and Expansion Plans – A Coordinated Effort
The phased approach to development will require Labrador Iron Mines to simultaneously coordinate production, expansion, and commissioning of various mines, mills, and other pieces of equipment. Exhibit 2.9 summarizes our expectations for production volumes from the DSO deposits over the next five years. Our current estimates include assumptions for the development of Stages 1 and 2 deposits only, as the capital expenditures and permitting necessary to construct the significant infrastructure required to access the Stages 3 and 4 deposits could be substantial and are not well defined at this time. We note that the inclusion of Stages 3 and 4 deposits would not impact our short-term estimates, as Labrador Iron Mines’ production is effectively capped at 5-6 Mtpa due to rail capacity constraints.
37
Labrador Iron Mines Holdings Limited
March 2011
Exhibit 2.9: Planned Production from Labrador Iron Mines’ DSO Project by Stage 6
Direct Shipping Ore Production (Mt)
$80 5 $70 4
$60 $50
3 $40 2
$30 $20
1 $10 0
Cash Operating Unit Costs (US$/tonne ore)
$90
$0 2010
2011E
2012E
2013E
2014E
2015E
Fiscal Year Source: Scotia Capital estimates.
Commissioning and mining operations are expected to begin in April 2011, weather permitting. Labrador Iron Mines has completed preparation work and construction on both the James mine site and the Silver Yard beneficiation plant in order to facilitate commissioning in April 2011. Pre-stripping work has already started at the site; most of the James North pit area has already been stripped of overburden and the ore body is exposed along the first production bench. The first phase of the Silver Yard beneficiation plant is also substantially completed. We expect Labrador Iron Mines will sell approximately 1.5 Mt of lump ore and coarse sinter fines from the James deposit in calendar 2011 from production of approximately 2 Mt. Full-scale mining operations are expected to begin in April 2011 and will continue for eight months until November. Concurrent installation of new equipment. As the company completes commissioning on the first phase of its Silver Yard beneficiation plant, Labrador Iron Mines will add a fines recovery system (including a hydrosizer and pan filter) during summer 2011 to improve iron ore yield through the recovery of a new saleable product. The new product, known as sinter extra fines, can be sold separately or blended with the company’s coarse sinter fines product. Labrador Iron Mines expects that the new system will be operational by September 2011. Plans for an additional production line. As the company completes installation of the fines recovery system, it is also planning to install an additional production line at Silver Yard to produce an ultra fines product from lower-grade and finer ores. The ultra fines product would be sold as pellet feed. Installation of the expansion line, on which the company plans to start construction in fall 2011 and plans to start operations for spring 2012, is expected to increase the plant’s capacity to 3 Mtpa from 2 Mtpa through improved ore recovery.
38
Labrador Trough Iron Ore
March 2011
Expansion beyond the James deposit will start with construction in 2012. We anticipate that preparation of the Redmond deposit and construction of a second beneficiation plant will start late in calendar 2012. We expect that Labrador Iron Mines will start mining operations at the Redmond site in calendar 2013. LOGISTICS
Rail access to the site is completed. Labrador Iron Mines has completed the construction of its 100%owned 4.5 km spur line (as illustrated in Exhibit 2.10), which connects the Silver Yard beneficiation plant to the Tshiuetin Rail Transportation (TSH Rail). Labrador Iron Mines, in conjunction with New Millennium, plans to work with TSH to refurbish the railway main line in order to accommodate the planned DSO production from both companies. We expect that improvements to the rail line will be funded through usage-based tariffs or higher haulage rates. Exhibit 2.10: Labrador Iron Mines’ 100% Owned 4.5 Km Spur Line (November 2010)
Ore will travel along the TSH Rail line to Labrador City, where it will be hauled along the QNS&L Railway to Sept-Îles, Quebec. Cliffs Natural Resources’ Arnaud Railway joins the QNS&L Railway to ship loading facilities at the Pointe-Noire terminal. A haulage agreement has been reached with TSH Rail. Labrador Iron Mines expects it will haul ore for about 240 days during the 2011 shipping season, which implies a frequency of about two trains every three days. LIM will provide the locomotives, which will be leased by LIM and operated by TSH. Each train will comprise 120 rail cars and will be powered by two robotized SD-40 locomotives. These rail cars will also be leased by LIM. The agreement is only in place for 2011; a separate agreement must be reached for 2012 and subsequent years.
Source: Scotia Capital.
LIM has agreed to advance to TSH a capacity reservation deposit of $750,000 to enable TSH to prepare for smooth ramp-up of its operations to ship LIM’s iron ore in calendar 2011 in accordance with LIM’s operating requirements. TSH will repay the reservation deposit over a two-year period beginning in 2013 as a deduction against monthly haulage rates.
Negotiations with the other common carriers are progressing. Labrador Iron Mines recently signed a haulage agreement with the QNS&L Railway, while negotiations with the Arnaud Railway are under negotiation. Labrador Iron Mines expects that contract negotiations will be completed in calendar Q1/11, before the company is expected to begin shipping ore to customers. The company has previously transported equipment to its site and has shipped its bulk sample ore to Sept-Îles via the existing rail network.
39
Labrador Iron Mines Holdings Limited
March 2011
Port access is secured. Labrador Iron Mines has signed an agreement with the Sept-Îles Port Authority for the use of its Pointe-Noire port, which is currently used to ship ore from Cliffs Natural Resources’ Wabush mine. We believe that there is significant excess capacity at the port – Cliffs shipped approximately 2.5 Mt to its customers in 2009, which is well below the port’s nameplate capacity of approximately 10 Mtpa. Reliance on competitors will add to unit transportation costs. Similar to Labrador Iron Mines’ strategy to rely on contract labour, LIM plans to subcontract transportation of the company’s iron ore to operators of existing underutilized assets in the region. This strategy will dramatically reduce upfront capital requirements and will significantly shorten development and construction timelines. However, we anticipate that Labrador Iron Mines’ unit transportation costs will be higher than its peers on an ongoing basis.
40
Labrador Trough Iron Ore
March 2011
Risks START-UP RISKS
Labrador Iron Mines has limited experience in placing resource properties into production, and its ability to do so will be dependent upon using the services of appropriately experienced personnel or entering into agreements with other major resource companies that can provide such expertise. There can be no assurance that Labrador Iron Mines will produce revenue, operate profitably, or provide a return on investment in the future. FIRST NATIONS RISKS
Labrador Iron Mines conducts its operations in western Labrador and northeastern Quebec, which are areas subject to conflicting First Nations land claims. Failure to finalize an Impact Benefits Agreement (IBA) with any of the four groups may result in a delay to the start of mining operations. We expect that all agreements will be completed before spring 2011, which is when the company is expected to begin operations. The company has recognized the claims of four First Nations groups: the Labrador Innu (of Newfoundland and Labrador), the Naskapi Nation of Kawawachikamach (of Quebec), the Innu of Uashat and ManiUtenam (the Uashaunnuat) (of Quebec), and the Innu Matimekush-Lac John (of Quebec). The Labrador Metis Nation has asserted a land claim in parts of Labrador, which may include the Schefferville area. However, this land claim has not been accepted for negotiation by the Governments of Canada or of Newfoundland and Labrador. Labrador Iron Mines has signed Impact Benefits Agreements with the Labrador Innu and with the Naskapi Nation of Kawawachikamach. Negotiations with both Quebec Innu communities are continuing but agreements have not yet been reached. In December 2010, Labrador Iron Mines reached an Agreement in Principle with the Innu of Uashat and Mani-Utenam (the Uashaunnuat), which stipulates the principal terms to be included in a Final Agreement to be concluded by March 2011. LIM is also proceeding with negotiations with the Innu Matimekush-Lac John. In March 2008, LIM entered into a Memorandum of Understanding with the Innu community Matimekush-Lac John, wherein the parties agreed to negotiate an IBA and LIM agreed to use its best efforts to employ or contract with individuals and businesses of Matimekush. COMMODITY RISKS
Labrador Iron Mines has only minimal ability to affect the price received for the iron ore products it produces and sells. The pricing that the company will receive will be based on global prices and, ultimately, factors that are significantly out of its control. Any deviation from our forecast commodity prices could have a material impact on Labrador Iron Mines’ financial performance and could prevent the share price from achieving our one-year target price. DEPENDENCE ON THE STEEL INDUSTRY
Substantially all of the iron ore that Labrador Iron Mines produces is sold to steelmakers. The steel industry’s demand for iron ore is affected by a number of factors, including the cyclical nature of that industry’s business, technological developments in the steelmaking process, and availability of substitutes for steel. A significant reduction in the demand for steel products would reduce the demand for iron ore, which would have a material adverse effect on Labrador Iron Mines.
41
Labrador Iron Mines Holdings Limited
March 2011
FOREIGN CURRENCY EXCHANGE
Labrador Iron Mines’ operating results and cash flows are affected by foreign currency exchange rates. Exchange rate movements have a significant impact on results as revenues are received in U.S. dollars, while financing costs and equipment lease costs are in U.S. dollars and operating and capital costs are incurred primarily in Canadian dollars. In addition, the relative exchange rate fluctuation between the Canadian dollar and the currencies of Labrador Iron Mines’ international competitors impacts the ability of Labrador Iron Mines’ products to compete in foreign markets.
42
Labrador Trough Iron Ore
March 2011
Management John Kearney, Chairman and Chief Executive Officer
John Kearney has 37 years experience in the mining industry. He has been the Chairman and CEO of Labrador Iron Mines since its IPO in 2007 and is also Chairman of Labrador Iron Mines’ parent company, Anglesey Mining Plc. Mr. Kearney is currently the Chairman or Director of a number of public companies, including Canadian Zinc Corporation, and is currently President of the Northwest Territories and Nunavut Chamber of Mines and a Director of the Mining Association of Canada. Mr. Kearney holds degrees in law and economics from University College Dublin and an MBA from Trinity College Dublin. Bill Hooley, Director, President, and Chief Operating Officer
Bill Hooley is currently the Chief Executive of Anglesey Mining Plc. He has 39 years of experience in the global mineral industry. Prior to joining Labrador Iron Mines, Mr. Hooley was Managing Director of Micon International Ltd. between 2000 and 2005. Mr. Hooley holds a degree in mining engineering from the Royal School of Mines, Imperial College, London. Terence McKillen, Director and Executive Vice-President
Terence McKillen is a professional geologist and has 40 years of experience in the mining industry. He is currently Director, President, and CEO of Xtierra Inc., Conquest Resources Limited, and Chief Executive of Minco Plc. He holds degrees in geology from Trinity College Dublin and a master’s degree in mining geology and mineral exploration from the University of Leicester.
43
Labrador Iron Mines Holdings Limited
March 2011
Exhibit 2.11: Labrador Iron Mines Holdings Limited Value Summary
Income Statement (C$M) Revenues Operating Costs Depreciation and Amortization General and Administration Other Operating Earnings Interest & Other Income (expenses) Total Taxes Other Net Earnings Adjusted Net Earnings Shares O/S (million) (basic) Shares O/S (million) (FD) EBITDA Cash Flow Statement (C$M) Operating cash flow (before w/c changes) Change in non-cash working capital Cash from operating activities Cash from investing activities Cash from financing activities Increase (decrease) in cash Net free cash flow
All amounts in C$, except where noted
Labrador Iron Mining Holdings Limited (LIM.TO C$13.80)
Q1/11A Q2/10A
Q2/11A Q3/10A
Q3/11A Q4/10A
Q4/11E Q1/11E
2010A 2009
2011E 2010
2012E 2011
2013E 2012
($0.01) ($0.01) ($0.02) ($0.13) $0.00 $4.04
($0.02) ($0.02) ($0.02) ($0.09) $0.00 $4.02
($0.03) ($0.03) ($0.02) ($0.08) $0.00 $3.99
($0.03) ($0.03) ($0.02) ($0.13) $0.00 $3.96
$0.03 $0.03 ($0.06) ($0.27) $0.00 $4.73
($0.09) ($0.09) ($0.09) ($0.43) $0.00 $3.96
$0.53 $0.53 $0.56 $0.14 $0.00 $4.52
$0.73 $0.73 $0.76 $0.06 $0.00 $5.28
n.m. n.m. n.m. n.m. -28% 1% 0.0%
n.m. n.m. n.m. n.m. -14% n.m. 0.0%
25.9 24.8 16.5 26% -15% 12% 0.0%
18.9 18.1 12.1 25% -14% 14% 0.0%
SC C$ Forecast (US$/C$)1 Expressed on a calendar year basis
$0 $0 ($0) ($1) ($0) ($1) $0 $0 $0 ($1) ($1) 43.6 43.6 ($1)
$0 $0 $0 ($1) ($0) ($1) $0 $0 $0 ($1) ($1) 43.6 43.6 ($1)
$0 $0 $0 ($1) ($0) ($1) $0 $0 $0 ($1) ($1) 43.6 43.6 ($1)
$0 $0 ($0) ($3) ($0) ($3) $0 $4 $0 $1 $1 37.1 37.1 ($3)
$0 $0 ($0) ($4) ($1) ($5) $0 $1 $0 ($4) ($4) 43.6 43.6 ($5)
$131 ($92) ($0) ($4) ($1) $34 $0 ($11) $0 $23 $23 43.6 43.6 $34
$185 ($133) ($1) ($4) ($1) $46 $0 ($14) $0 $32 $32 43.6 43.6 $47
($1) $2 $1 ($9) $0 ($7) ($6)
($1) $1 ($0) ($5) ($0) ($6) ($4)
($1) $0 ($1) ($3) $0 ($4) ($4)
($1) $0 ($1) ($5) $0 ($6) ($6)
($2) ($1) ($3) ($17) $33 $13 ($10)
($4) $3 ($1) ($21) $0 ($22) ($19)
$24 ($0) $24 ($18) ($1) $6 $6
$33 ($1) $33 ($31) $0 $2 $3
190 228 209 $1.03
190 228 209 $1.03
185 222 204 $1.03
180 216 198 $1.03
109 134 132 $0.97
173 204 196 $1.03
186 224 205 $1.01
170 204 187 $0.99
0.0 0.0 $0.00 8% NPV $979 $979 $21 ($2) ($1) ($20) $978 $22.45 0.61
0.0 0.0 $0.00 10% NPV $820 $820 $21 ($2) ($1) ($17) $822 $18.88 0.73
0.0 0.0 $0.00 2010A
0.0 0.0 $0.00 2011E
0.7 0.5 $81.67 2012E
1.3 0.4 $74.75 2013E
Current Assets Long-Term Assets Total Assets
$49 $161 $210
$27 $185 $211
$33 $202 $235
$35 $233 $268
Total Debt Other Liabilities Minority interests Shareholders' Equity Total Liabilities & Equity
$0 $34 $0 $176 $210
$2 $36 $0 $173 $211
$2 $36 $0 $197 $235
$2 $36 $0 $230 $268
$513 ($48) $0 $0 $464
$601 ($24) $0 $0 $577
$601 ($31) $0 $0 $570
$601 ($33) $0 $0 $568
$6 $3 $0 Jan-09
Jul-09
Jan-10
Jul-10
Jan-11
21.0 18.0 15.0 12.0 9.0 6.0 3.0 0.0 Jan-09
Jul-09
Jan-10
Jul-10
Jan-11
S&P/TSX Metals & Mining S&P/TSX
Group NPV distribution
Direct Shipping Ore 100%
Rating and Target Rating 1-Sector Outperform Risk Ranking Caution warranted 1-yr Target C$20.00 1-yr ROR 44.9% Valuation Method: 0.9x NAV (8%)
2013E
2012E
Source: Company reports; Reuters; Scotia Capital estimates.
2011E
Leverage: % Change in parameter for 10% change in Iron Ore US$/C$ 41% -37% 39% -35% 39% -36%
F2011E EPS F2011E CFPS 8% NAV per share
Revenue Distribution
$200 $180 $160 $140 $120 $100 $80 $60 $40 $20 $0 2010
0.0 0.0 0.0 0.0 $0.00 $0.00 Balance Sheet (C$)
Enterprise Value (C$) Market Capitalization Net Debt Minority Interests Other Assets Enterprise Value
44
$9
LIM.TO
1
Operations Parameters Iron ore fines production (Mt) Iron ore lump production (Mt) Unit cash costs (US$/tonne) Net Asset Value Direct Shipping Ore Total primary assets Working Capital Long-Term Debt Reclamation Obligations Corporate SG&A Net Asset Value NAVPS (C$/share) Multiple to NAV
$12
Relative Price Performance $0 $0 ($0) ($1) ($0) ($1) $0 $0 $0 ($1) ($1) 43.5 43.5 ($1)
Scotia Capital Forecasts Iron ore, Hamersley fines (US cents/dmtu FOB)1 Iron ore, Hamersley lump (US cents/dmtu FOB)1 Iron ore, Nibrasco pellets (US cents/dmtu FOB)1
Share Price History (LIM.TO, C$) $15
.
Fiscal Calendar Per share data Net Earnings per share - FD Adjusted Net Earnings per share - FD Operating CFPS (pre W/C changes) (basic) Net Free Cash Flow per share (basic) Dividend per share (basic) Book Value per Share (basic) Financial Ratios Price/Earnings (P/E) Price/Cash Flow per Share (P/CF) EV/EBITDA EBITDA Margin Net Debt/[Total debt+equity] ROE Dividend Yield
Revenues (C$M)
March 11, 2011
Labrador Trough Iron Ore
March 2011
Financial Statements Exhibit 2.12: Labrador Iron Mines Holdings Limited Income Statement Q1/11A Q2/10A $0.0 $0.0 $0.0
Q2/11A Q3/10A $0.0 $0.0 $0.0
Q3/11A Q4/10A $0.0 $0.0 $0.0
Q4/11E Q1/11E $0.0 $0.0 $0.0
2009A
2010A
2011E
2012E
$0.0 $0.0 $0.0
$0.0 $0.0 $0.0
$0.0 $0.0 $0.0
$131.4 ($91.9) $39.5
Operating expenses General and administration Stock-based compensation Depreciation / amortization Exploration and business development Total operating expenses
$0.9 $0.0 $0.0 $0.0 $0.9
$1.1 $0.2 $0.0 $0.0 $1.3
$1.1 $0.2 $0.0 $0.0 $1.3
$1.1 $0.2 $0.0 $0.0 $1.3
$1.6 $0.7 $0.0 $0.0 $2.3
$2.6 $0.1 $0.1 $0.0 $2.8
$4.1 $0.6 $0.1 $0.0 $4.7
$4.3 $0.7 $0.3 $0.0 $5.3
Operating earnings
($0.9)
($1.3)
($1.3)
($1.3)
($2.3)
($2.8)
($4.7)
$34.2
Other income and expenses Interest income Interest and financing (expense) Total other income and expenses
$0.0 $0.0 $0.0
$0.1 $0.0 $0.1
$0.0 $0.0 $0.0
$0.0 $0.0 $0.0
$1.2 $0.0 $1.2
$0.1 $0.0 $0.1
$0.1 $0.0 $0.1
$0.0 $0.0 $0.0
Earnings (loss) before taxes and other items
($0.9)
($1.2)
($1.3)
($1.3)
($1.1)
($2.7)
($4.6)
$34.2
Current taxes Deferred taxes Total taxes
$0.0 ($0.3) ($0.3)
$0.0 ($0.3) ($0.3)
$0.0 $0.0 $0.0
$0.0 $0.0 $0.0
$0.0 ($0.8) ($0.8)
$0.0 ($3.9) ($3.9)
$0.0 ($0.6) ($0.6)
$11.0 $0.0 $11.0
Net earnings (loss) Adjusted net earnings (loss)
($0.6) ($0.6)
($0.9) ($0.9)
($1.3) ($1.3)
($1.3) ($1.3)
($0.4) ($0.4)
$1.2 $1.2
($4.0) ($4.0)
$23.2 $23.2
EPS (adjusted and diluted) C$/share
($0.01)
($0.02)
($0.03)
($0.03)
($0.01)
$0.03
($0.09)
$0.53
(millions C$)
Fiscal calendar
Revenue Operating costs Gross margin
Source: Company reports; Scotia Capital estimates.
45
Labrador Iron Mines Holdings Limited
March 2011
Exhibit 2.13: Labrador Iron Mines Holdings Limited Cash Flow Statement Q1/11A Q2/10A
Q2/11A Q3/10A
Q3/11A Q4/10A
Q4/11E Q1/11E
2009A
2010A
2011E
2012E
Operating activities Net earnings Depreciation and depletion Stock-based compensation Future income tax recovery Other items Operating cash flow
($0.6) $0.0 $0.0 ($0.3) $0.0 ($0.8)
($0.9) $0.0 $0.2 ($0.3) $0.0 ($1.0)
($1.3) $0.0 $0.2 $0.0 $0.0 ($1.1)
($1.3) $0.0 $0.2 $0.0 $0.0 ($1.1)
($0.4) $0.0 $0.7 ($0.8) $0.0 ($0.4)
$1.2 $0.1 $0.1 ($3.9) $0.0 ($2.5)
($4.0) $0.1 $0.6 ($0.6) $0.0 ($3.9)
$23.2 $0.0 $0.7 $0.0 $0.0 $24.0
Change in non-cash working capital Cash provided (used) from operating activities
$1.9 $1.1
$0.7 ($0.3)
$0.0 ($1.1)
$0.0 ($1.1)
($0.4) ($0.8)
($0.6) ($3.1)
$2.6 ($1.4)
$0.0 $24.0
Investing activities Mineral property interests (Decrease) in long-term payables Property, plant & equipment Increase in non-current inventory Other items Cash provided (used) from investing activities
($1.3) ($0.5) ($6.8) $0.0 $0.0 ($8.6)
($2.0) $0.0 ($3.4) $0.0 $0.0 ($5.4)
$0.0 $0.0 ($2.5) $0.0 $0.0 ($2.5)
$0.0 $0.0 ($4.5) $0.0 $0.0 ($4.5)
($10.4) $0.0 ($1.0) $0.0 $0.0 ($11.4)
($7.4) ($2.1) ($7.0) $0.0 $0.0 ($16.5)
($3.3) ($0.5) ($17.2) $0.0 $0.0 ($21.0)
$0.0 $0.0 ($17.5) $0.0 $0.0 ($17.5)
Financing activities Borrowings Repayments Common shares issued Exercise of stock options Exercise of warrants Cash provided (used) from financing activities
$0.0 ($0.1) $0.0 $0.2 $0.1 $0.2
$0.0 ($0.2) $0.0 $0.1 $0.0 ($0.0)
$0.0 $0.0 $0.0 $0.0 $0.0 $0.0
$0.0 $0.0 $0.0 $0.0 $0.0 $0.0
$0.0 $0.0 ($0.0) $0.0 $0.0 ($0.0)
$0.0 $0.0 $32.7 $0.1 $0.0 $32.8
$0.0 ($0.2) $0.0 $0.4 $0.1 $0.2
$0.0 ($0.6) $0.0 $0.0 $0.0 ($0.6)
Effect of exchange rate changes on cash and equivalents
$0.0
$0.0
$0.0
$0.0
$0.0
$0.0
$0.0
$0.0
Increase (decrease) in cash Cash balance @ BOP Cash balance @ EOP
($7.3) $48.3 $41.0
($5.7) $41.0 $35.3
($3.6) $35.3 $31.7
($5.6) $31.7 $26.1
($12.3) $47.5 $35.2
$13.1 $35.2 $48.3
($22.2) $48.3 $26.1
$5.9 $26.1 $32.0
Reported operating cash flow (pre-W/C adjustments) Net free cash flow (millions C$)
($0.8) ($5.8)
($1.0) ($3.9)
($1.1) ($3.6)
($1.1) ($5.6)
($0.4) ($1.9)
($2.3) ($9.9)
($3.9) ($18.8)
$24.2 $6.1
Operating CFPS, pre-W/C adjustments (C$/share) Net free cash flow per share (C$/share)
($0.02) ($0.13)
($0.02) ($0.09)
($0.02) ($0.08)
($0.02) ($0.13)
($0.01) ($0.05)
($0.06) ($0.27)
($0.09) ($0.43)
$0.56 $0.14
(millions C$)
Fiscal calendar
Source: Company reports; Scotia Capital estimates.
46
Labrador Trough Iron Ore
March 2011
Exhibit 2.14: Labrador Iron Mines Holdings Limited Balance Sheet Q1/11A Q2/10A
Q2/11A Q3/10A
Q3/11A Q4/10A
Q4/11E Q1/11E
2009A
2010A
2011E
2012E
Current assets Cash and cash equivalents Accounts receivable Inventories Other current assets Total current assets
$41 $1 $0 $0 $42
$35 $0 $0 $0 $36
$32 $0 $0 $0 $32
$26 $0 $0 $0 $27
$35 $1 $0 $0 $36
$48 $1 $0 $0 $49
$26 $0 $0 $0 $27
$32 $0 $0 $0 $33
Long-term assets Mineral property interests Prepaid expenses Property and equipment Inventory Other long term assets Total long term assets
$152 $2 $17 $0 $0 $172
$155 $2 $21 $0 $0 $178
$155 $2 $23 $0 $0 $180
$155 $2 $28 $0 $0 $185
$141 $0 $1 $0 $0 $142
$151 $2 $8 $0 $0 $161
$155 $2 $28 $0 $0 $185
$155 $2 $45 $0 $0 $202
Total assets
$213
$213
$212
$211
$178
$210
$211
$235
Current liabilities Accounts payable and accrued liabilities Current portion of long-term debt and capital leases Short-term debt Total current liabilities
$4 $1 $0 $4
$5 $1 $0 $5
$5 $1 $0 $5
$5 $1 $0 $5
$1 $0 $0 $1
$2 $0 $0 $2
$5 $1 $0 $5
$5 $0 $0 $5
Long-term liabilities Long-term payables Long-term portion of debt and capital lease obligations Asset retirement obligation Future income and mining taxes Total long-term liabilities
$1 $2 $0 $31 $33
$1 $2 $1 $31 $33
$1 $2 $1 $31 $33
$1 $2 $1 $31 $33
$0 $0 $0 $36 $36
$1 $0 $0 $31 $32
$1 $2 $1 $31 $33
$1 $2 $1 $31 $33
Total liabilities
$38
$39
$39
$39
$37
$34
$39
$38
Shareholders' Equity Common share capital Warrants Contributed Surplus Retained earnings (deficit) Accumulated other comprehensive income Total shareholders' equity
$161 $1 $14 ($1) $0 $175
$161 $1 $14 ($2) $0 $175
$161 $1 $14 ($3) $0 $174
$161 $1 $15 ($4) $0 $173
$126 $6 $8 $2 $0 $141
$161 $1 $14 ($0) $0 $176
$161 $1 $15 ($4) $0 $173
$161 $1 $15 $19 $0 $197
Total liabilities and shareholders' equity
$213
$213
$212
$211
$178
$210
$211
$235
(millions C$)
Fiscal calendar
Assets
Liabilities and Shareholders' Equity
Source: Company reports; Scotia Capital estimates.
47
March 2011
Labrador Trough Iron Ore A Race to Grow
Jackie Przybylowski, P.Eng., MBA – 416-863-2852 (Scotia Capital Inc. - Canada)
Materials – Metals & Mining Research
For Reg AC Certification and important disclosures see Appendix A of this report. Analysts employed by non-U.S. affiliates are not registered/qualified as research analysts with FINRA in the U.S.
Labrador Trough Iron Ore
March 2011
Labrador Iron Mines Holdings Limited (LIM-T) Mar 11, 2011: Rating: Risk: IBES EPS 2011E IBES EPS 2012E
$13.80 1-Sector Outperform Caution Warranted $-0.06 $1.38
1-Yr Target: 1-Yr ROR: 2-Yr Target: 2-Yr ROR: Div. (Curr.): Yield
$20.00 44.9% $20.00 44.9% $0.00 0.0%
Capitalization Shares O/S (M) Total Value ($M) Float O/S (M) Float Value ($M)
43.6 601.1 21.7 299.5
Valuation: 0.9x NAV (8%) Key Risks to Target: Commodity price, operating, and technical risks, environmental and legal risks Qtly Adj EPS (FD) (Next Release: Jul-11) Y/E MARCH-31 Jun Sep 2010A $-0.01A $-0.01A 2011E $-0.01A $-0.02A 2012E $-0.03 $0.51 2013E $0.27 $0.43
Dec $0.06A $-0.03A $0.08 $0.06
Mar $-0.01A $-0.03 $-0.03 $-0.03
Year $0.03A $-0.09 $0.53 $0.73
P/E n.a. n.a. 24.6x. 17.9x
Qtly CFPS (FD) 2010A 2011E 2012E 2013E
Dec $-0.02A $-0.02A $0.08 $0.07
Mar $-0.02A $-0.02 $-0.02 $-0.02
Year $-0.06A $-0.09 $0.56 $0.76
P/CF n.a. n.a. 23.5x 17.2x
Jun $-0.00A $-0.02A $-0.02 $0.28
Sep $-0.02A $-0.02A $0.52 $0.44
Regular Voting Note: Historical price multiple calculations use FYE price. Source: Reuters; company reports; Scotia Capital estimates.
LIM Be Nimble, LIM Be Quick INVESTMENT HIGHLIGHTS
The phased approach is low risk and quick to build. Labrador Iron Mines Holdings Limited (Labrador Iron Mines, or LIM) plans to start commissioning and mining activities as early as April 2011, weather permitting. Production will start with a small and moveable beneficiation plant, which is quicker and less expensive to build than a larger, centralized processing complex. The phased approach is also flexible, and will permit the company to expand production as required in the future. • Labrador Iron Mines offers high sensitivity to iron ore prices owing to its relatively high operating costs and expected near-term sales. High sensitivity to iron ore prices is attractive in the current strong iron ore commodity price environment. • A likely acquisition target. Management has strategically protected the acquisition potential of the company as Labrador Iron Mines has no partners or offtake agreements, and has not signed any longterm supply contracts. Independence ensures that all of Labrador Iron Mines’ future production would be available to a potential acquirer. • We have initiated coverage on the common shares of Labrador Iron Mines with a 1-Sector Outperform rating and a one-year target price of $20.00 per share, which implies a 45% rate of return. Our Labrador Iron Mines target price is based on a 0.9x multiple to our 8% discount rate NAV. Labrador Iron Mines is currently trading at 0.6x P/NAV. We expect that demonstration of successful production will close the gap between the current share price and our target value. •
27
Labrador Iron Mines Holdings Limited
March 2011
Summary and Investment Recommendation We have initiated coverage on the common shares of Labrador Iron Mines Holdings Limited (Labrador Iron Mines) with a 1-Sector Outperform rating. Our one-year target price is $20.00 per share, which implies a 45% rate of return. Our Labrador Iron Mines target price is based on a 0.9x multiple to our 8% discount rate NAV. Labrador Iron Mines is currently trading at 0.6x P/NAV (see Exhibit 2.1), which is the lowest among the iron ore-focused equities in our coverage universe. We expect that demonstration of successful production at Labrador Iron Mines’ DSO project will close the gap between the current share price and our target value. Labrador Iron Mines offers high sensitivity to iron ore prices. High sensitivity to iron ore prices is attractive in the current strong iron ore commodity price environment. Among all iron ore-focused equities in our coverage universe, development-stage equities New Millennium and Labrador Iron Mines are most sensitive to iron ore prices. We estimate that a 10% change in the iron ore commodity price will impact Labrador Iron Mines’ fiscal 2012E EPS by 42%, fiscal 2012E CFPS by 40%, and NAV (8%) by 39%. The phased approach is low risk and quick to build. Labrador Iron Mines plans to start commissioning and mining activities as early as April 2011, weather permitting. Labrador Iron Mines plans to develop its 20 DSO deposits according to a phased approach. The company will mine the deposits in four stages, based on the deposits’ relative proximity to existing infrastructure. The phased approach will enable LIM to start production with a smaller beneficiation plant, which is less expensive to build and requires a shorter time for development and construction than would a larger, centralized processing complex. The phased approach is also flexible, and will permit the company to expand production as required in the future. Labrador Iron Mines could be a strategic acquisition target. We believe that the company is an attractive takeover target for steel producers seeking to secure supplies of key raw materials and to control input costs. In addition, management has strategically protected the acquisition potential of the company, as Labrador Iron Mines has no partners or offtake agreements, and has not signed any long-term supply contracts. Independence ensures that all of Labrador Iron Mines’ future production would be available to a potential acquirer. In our view, the most likely acquirer is Tata Steel, which already owns an 80% stake in the neighbouring New Millennium DSO project. Our target price implies a value in line with historical transactions. Our one-year target price of $20 per share and Labrador Iron Mines’ 151 Mt resource estimate (includes non-NI 43-101 compliant resources) implies a takeover transaction multiple of 5.8x, which is in line with the comparable transactions. Exhibit 2.1: Bulk Commodities Coverage Universe – Comparative Valuation Analysis (Calendar-Year Basis) Price 11-Mar-11 Coal Grande Cache Coal C$9.17 Western Coal C$11.67 Average, coal-focused equities Iron Ore Labrador Iron Mines C$13.80 Labrador Iron Ore Royalty Corp. C$71.22 New Millennium C$3.86 Average, iron ore-focused equities Average, bulk commodity coverage universe 1 2
Rating 1
One Year Target Price
Rate of Return
1-SO 2-SP
C$ 14.00 C$ 12.80
1-SO 2-SP 3-SU
C$ 20.00 C$ 84.00 C$ 4.75
Market Cap (M)
P/NAV
52.7% 9.7%
C$ 943 C$ 3,320
44.9% 20.8% 23.1%
C$ 601 C$ 2,279 C$ 571
1-SO = 1-Sector Outperform; 2-SP = 2-Sector Perform; 3-SU = 3-Sector Underperform P/E, P/CF, and EV/EBITDA multiples are capped at 30x
Source: Reuters; Scotia Capital estimates.
28
P/E 2
P/CF 2
EV/EBITDA 2
2011E
2012E
2011E
2012E
2011E
2012E
0.5 0.7 0.6
9.8 5.8 7.8
8.7 7.2 7.9
5.8 4.6 5.2
5.2 5.4 5.3
6.1 4.0 5.0
5.4 4.8 5.1
0.6 0.8 0.6 0.7 0.7
25.9 17.3 n.m. 21.6 13.3
18.9 11.7 n.m. 15.3 10.9
24.8 23.2 n.m. 24.0 12.7
18.1 28.0 n.m. 23.0 12.4
16.9 25.3 n.m. 21.1 11.5
12.4 20.9 n.m. 16.7 9.7
Labrador Trough Iron Ore
March 2011
Capital Markets Profile Labrador Iron Mines Holdings Limited is listed on the TSX under the symbol “LIM.” The company was originally listed under the symbol “LIR” following its December 2007 IPO but changed ticker symbols in March 2009. Labrador Iron Mines has approximately 44.0 million shares outstanding and a free float of approximately 21.7 million shares. The average daily trading volume over the past 200 days is approximately 190,000 shares. Exhibit 2.2 shows Labrador Iron Mines’ share price history since its IPO in late 2007 relative to the S&P/TSX Canadian Mining Index, and the iron ore benchmark settlement price for Carajas fines. Parent company Anglesey Mining Plc is LIM’s largest shareholder, with approximately 17.8 million shares or 41% of LIM’s shares outstanding. Two executive members of the LIM board are also executive members of the Anglesey board. Besides its ownership stake in Labrador Iron Mines, Anglesey Mining also owns the Parys Mountain copper-lead-zinc deposit in Wales. Ownership by institutions and insiders is significant. Institutional ownership represents approximately 23% of Labrador Iron Mines’ shareholder base, according to Reuters estimates. As at February 1, 2011, Labrador Iron Mines’ management held approximately 2.6 million shares or 6% of shares outstanding, including Chairman & CEO John Kearney, who holds approximately 1.6 million shares or 4% of shares outstanding, and Director & Executive Vice-President Terence McKillen, who holds approximately 0.8 million shares or 2% of shares outstanding. Labrador Iron Mines has raised approximately $88 million to fund the development of the Schefferville DSO project. The company last accessed the markets in March 2010 when it raised $35 million through the issue of $30 million in common shares and $5 million in flow-through shares on a bought deal basis at a price of $5.55 per treasury common share and $6.65 per flow-through share. The proceeds were used for exploration and development of the company’s mineral projects and for general corporate and working capital purposes. Previously, LIM raised approximately $53 million at its December 2007 IPO. Exhibit 2.2: Labrador Iron Mines Share Price History Relative to the S&P/TSX Canadian Mining Index and the Carajas Fines Benchmark Price $10.00
$180
$9.00
September 2010: Agreement with 1400 Quebec Innu to eliminate blockade
Carajas Fines benchmark price (U.S. cents/dmtu)
May 2010: Permit for railway received
$8.00
$140
$7.00
$120
$100
$80
$60
$40
$20
$0
LIM share price (C$)
Iron Ore Contract Price (US¢/dmtu)
LIM share price (C$) $160
March 2010: C$35 million bought deal financing
1000
$6.00
800
May 2008: LIM signs MOU agreement with Innu nation, files project registration application
$5.00
600
December 2007: LIM commenced trading on Toronto Stock Exchange
$4.00
$3.00
400
July 2010: Approval to commence construction of mining facilities
$2.00
200
November 2009: EIS accepted for Schefferville area project
$1.00
December 2009: Acquisition of additional 50 Mt DSO ore
$0.00
0 J
A
J
S D M J
2000
2001
S D M J 2002
S D M J 2003
S D M J 2004
S D M J 2005
Source: Reuters; company reports; AME Mineral Economics; Scotia Capital.
29
1200
S&P/TSX Canadian Mining Index
S&P/TSX Canadian Mining Index
$200
S D M J 2006
S D M J 2007
S D M J 2008
S D M J 2009
S D M J 2010
S D
Labrador Iron Mines Holdings Limited
March 2011
Corporate Profile Labrador Iron Mines is a development-stage company whose primary asset is its 100%-owned Schefferville project, located in western Labrador and northeastern Quebec. The project comprises 20 DSO deposits. The Iron Ore Company of Canada previously held Labrador leases and mined adjacent DSO deposits from 1954 to 1982. Labrador Iron Mines’ DSO deposits are in close proximity to New Millennium’s DSO assets. In October 2009, Labrador Iron Mines and New Millennium agreed to exchange certain mineral licences, which eliminated any fragmented ownership of mining rights in the Schefferville area and will enable both companies to separately explore, develop, and mine their respective DSO deposits. Labrador Iron Mines benefits from historical infrastructure in Schefferville. IOC developed the direct shipping iron ore reserves in the Schefferville region in the 1950s and, in one of the largest industrial undertakings in the world at the time, IOC built rail, port, and power infrastructure to connect Schefferville to the Sept-Îles shipping terminals and to the existing regional electrical power grid. A phased approach to development means lower capex, shorter construction time, and lower risk. Labrador Iron Mines plans to develop its 20 DSO deposits according to a phased approach. The company will mine the deposits in four stages, based on the deposits’ relative proximity to existing infrastructure. The phased approach will enable Labrador Iron Mines to start production with a smaller beneficiation plant, which is less expensive to build and requires a shorter time for development and construction than would a larger, centralized processing complex. The phased approach is also flexible, and will permit the company to expand production as required in the future.
Estimated capital intensity (C$ millions ÷ Production capacity (Mtpa))
Exhibit 2.3: Labrador Iron Mines’ DSO Project Enjoys Significantly Lower Capital Intensity Than Comparable Projects 250
200
150
100
50
0 Labrador Iron Mines DSO phase 1A
Source: Company reports; Scotia Capital estimates.
30
New Millennium DSO phase 1
Baffinland Mary River
Labrador Trough Iron Ore
March 2011
Low initial capital costs relative to other projects… Labrador Iron Mines’ phased development approach, its plan to rely on contract mining, and its access to existing infrastructure have reduced the cost to develop the project’s infrastructure, mines, mills, and auxiliary services. As illustrated in Exhibit 2.3, we estimate the initial capital costs of the project are significantly lower than the costs of other iron ore development projects in the Labrador Trough area relative to the anticipated long-run annual production capacities of the projects (as were estimated in the projects’ respective pre-construction technical reports). ... Low capital costs are offset by higher operating costs. The offset to low initial capital intensity is anticipated higher ongoing operating costs. Because Labrador Iron Mines will rely on contract labour to operate the mine and mill and to maintain equipment and facilities, and because it will contract the rail and port transportation of its ore, we estimate that Labrador Iron Mines’ operating costs will be higher than the operating costs of other iron ore development projects in the Labrador Trough area (illustrated in Exhibit 2.4, as the operating costs were estimated in the projects’ respective pre-construction technical reports). Labrador Iron Mines’ fiscal year begins April 1. The quarter ended December 31, 2010, is Labrador Iron Mines’ Q3/F11. Exhibit 2.4: Operating Costs Are High Relative to Other Projects $60
Estimated operating unit cost (C$/tonne)
$50
$40
$30
$20
$10
$0 Labrador Iron Mines DSO phase 1A
New Millennium DSO phase 1
Baffinland Mary River
Source: Company reports; Scotia Capital estimates.
MAINTAINING INDEPENDENCE
Labrador Iron Mines has strategically positioned itself as a future takeover target. Unlike many of the iron ore developers and early-stage producers in the Labrador Trough, Labrador Iron Mines is not obligated to supply iron ore to any one buyer under any long-term agreement. The company has no partners or offtake agreements, and has not signed any long-term supply contracts. Independence ensures that all of Labrador Iron Mines’ future production would be available to a potential acquirer.
31
Labrador Iron Mines Holdings Limited
March 2011
Labrador Iron Mines could be a strategic acquisition target. We believe that the company is an attractive takeover target for steel producers seeking to secure supplies of key raw materials and to control input costs. In our view, a likely acquirer is Tata Steel, strategic partner with neighbouring New Millennium. Other potential buyers could include Wuhan Iron & Steel, ArcelorMittal, AK Steel, US Steel, or a diversified miner with exposure to bulk commodities. We expect that steel producers such as Wuhan, ArcelorMittal, AK Steel, and US Steel will continue the general trend of vertical integration among steelmakers in order to control input costs and to secure supply of key steelmaking raw materials. Labrador Iron Mines could be an attractive acquisition target to a diversified miner with exposure to bulk commodities that is seeking to increase exposure to the commodity or seeking to protect its market share (and pricing power) against vertical integration of steel producers. Tata Steel is the most likely acquirer. Given the close proximity of Labrador Iron Mines to New Millennium, we believe the combination of the two companies would produce significant cost synergies. Tata Steel, New Millennium’s strategic partner and majority owner of the NML DSO project, has recently reached an agreement to acquire a 64% ownership stake in NML’s taconite projects, and could also acquire Labrador Iron Mines and combine the two operations. However, we do not believe that Tata would likely move to acquire Labrador Iron Mines until a feasibility study on New Millennium’s LabMag and KéMag taconite deposits is completed, in order for Tata Steel to fully evaluate and compare its alternatives. We expect a feasibility study on NML’s taconite deposits will be completed by late 2011.
32
Labrador Trough Iron Ore
March 2011
Valuation and Analysis METHODOLOGY AND ASSUMPTIONS
Our primary valuation approach for Labrador Iron Mines is P/NAV, with our NAV based on a discounted cash flow analysis and using the USD/CAD exchange rate and iron ore price assumptions summarized in Exhibit 1.22. This approach is consistent with our coverage universe. We believe that P/NAV is the most appropriate metric for Labrador Iron Mines because it takes into account capital structure (through the deduction of liabilities in the NAV calculation) and captures the value for assets with long lives and for projects that are not currently in production but are likely to become producing assets at a future date. Exhibit 2.5: Labrador Iron Mines Net Asset Value 8%
10%
Primary Assets (after taxes) (C$ millions) DSO (100%) Total primary assets (C$ millions)
$979 $979
$820 $820
Corporate Adjustments (C$ millions) Net cash Reclamation and Mine Closure Obligations Corporate G&A Total corporate adjustments (C$ millions)
$20 ($1) ($20) ($1)
$20 ($1) ($17) $2
Our estimated NAV is $22.45 per share. We have assumed an 8% discount rate is applied to Labrador Iron Mines’ primary mining assets, which is consistent with the majority of companies in our coverage universe. Labrador Iron Mines’ NAV is based exclusively on the iron ore assets it holds in the Schefferville, Quebec, region (see Exhibit 2.5).
We apply a 0.9x multiple to our 8% discount rate to arrive at our one-year target price of $978 $822 $20.00 per share, which implies a 45% rate of $22.45 $18.88 return. This multiple is above the 0.8x P/NAV Source: Scotia Capital estimates. applied to New Millennium but below the 1.0x P/NAV applied to Labrador Iron Ore Royalty Corp. (LIORC). We believe that Labrador Iron Mines is a lower-risk investment relative to New Millennium because its project is nearly fully funded and close to production (compared with New Millennium, which is a development-stage company and will be required to raise additional capital to fund project development, in our view). We also believe that Labrador Iron Mines is a higher-risk investment relative to Labrador Iron Ore Royalty Corp., which receives steady royalty and commission revenues from the Iron Ore Company of Canada. LIORC also participates in strong iron ore commodity markets and capacity expansion at IOC through its 15.1% equity interest. Net Asset Value TOTAL NAV (C$ millions) NAVPS (C$/share)
Labrador Iron Mines is currently trading at 0.6x P/NAV (see Exhibit 2.1), which is the lowest among the iron ore-focused equities in our coverage universe. We expect that demonstration of successful production at Labrador Iron Mines’ DSO project will close the gap between the current share price and our target value. RECENT ACQUISITIONS ARE IN LINE WITH OUR TARGET
Our target price implies a value in line with historical transactions. Our one-year target price of $20 per share and Labrador Iron Mines’ 151 Mt Resource estimate (includes non-NI 43-101 compliant resources) implies a takeover transaction multiple of 5.8x, which is in line with the comparable transactions.
33
Labrador Iron Mines Holdings Limited
March 2011
Recently announced acquisitions of Baffinland Iron Mines and Consolidated Thompson Iron Mines bookend the expected takeover value for Labrador Iron Mines, in our view. Relative to Labrador Iron Mines’ Schefferville DSO project, Baffinland Iron Mines’ flagship Mary River asset is a more capitalintensive, earlier-stage development project while development of Consolidated Thompson’s flagship Bloom Lake mine was less capital-intensive. As is illustrated in Exhibit 1.25, historical transactions have valued comparable iron ore assets at between 1.4x and 6.4x NI 43-101 compliant resources. We believe that the implied 5.8x transaction multiple for Labrador Iron Mines is justified, as Labrador Iron Mines’ status as a near-term producer and its near-term minimal capital spending requirements are more in line with Consolidated Thompson’s status as a producer rather than Baffinland Iron Mines’ status as a development story with significant capex required to develop the Mary River mine and infrastructure. HIGH SENSITIVITY TO IRON ORE PRICES
Exhibit 2.6: Sensitivity to a 10% Change in Iron Ore Prices and the USD/CAD Exchange Rate
% Change in parameter for a 10% change in: Iron ore price
US$/C$
41.7%
-37.9%
2012E CFPS
40.0%
-36.4%
NAVPS
39.1%
-35.5%
2012E EPS
Source: Scotia Capital estimates.
Labrador Iron Mines offers high leverage to iron ore prices. High sensitivity to iron ore prices is attractive in the current strong iron ore commodity price environment. As illustrated in Exhibit 1.26, on a net asset value basis Labrador Iron Mines is most sensitive to iron ore prices for the same $1,000 investment because of high expected operating cash costs and due to its expected near-term production and sales.
Labrador Iron Mines’ financial performance will be largely driven by the iron ore price. As illustrated in Exhibit 2.6, we estimate that a 10% increase in the price of iron ore will impact Labrador Iron Mines’ fiscal 2012E EPS by 42%, fiscal 2012E CFPS by 40%, and NAV (8%) by 39%. Labrador Iron Mines is also sensitive to changes in the USD/CAD exchange rate. Iron ore prices are typically settled in U.S. dollars, while most of the company’s operating costs are incurred in Canadian dollars, as all of its operations are based in the provinces of Quebec and Newfoundland and Labrador. We estimate that a 10% increase in the USD/CAD exchange rate will reduce Labrador Iron Mines’ fiscal 2012E EPS by 38%, fiscal 2012E CFPS by 36%, and NAV (8%) by 36%.
34
Labrador Trough Iron Ore
March 2011
Operations Profile Labrador Iron Mines’ Schefferville project comprises 20 DSO deposits (see Exhibit 2.7), which contain over 150 Mt total reserves (25 Mt NI 43-101 compliant estimates and 125 Mt historical). The company plans to mine all deposits using conventional open-pit mining methods. Exhibit 2.7: Phased Mine Approach Starts with Centrally Located Deposits
Source: Company reports.
Contract workers improve operating flexibility, but at a cost. Mining, processing, and transportation will all be conducted by contract workers, which will afford Labrador Iron Mines operational flexibility and does not require the company to maintain equipment or to hold a significant inventory of spare equipment or parts. On the other hand, the reliance on contract workers will increase operating costs. As illustrated in Exhibit 2.4, we expect unit operating costs at the Labrador Iron Mines Schefferville DSO project will be higher than other comparable mining operations. A seasonal operation. We expect that Labrador Iron Mines will report minimal production and sales in the December through March period each year, as the company intends to operate approximately eight months of the year (April through November), with mining and processing operations halted during the coldest winter months. Although mining operations could continue year-round, the processing and shipping operations are not economic during winter months, as higher-moisture ore would freeze in the rail cars. Labrador Iron Mines does not plan to install expensive and energy-intensive ore dryers, which would facilitate shipping and sales during winter months. Labrador Iron Mines has developed a phased approach to mining its deposits. The Schefferville DSO project will be mined in four stages, based on the deposits’ relative proximity to existing infrastructure (see Exhibit 2.7):
35
Labrador Iron Mines Holdings Limited
March 2011
• Stage 1A comprises the James, Redmond, and Houston deposits. Stage 1A includes the most centrally located deposits, which are closest to the town of Schefferville and to existing road, rail, and power infrastructure. In total, Stage 1A deposits contain about 30.5 Mt Measured & Indicated Resources.
Stage 1B includes the Denault, Star Creek, Malcolm, Gill, Knob Lake, Squaw Woolett, Ruth 8, and Lance Ridge deposits. In total, Stage 1B deposits contain about 20.9 Mt NI 43-101 compliant and historical (non-NI 43-101 compliant) resources.
•
• Stage 2 includes the Howse, Barney, and Fleming 9 deposits. In total, Stage 2 deposits contain about 37.1 Mt historical (non-NI 43-101 compliant) iron ore resources.
Stages 3 and 4 include the Sawyer, Astray, Kivivic, Eclipse, Partington, and Trough deposits. Significant additional infrastructure will be required to bring Stages 3 and 4 into production, which is not scheduled until 2020. In total, Stages 3 and 4 deposits contain about 69.6 Mt historical (non-NI 43-101 compliant) iron ore resources.
•
PROCESSING: A UNIQUE APPROACH FOR UNIQUE ASSETS
Labrador Iron Mines’ Schefferville DSO projects are each individually relatively small and are dispersed, as compared with the large and continuous ore bodies mined by IOC, Cliffs Natural Resources, ArcelorMittal, and Consolidated Thompson in the Labrador City/Wabush area. To overcome the challenges of long haulage distances and high transportation charges that would normally be associated with small and dispersed deposits, Labrador Iron Mines has devised a unique approach to ore processing – the construction of several small, moveable beneficiation plants. We believe the approach is well suited to the company’s unique assets. Beneficiation is a simple process. Due to the direct-shipping nature of the Schefferville ore, the processing of Labrador Iron Mines’ ore will require only crushing, washing, and screening. This is comparable to the processing required to prepare New Millennium’s direct ship ore. Labrador Iron Mines’ tailings will be relatively simple to treat, as no chemicals will be used in the beneficiation process. Labrador Iron Mines will construct moveable beneficiation plants in order to reduce hauling costs, which would be increasingly significant as the company progresses through its mine plan. Downtime required for relocation of the plant is short – Labrador Iron Mines estimates that complete relocation and reinstallation of the equipment would require approximately six to eight weeks. The Silver Yard beneficiation plant (as illustrated in Exhibit 2.8) is nearly fully constructed and will be completed before commissioning and operations are scheduled to begin in April 2011. The first plant is initially located at Silver Yard, approximately 1 km northeast of the James deposit. Silver Yard will process ores from the James, Gill, and Ruth 8 deposits. When these assets are depleted, the plant will be relocated to a subsequent mining area. Planned hydrosizer will improve recoveries. Labrador Iron Mines has plans to construct a hydrosizer and filter at Silver Yard in 2011. The hydrosizer will recover “ultra fines” from the residue, thus improving the iron recoveries of the operation. The hydrosizer is expected to start operations in 2012; until then, the company will stockpile ultra fines for future treatment.
36
Labrador Trough Iron Ore
March 2011
Exhibit 2.8: Silver Yard Beneficiation Plant (November 2010)
Source: Scotia Capital.
Scaleable production through the construction of additional processing facilities. Labrador Iron Mines’ plans to increase iron ore output will be facilitated through the construction of additional beneficiation plants, which will be strategically located to reduce overall hauling distances over the life of the deposits. The company plans to start construction on a 3 Mtpa beneficiation plant at its Redmond site in late 2012 for operation beginning in 2013. We estimate that the capital cost required to build the second plant is approximately $25 million, which is comparable to the $20 million cost to build the initial 2 Mtpa plant at Silver Yard. The second plant would service both the Redmond and Houston deposits. DSO production is effectively capped at 5-6 Mtpa. Labrador Iron Mines plans to increase production capacity to approximately 6 Mtpa with the addition of two additional beneficiation plants. We believe that the company is effectively constrained to this throughput level because of limited capacity on the rail lines, in particular the TSH Railway. We do not expect meaningful expansion of the TSH Railway, as expansion would require significant capital expenditures and is not economic at current and anticipated iron ore prices. Ramp-up and Expansion Plans – A Coordinated Effort
The phased approach to development will require Labrador Iron Mines to simultaneously coordinate production, expansion, and commissioning of various mines, mills, and other pieces of equipment. Exhibit 2.9 summarizes our expectations for production volumes from the DSO deposits over the next five years. Our current estimates include assumptions for the development of Stages 1 and 2 deposits only, as the capital expenditures and permitting necessary to construct the significant infrastructure required to access the Stages 3 and 4 deposits could be substantial and are not well defined at this time. We note that the inclusion of Stages 3 and 4 deposits would not impact our short-term estimates, as Labrador Iron Mines’ production is effectively capped at 5-6 Mtpa due to rail capacity constraints.
37
Labrador Iron Mines Holdings Limited
March 2011
Exhibit 2.9: Planned Production from Labrador Iron Mines’ DSO Project by Stage 6
Direct Shipping Ore Production (Mt)
$80 5 $70 4
$60 $50
3 $40 2
$30 $20
1 $10 0
Cash Operating Unit Costs (US$/tonne ore)
$90
$0 2010
2011E
2012E
2013E
2014E
2015E
Fiscal Year Source: Scotia Capital estimates.
Commissioning and mining operations are expected to begin in April 2011, weather permitting. Labrador Iron Mines has completed preparation work and construction on both the James mine site and the Silver Yard beneficiation plant in order to facilitate commissioning in April 2011. Pre-stripping work has already started at the site; most of the James North pit area has already been stripped of overburden and the ore body is exposed along the first production bench. The first phase of the Silver Yard beneficiation plant is also substantially completed. We expect Labrador Iron Mines will sell approximately 1.5 Mt of lump ore and coarse sinter fines from the James deposit in calendar 2011 from production of approximately 2 Mt. Full-scale mining operations are expected to begin in April 2011 and will continue for eight months until November. Concurrent installation of new equipment. As the company completes commissioning on the first phase of its Silver Yard beneficiation plant, Labrador Iron Mines will add a fines recovery system (including a hydrosizer and pan filter) during summer 2011 to improve iron ore yield through the recovery of a new saleable product. The new product, known as sinter extra fines, can be sold separately or blended with the company’s coarse sinter fines product. Labrador Iron Mines expects that the new system will be operational by September 2011. Plans for an additional production line. As the company completes installation of the fines recovery system, it is also planning to install an additional production line at Silver Yard to produce an ultra fines product from lower-grade and finer ores. The ultra fines product would be sold as pellet feed. Installation of the expansion line, on which the company plans to start construction in fall 2011 and plans to start operations for spring 2012, is expected to increase the plant’s capacity to 3 Mtpa from 2 Mtpa through improved ore recovery.
38
Labrador Trough Iron Ore
March 2011
Expansion beyond the James deposit will start with construction in 2012. We anticipate that preparation of the Redmond deposit and construction of a second beneficiation plant will start late in calendar 2012. We expect that Labrador Iron Mines will start mining operations at the Redmond site in calendar 2013. LOGISTICS
Rail access to the site is completed. Labrador Iron Mines has completed the construction of its 100%owned 4.5 km spur line (as illustrated in Exhibit 2.10), which connects the Silver Yard beneficiation plant to the Tshiuetin Rail Transportation (TSH Rail). Labrador Iron Mines, in conjunction with New Millennium, plans to work with TSH to refurbish the railway main line in order to accommodate the planned DSO production from both companies. We expect that improvements to the rail line will be funded through usage-based tariffs or higher haulage rates. Exhibit 2.10: Labrador Iron Mines’ 100% Owned 4.5 Km Spur Line (November 2010)
Ore will travel along the TSH Rail line to Labrador City, where it will be hauled along the QNS&L Railway to Sept-Îles, Quebec. Cliffs Natural Resources’ Arnaud Railway joins the QNS&L Railway to ship loading facilities at the Pointe-Noire terminal. A haulage agreement has been reached with TSH Rail. Labrador Iron Mines expects it will haul ore for about 240 days during the 2011 shipping season, which implies a frequency of about two trains every three days. LIM will provide the locomotives, which will be leased by LIM and operated by TSH. Each train will comprise 120 rail cars and will be powered by two robotized SD-40 locomotives. These rail cars will also be leased by LIM. The agreement is only in place for 2011; a separate agreement must be reached for 2012 and subsequent years.
Source: Scotia Capital.
LIM has agreed to advance to TSH a capacity reservation deposit of $750,000 to enable TSH to prepare for smooth ramp-up of its operations to ship LIM’s iron ore in calendar 2011 in accordance with LIM’s operating requirements. TSH will repay the reservation deposit over a two-year period beginning in 2013 as a deduction against monthly haulage rates.
Negotiations with the other common carriers are progressing. Labrador Iron Mines recently signed a haulage agreement with the QNS&L Railway, while negotiations with the Arnaud Railway are under negotiation. Labrador Iron Mines expects that contract negotiations will be completed in calendar Q1/11, before the company is expected to begin shipping ore to customers. The company has previously transported equipment to its site and has shipped its bulk sample ore to Sept-Îles via the existing rail network.
39
Labrador Iron Mines Holdings Limited
March 2011
Port access is secured. Labrador Iron Mines has signed an agreement with the Sept-Îles Port Authority for the use of its Pointe-Noire port, which is currently used to ship ore from Cliffs Natural Resources’ Wabush mine. We believe that there is significant excess capacity at the port – Cliffs shipped approximately 2.5 Mt to its customers in 2009, which is well below the port’s nameplate capacity of approximately 10 Mtpa. Reliance on competitors will add to unit transportation costs. Similar to Labrador Iron Mines’ strategy to rely on contract labour, LIM plans to subcontract transportation of the company’s iron ore to operators of existing underutilized assets in the region. This strategy will dramatically reduce upfront capital requirements and will significantly shorten development and construction timelines. However, we anticipate that Labrador Iron Mines’ unit transportation costs will be higher than its peers on an ongoing basis.
40
Labrador Trough Iron Ore
March 2011
Risks START-UP RISKS
Labrador Iron Mines has limited experience in placing resource properties into production, and its ability to do so will be dependent upon using the services of appropriately experienced personnel or entering into agreements with other major resource companies that can provide such expertise. There can be no assurance that Labrador Iron Mines will produce revenue, operate profitably, or provide a return on investment in the future. FIRST NATIONS RISKS
Labrador Iron Mines conducts its operations in western Labrador and northeastern Quebec, which are areas subject to conflicting First Nations land claims. Failure to finalize an Impact Benefits Agreement (IBA) with any of the four groups may result in a delay to the start of mining operations. We expect that all agreements will be completed before spring 2011, which is when the company is expected to begin operations. The company has recognized the claims of four First Nations groups: the Labrador Innu (of Newfoundland and Labrador), the Naskapi Nation of Kawawachikamach (of Quebec), the Innu of Uashat and ManiUtenam (the Uashaunnuat) (of Quebec), and the Innu Matimekush-Lac John (of Quebec). The Labrador Metis Nation has asserted a land claim in parts of Labrador, which may include the Schefferville area. However, this land claim has not been accepted for negotiation by the Governments of Canada or of Newfoundland and Labrador. Labrador Iron Mines has signed Impact Benefits Agreements with the Labrador Innu and with the Naskapi Nation of Kawawachikamach. Negotiations with both Quebec Innu communities are continuing but agreements have not yet been reached. In December 2010, Labrador Iron Mines reached an Agreement in Principle with the Innu of Uashat and Mani-Utenam (the Uashaunnuat), which stipulates the principal terms to be included in a Final Agreement to be concluded by March 2011. LIM is also proceeding with negotiations with the Innu Matimekush-Lac John. In March 2008, LIM entered into a Memorandum of Understanding with the Innu community Matimekush-Lac John, wherein the parties agreed to negotiate an IBA and LIM agreed to use its best efforts to employ or contract with individuals and businesses of Matimekush. COMMODITY RISKS
Labrador Iron Mines has only minimal ability to affect the price received for the iron ore products it produces and sells. The pricing that the company will receive will be based on global prices and, ultimately, factors that are significantly out of its control. Any deviation from our forecast commodity prices could have a material impact on Labrador Iron Mines’ financial performance and could prevent the share price from achieving our one-year target price. DEPENDENCE ON THE STEEL INDUSTRY
Substantially all of the iron ore that Labrador Iron Mines produces is sold to steelmakers. The steel industry’s demand for iron ore is affected by a number of factors, including the cyclical nature of that industry’s business, technological developments in the steelmaking process, and availability of substitutes for steel. A significant reduction in the demand for steel products would reduce the demand for iron ore, which would have a material adverse effect on Labrador Iron Mines.
41
Labrador Iron Mines Holdings Limited
March 2011
FOREIGN CURRENCY EXCHANGE
Labrador Iron Mines’ operating results and cash flows are affected by foreign currency exchange rates. Exchange rate movements have a significant impact on results as revenues are received in U.S. dollars, while financing costs and equipment lease costs are in U.S. dollars and operating and capital costs are incurred primarily in Canadian dollars. In addition, the relative exchange rate fluctuation between the Canadian dollar and the currencies of Labrador Iron Mines’ international competitors impacts the ability of Labrador Iron Mines’ products to compete in foreign markets.
42
Labrador Trough Iron Ore
March 2011
Management John Kearney, Chairman and Chief Executive Officer
John Kearney has 37 years experience in the mining industry. He has been the Chairman and CEO of Labrador Iron Mines since its IPO in 2007 and is also Chairman of Labrador Iron Mines’ parent company, Anglesey Mining Plc. Mr. Kearney is currently the Chairman or Director of a number of public companies, including Canadian Zinc Corporation, and is currently President of the Northwest Territories and Nunavut Chamber of Mines and a Director of the Mining Association of Canada. Mr. Kearney holds degrees in law and economics from University College Dublin and an MBA from Trinity College Dublin. Bill Hooley, Director, President, and Chief Operating Officer
Bill Hooley is currently the Chief Executive of Anglesey Mining Plc. He has 39 years of experience in the global mineral industry. Prior to joining Labrador Iron Mines, Mr. Hooley was Managing Director of Micon International Ltd. between 2000 and 2005. Mr. Hooley holds a degree in mining engineering from the Royal School of Mines, Imperial College, London. Terence McKillen, Director and Executive Vice-President
Terence McKillen is a professional geologist and has 40 years of experience in the mining industry. He is currently Director, President, and CEO of Xtierra Inc., Conquest Resources Limited, and Chief Executive of Minco Plc. He holds degrees in geology from Trinity College Dublin and a master’s degree in mining geology and mineral exploration from the University of Leicester.
43
Labrador Iron Mines Holdings Limited
March 2011
Exhibit 2.11: Labrador Iron Mines Holdings Limited Value Summary
Income Statement (C$M) Revenues Operating Costs Depreciation and Amortization General and Administration Other Operating Earnings Interest & Other Income (expenses) Total Taxes Other Net Earnings Adjusted Net Earnings Shares O/S (million) (basic) Shares O/S (million) (FD) EBITDA Cash Flow Statement (C$M) Operating cash flow (before w/c changes) Change in non-cash working capital Cash from operating activities Cash from investing activities Cash from financing activities Increase (decrease) in cash Net free cash flow
All amounts in C$, except where noted
Labrador Iron Mining Holdings Limited (LIM.TO C$13.80)
Q1/11A Q2/10A
Q2/11A Q3/10A
Q3/11A Q4/10A
Q4/11E Q1/11E
2010A 2009
2011E 2010
2012E 2011
2013E 2012
($0.01) ($0.01) ($0.02) ($0.13) $0.00 $4.04
($0.02) ($0.02) ($0.02) ($0.09) $0.00 $4.02
($0.03) ($0.03) ($0.02) ($0.08) $0.00 $3.99
($0.03) ($0.03) ($0.02) ($0.13) $0.00 $3.96
$0.03 $0.03 ($0.06) ($0.27) $0.00 $4.73
($0.09) ($0.09) ($0.09) ($0.43) $0.00 $3.96
$0.53 $0.53 $0.56 $0.14 $0.00 $4.52
$0.73 $0.73 $0.76 $0.06 $0.00 $5.28
n.m. n.m. n.m. n.m. -28% 1% 0.0%
n.m. n.m. n.m. n.m. -14% n.m. 0.0%
25.9 24.8 16.5 26% -15% 12% 0.0%
18.9 18.1 12.1 25% -14% 14% 0.0%
SC C$ Forecast (US$/C$)1 Expressed on a calendar year basis
$0 $0 ($0) ($1) ($0) ($1) $0 $0 $0 ($1) ($1) 43.6 43.6 ($1)
$0 $0 $0 ($1) ($0) ($1) $0 $0 $0 ($1) ($1) 43.6 43.6 ($1)
$0 $0 $0 ($1) ($0) ($1) $0 $0 $0 ($1) ($1) 43.6 43.6 ($1)
$0 $0 ($0) ($3) ($0) ($3) $0 $4 $0 $1 $1 37.1 37.1 ($3)
$0 $0 ($0) ($4) ($1) ($5) $0 $1 $0 ($4) ($4) 43.6 43.6 ($5)
$131 ($92) ($0) ($4) ($1) $34 $0 ($11) $0 $23 $23 43.6 43.6 $34
$185 ($133) ($1) ($4) ($1) $46 $0 ($14) $0 $32 $32 43.6 43.6 $47
($1) $2 $1 ($9) $0 ($7) ($6)
($1) $1 ($0) ($5) ($0) ($6) ($4)
($1) $0 ($1) ($3) $0 ($4) ($4)
($1) $0 ($1) ($5) $0 ($6) ($6)
($2) ($1) ($3) ($17) $33 $13 ($10)
($4) $3 ($1) ($21) $0 ($22) ($19)
$24 ($0) $24 ($18) ($1) $6 $6
$33 ($1) $33 ($31) $0 $2 $3
190 228 209 $1.03
190 228 209 $1.03
185 222 204 $1.03
180 216 198 $1.03
109 134 132 $0.97
173 204 196 $1.03
186 224 205 $1.01
170 204 187 $0.99
0.0 0.0 $0.00 8% NPV $979 $979 $21 ($2) ($1) ($20) $978 $22.45 0.61
0.0 0.0 $0.00 10% NPV $820 $820 $21 ($2) ($1) ($17) $822 $18.88 0.73
0.0 0.0 $0.00 2010A
0.0 0.0 $0.00 2011E
0.7 0.5 $81.67 2012E
1.3 0.4 $74.75 2013E
Current Assets Long-Term Assets Total Assets
$49 $161 $210
$27 $185 $211
$33 $202 $235
$35 $233 $268
Total Debt Other Liabilities Minority interests Shareholders' Equity Total Liabilities & Equity
$0 $34 $0 $176 $210
$2 $36 $0 $173 $211
$2 $36 $0 $197 $235
$2 $36 $0 $230 $268
$513 ($48) $0 $0 $464
$601 ($24) $0 $0 $577
$601 ($31) $0 $0 $570
$601 ($33) $0 $0 $568
$6 $3 $0 Jan-09
Jul-09
Jan-10
Jul-10
Jan-11
21.0 18.0 15.0 12.0 9.0 6.0 3.0 0.0 Jan-09
Jul-09
Jan-10
Jul-10
Jan-11
S&P/TSX Metals & Mining S&P/TSX
Group NPV distribution
Direct Shipping Ore 100%
Rating and Target Rating 1-Sector Outperform Risk Ranking Caution warranted 1-yr Target C$20.00 1-yr ROR 44.9% Valuation Method: 0.9x NAV (8%)
2013E
2012E
Source: Company reports; Reuters; Scotia Capital estimates.
2011E
Leverage: % Change in parameter for 10% change in Iron Ore US$/C$ 41% -37% 39% -35% 39% -36%
F2011E EPS F2011E CFPS 8% NAV per share
Revenue Distribution
$200 $180 $160 $140 $120 $100 $80 $60 $40 $20 $0 2010
0.0 0.0 0.0 0.0 $0.00 $0.00 Balance Sheet (C$)
Enterprise Value (C$) Market Capitalization Net Debt Minority Interests Other Assets Enterprise Value
44
$9
LIM.TO
1
Operations Parameters Iron ore fines production (Mt) Iron ore lump production (Mt) Unit cash costs (US$/tonne) Net Asset Value Direct Shipping Ore Total primary assets Working Capital Long-Term Debt Reclamation Obligations Corporate SG&A Net Asset Value NAVPS (C$/share) Multiple to NAV
$12
Relative Price Performance $0 $0 ($0) ($1) ($0) ($1) $0 $0 $0 ($1) ($1) 43.5 43.5 ($1)
Scotia Capital Forecasts Iron ore, Hamersley fines (US cents/dmtu FOB)1 Iron ore, Hamersley lump (US cents/dmtu FOB)1 Iron ore, Nibrasco pellets (US cents/dmtu FOB)1
Share Price History (LIM.TO, C$) $15
.
Fiscal Calendar Per share data Net Earnings per share - FD Adjusted Net Earnings per share - FD Operating CFPS (pre W/C changes) (basic) Net Free Cash Flow per share (basic) Dividend per share (basic) Book Value per Share (basic) Financial Ratios Price/Earnings (P/E) Price/Cash Flow per Share (P/CF) EV/EBITDA EBITDA Margin Net Debt/[Total debt+equity] ROE Dividend Yield
Revenues (C$M)
March 11, 2011
Labrador Trough Iron Ore
March 2011
Financial Statements Exhibit 2.12: Labrador Iron Mines Holdings Limited Income Statement Q1/11A Q2/10A $0.0 $0.0 $0.0
Q2/11A Q3/10A $0.0 $0.0 $0.0
Q3/11A Q4/10A $0.0 $0.0 $0.0
Q4/11E Q1/11E $0.0 $0.0 $0.0
2009A
2010A
2011E
2012E
$0.0 $0.0 $0.0
$0.0 $0.0 $0.0
$0.0 $0.0 $0.0
$131.4 ($91.9) $39.5
Operating expenses General and administration Stock-based compensation Depreciation / amortization Exploration and business development Total operating expenses
$0.9 $0.0 $0.0 $0.0 $0.9
$1.1 $0.2 $0.0 $0.0 $1.3
$1.1 $0.2 $0.0 $0.0 $1.3
$1.1 $0.2 $0.0 $0.0 $1.3
$1.6 $0.7 $0.0 $0.0 $2.3
$2.6 $0.1 $0.1 $0.0 $2.8
$4.1 $0.6 $0.1 $0.0 $4.7
$4.3 $0.7 $0.3 $0.0 $5.3
Operating earnings
($0.9)
($1.3)
($1.3)
($1.3)
($2.3)
($2.8)
($4.7)
$34.2
Other income and expenses Interest income Interest and financing (expense) Total other income and expenses
$0.0 $0.0 $0.0
$0.1 $0.0 $0.1
$0.0 $0.0 $0.0
$0.0 $0.0 $0.0
$1.2 $0.0 $1.2
$0.1 $0.0 $0.1
$0.1 $0.0 $0.1
$0.0 $0.0 $0.0
Earnings (loss) before taxes and other items
($0.9)
($1.2)
($1.3)
($1.3)
($1.1)
($2.7)
($4.6)
$34.2
Current taxes Deferred taxes Total taxes
$0.0 ($0.3) ($0.3)
$0.0 ($0.3) ($0.3)
$0.0 $0.0 $0.0
$0.0 $0.0 $0.0
$0.0 ($0.8) ($0.8)
$0.0 ($3.9) ($3.9)
$0.0 ($0.6) ($0.6)
$11.0 $0.0 $11.0
Net earnings (loss) Adjusted net earnings (loss)
($0.6) ($0.6)
($0.9) ($0.9)
($1.3) ($1.3)
($1.3) ($1.3)
($0.4) ($0.4)
$1.2 $1.2
($4.0) ($4.0)
$23.2 $23.2
EPS (adjusted and diluted) C$/share
($0.01)
($0.02)
($0.03)
($0.03)
($0.01)
$0.03
($0.09)
$0.53
(millions C$)
Fiscal calendar
Revenue Operating costs Gross margin
Source: Company reports; Scotia Capital estimates.
45
Labrador Iron Mines Holdings Limited
March 2011
Exhibit 2.13: Labrador Iron Mines Holdings Limited Cash Flow Statement Q1/11A Q2/10A
Q2/11A Q3/10A
Q3/11A Q4/10A
Q4/11E Q1/11E
2009A
2010A
2011E
2012E
Operating activities Net earnings Depreciation and depletion Stock-based compensation Future income tax recovery Other items Operating cash flow
($0.6) $0.0 $0.0 ($0.3) $0.0 ($0.8)
($0.9) $0.0 $0.2 ($0.3) $0.0 ($1.0)
($1.3) $0.0 $0.2 $0.0 $0.0 ($1.1)
($1.3) $0.0 $0.2 $0.0 $0.0 ($1.1)
($0.4) $0.0 $0.7 ($0.8) $0.0 ($0.4)
$1.2 $0.1 $0.1 ($3.9) $0.0 ($2.5)
($4.0) $0.1 $0.6 ($0.6) $0.0 ($3.9)
$23.2 $0.0 $0.7 $0.0 $0.0 $24.0
Change in non-cash working capital Cash provided (used) from operating activities
$1.9 $1.1
$0.7 ($0.3)
$0.0 ($1.1)
$0.0 ($1.1)
($0.4) ($0.8)
($0.6) ($3.1)
$2.6 ($1.4)
$0.0 $24.0
Investing activities Mineral property interests (Decrease) in long-term payables Property, plant & equipment Increase in non-current inventory Other items Cash provided (used) from investing activities
($1.3) ($0.5) ($6.8) $0.0 $0.0 ($8.6)
($2.0) $0.0 ($3.4) $0.0 $0.0 ($5.4)
$0.0 $0.0 ($2.5) $0.0 $0.0 ($2.5)
$0.0 $0.0 ($4.5) $0.0 $0.0 ($4.5)
($10.4) $0.0 ($1.0) $0.0 $0.0 ($11.4)
($7.4) ($2.1) ($7.0) $0.0 $0.0 ($16.5)
($3.3) ($0.5) ($17.2) $0.0 $0.0 ($21.0)
$0.0 $0.0 ($17.5) $0.0 $0.0 ($17.5)
Financing activities Borrowings Repayments Common shares issued Exercise of stock options Exercise of warrants Cash provided (used) from financing activities
$0.0 ($0.1) $0.0 $0.2 $0.1 $0.2
$0.0 ($0.2) $0.0 $0.1 $0.0 ($0.0)
$0.0 $0.0 $0.0 $0.0 $0.0 $0.0
$0.0 $0.0 $0.0 $0.0 $0.0 $0.0
$0.0 $0.0 ($0.0) $0.0 $0.0 ($0.0)
$0.0 $0.0 $32.7 $0.1 $0.0 $32.8
$0.0 ($0.2) $0.0 $0.4 $0.1 $0.2
$0.0 ($0.6) $0.0 $0.0 $0.0 ($0.6)
Effect of exchange rate changes on cash and equivalents
$0.0
$0.0
$0.0
$0.0
$0.0
$0.0
$0.0
$0.0
Increase (decrease) in cash Cash balance @ BOP Cash balance @ EOP
($7.3) $48.3 $41.0
($5.7) $41.0 $35.3
($3.6) $35.3 $31.7
($5.6) $31.7 $26.1
($12.3) $47.5 $35.2
$13.1 $35.2 $48.3
($22.2) $48.3 $26.1
$5.9 $26.1 $32.0
Reported operating cash flow (pre-W/C adjustments) Net free cash flow (millions C$)
($0.8) ($5.8)
($1.0) ($3.9)
($1.1) ($3.6)
($1.1) ($5.6)
($0.4) ($1.9)
($2.3) ($9.9)
($3.9) ($18.8)
$24.2 $6.1
Operating CFPS, pre-W/C adjustments (C$/share) Net free cash flow per share (C$/share)
($0.02) ($0.13)
($0.02) ($0.09)
($0.02) ($0.08)
($0.02) ($0.13)
($0.01) ($0.05)
($0.06) ($0.27)
($0.09) ($0.43)
$0.56 $0.14
(millions C$)
Fiscal calendar
Source: Company reports; Scotia Capital estimates.
46
Labrador Trough Iron Ore
March 2011
Exhibit 2.14: Labrador Iron Mines Holdings Limited Balance Sheet Q1/11A Q2/10A
Q2/11A Q3/10A
Q3/11A Q4/10A
Q4/11E Q1/11E
2009A
2010A
2011E
2012E
Current assets Cash and cash equivalents Accounts receivable Inventories Other current assets Total current assets
$41 $1 $0 $0 $42
$35 $0 $0 $0 $36
$32 $0 $0 $0 $32
$26 $0 $0 $0 $27
$35 $1 $0 $0 $36
$48 $1 $0 $0 $49
$26 $0 $0 $0 $27
$32 $0 $0 $0 $33
Long-term assets Mineral property interests Prepaid expenses Property and equipment Inventory Other long term assets Total long term assets
$152 $2 $17 $0 $0 $172
$155 $2 $21 $0 $0 $178
$155 $2 $23 $0 $0 $180
$155 $2 $28 $0 $0 $185
$141 $0 $1 $0 $0 $142
$151 $2 $8 $0 $0 $161
$155 $2 $28 $0 $0 $185
$155 $2 $45 $0 $0 $202
Total assets
$213
$213
$212
$211
$178
$210
$211
$235
Current liabilities Accounts payable and accrued liabilities Current portion of long-term debt and capital leases Short-term debt Total current liabilities
$4 $1 $0 $4
$5 $1 $0 $5
$5 $1 $0 $5
$5 $1 $0 $5
$1 $0 $0 $1
$2 $0 $0 $2
$5 $1 $0 $5
$5 $0 $0 $5
Long-term liabilities Long-term payables Long-term portion of debt and capital lease obligations Asset retirement obligation Future income and mining taxes Total long-term liabilities
$1 $2 $0 $31 $33
$1 $2 $1 $31 $33
$1 $2 $1 $31 $33
$1 $2 $1 $31 $33
$0 $0 $0 $36 $36
$1 $0 $0 $31 $32
$1 $2 $1 $31 $33
$1 $2 $1 $31 $33
Total liabilities
$38
$39
$39
$39
$37
$34
$39
$38
Shareholders' Equity Common share capital Warrants Contributed Surplus Retained earnings (deficit) Accumulated other comprehensive income Total shareholders' equity
$161 $1 $14 ($1) $0 $175
$161 $1 $14 ($2) $0 $175
$161 $1 $14 ($3) $0 $174
$161 $1 $15 ($4) $0 $173
$126 $6 $8 $2 $0 $141
$161 $1 $14 ($0) $0 $176
$161 $1 $15 ($4) $0 $173
$161 $1 $15 $19 $0 $197
Total liabilities and shareholders' equity
$213
$213
$212
$211
$178
$210
$211
$235
(millions C$)
Fiscal calendar
Assets
Liabilities and Shareholders' Equity
Source: Company reports; Scotia Capital estimates.
47
