Labrador Iron Ore Royalty Corporation (OTCPK: LIFZF) is a Canadian 100% iron ore focused R&S company. It owns 15.1% of Iron Ore Company of Canada (IOCC), a major producer of iron ore and iron pellets operating in Labrador and Newfoundland. In addition, Labrador Iron Ore Royalty holds a gross overriding royalty of 7% and a commission of C$0.1/tonne on all iron ore produced by IOCC. But the most interesting feature of Labrador Iron Ore Royalty Corporation is its dividend policy. The company distributes a large portion of its cash flow (the Labrador webpage claims it is 99% of standardized cash flow) to shareholders. Therefore, Labrador offers significant dividend yields.
As iron ore prices are critical to Labrador’s financial results, there is a strong correlation between the price of iron ore and Labrador’s share price. For the 9-year period from December 2012 to December 2021, the correlation was equal to 0.869, which is a very strong positive correlation. However, as can be seen in the chart below, during the recent crash in iron ore prices, Labrador stocks significantly outperformed iron ore and became relatively expensive. But thereafter, when the price of iron ore began to recover, Labrador’s stock price followed at a much slower pace. If this trend continues, Labrador stocks could become much more attractive soon.
High iron ore prices result in high cash flows generated by Labrador assets and subsequently higher dividend distributions. The graph below shows the evolution of TTM dividend payments since 2013. As the dividend is paid in Canadian dollars, the graph shows the dividends in Canadian dollars, as well as their value in US dollars, recalculated using exchange rates real. As can be seen, over the 9-year period, the TTM dividend never fell below CA$1 per share. In contrast, the highest value climbed to C$6.65 only a few months ago. The recent surge in dividend payments was linked to the rise in iron ore prices which broke through the $200/t mark, reaching the highest level in more than a decade. As can be seen from the chart, the size of dividends generally lags iron ore prices for several months. Also this time, the dividend payment jumped to the C$6.65 level at a time when the price of iron ore was already in freefall.
The stock price of Labrador is strongly correlated to the price of iron ore, it is possible to see that the relationship between the stock price and the dividend payments (graph below) is similar to the relationship between the price of iron ore and dividend payments. Also in this case, it is possible to see that the TTM dividend lags the stock price by several months. This makes sense, because there is a certain delay between when the company receives the money and when it pays the dividend. On the other hand, the stock price reacts immediately to changes in the price of iron ore and changes in other market conditions.
The different reaction times of dividends and the share price lead to a rather volatile development of dividend yields. As can be seen in the chart below, TTM dividend yields (calculated using previous 12-month dividends), as well as annualized dividend yields (calculated by annualizing the last dividend payment) experience a high volatility. However, positively for dividend investors, over the past decade, the TTM dividend yield has not fallen below 5%, and the annualized dividend yield has not fallen below 5% only slightly and for a very short time. This means that although Labrador’s dividend yield is very volatile, it remains at high levels. Or, to put it better, it fluctuates between high, very high, and sometimes even extremely high (over 20%).
The chart below shows the comparison of Labrador TTM dividend yields and iron ore price. The recent spike in dividend yields (at 20%) came 10 weeks after the iron ore price peaked at $220/t. However, the dividend yield reached an even higher level of 25% in March 2020, during the market sell-off linked to the outbreak of the COVID-19 pandemic.
At the time, the stock price fell below $10 (chart below), while the dividend was relatively high at C$3.3 (about $2.3), due to the bullish trend in iron ore prices recorded in 2019. However, a rapid recovery in iron ore prices and in Labrador’s share price brought the dividend yield back into the 10% zone. Only recently, after the share price fell due to the collapse in the price of iron ore, while dividends remained high due to the high iron ore prices experienced during the months of summer, the dividend yield went up. Right now, the dividend yield is coming down again, however, investors shouldn’t worry too much as the price of iron ore is going up. It bottomed out at the $90/t zone in November, but is now back to the $130/t level.
The collapse in iron ore prices was caused by Chinese efforts to reduce its domestic steel production. The official version is that the aim is to reduce air pollution before the start of the 2022 Winter Olympics. However, there is also speculation that the limitation of steel production was more related to market, because China simply does not need such large quantities of steel anymore. For now, given the recent rally in iron ore prices, it seems that the first version is true. At least the markets seem to believe so.
Of course, Labrador’s cash flow depends not only on iron ore prices, but also on IOCC’s production volumes. These have been relatively stable in recent years, hovering around 10 million tonnes of pellets and 8 million tonnes of concentrate.
What is also important is the cash flow structure of Labrador. As shown in the graph above, the cash flows generated by the gross overriding royalty of 7% and the commission of C$0.1/tonne provide some stability, while the dividends generated by the participation of 15.1 % in IOCC provide leverage to higher iron ore prices. In other words, the commission and royalty allow Labrador to keep the dividend yield above 5% when iron ore prices are relatively low, while the equity stake allows it to significantly increase the dividends when a bull market arrives.
It is also important to note that the current reserves are expected to be sufficient for more than 25 years of operation and that the resources have the potential to more than double the mine life. In addition, IOCC is operating well below its maximum capacity since, according to Labrador’s corporate presentation, its production capacity reaches 23 million tonnes of concentrate and 12.5 million tonnes of pellets per year.
Labrador Iron Ore Royalty Corporation provides exposure to iron ore prices and the production of Iron Ore Company of Canada. Labrador’s stock price is volatile enough to provide opportunities for short-term traders, but it also pays generous dividends that are attractive to dividend investors. The TTM dividend yield remains above 5% almost all the time. And there are also brief episodes where it hits double-digit values. Although the stock price is where it was 8 years ago at around $30, Labrador has paid total dividends of C$23 (around $19) during this period. However, a substantial portion of the dividends, C$13 (about $10), has been paid out over the past three years, confirming that timing is very important when investing in Labrador Iron Ore Royalty Corporation. For example, investors who bought the stock near March 2020 lows have realized around 200% equity and 70% dividend yield to date.
At present, stocks look relatively expensive as they have outperformed iron ore prices, especially during the fall iron ore price crash. This is probably the reason why the stock price reaction to the new bullish trend in the iron ore market is also very calm. However, if the price of iron ore continues to rise without a more significant reaction from Labrador’s share price, the shares will once again become more attractive. But for now, I wouldn’t rush to buy them.
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