IOC / Iron ore and iron ore pellets

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Mined and produced in Newfoundland and Labrador, Canada, the pellets are transported 418km by rail to the port at Sept-Îles, Quebec, where they are shipped to various markets throughout the world.

Stage

Producing

Commodity

Iron ore and iron ore pellets

Operator

Iron Ore Company of Canada (‘IOC’) / Rio Tinto

Location

Canada

Royalty rate and type
Indirect interest in 7% GRR

Balance sheet classification
Royalty financial instrument

An equity stake in Labrador Iron Ore Royalty Corporation (‘LIORC’), a Toronto-listed company which holds both a royalty and equity interest in the Iron Ore Company of Canada (‘IOC’) operations. This entitles LIORC to revenue from its 7% gross revenue royalty (along with a small commission) on sales from the operation, along with dividend income from its equity stake. LIORC is effectively a pass-through vehicle in so much that it has a limited mandate to pass through its net cash to shareholders by way of dividend, subject to retaining sufficient working capital. Given the restricted investment mandate available to its management, Ecora Resources considers this to effectively be a part ownership of the IOC royalty and accounts for this income as such. Between May 2018 and February 2020, Ecora Resources acquired a 7.01% interest in LIORC, investing C$109m ($83m) in total. To partially fund the acquisition of the Voisey’s Bay cobalt stream, the Group disposed of 76% of its holding in LIORC between November 2020 and February 2021 and now retains an interest of 1.6%.

As the investment in LIORC is considered to be a part ownership of the royalty, an understanding of the underlying operation and product is important. This was a key focus of our due diligence when considering making this investment.

IOC is one of Canada’s top iron ore producers, operated by Rio Tinto, and is among the top five producers of seaborne iron ore pellets in the world. It is a long-life operation with reserves sufficient for ~25 years at the current rate of production.

The operation extracts ~55Mt of crude ore annually and processes this into concentrate and pellets before transporting it by rail to port at Sept-Îles in Quebec. All of the infrastructure is owned by the operation, another key attraction of this investment. IOC produces a high quality iron ore pellet which is highly sought after due to its efficient use in steel mills, which reduces the carbon footprint of the steel produced. Its quality is supported by its low levels of impurities, being particularly low in phosphorus, alumina and sulphur. These attributes are very desirable, particularly in Asia.

LIORC declared total dividends of C$6.00 per share for the year ended 31 December 2021, an increase of 97% on the previous year’s dividends of C$3.05 per share. The 2021 dividends were well in advance of the C$4.10 per share consensus at this time last year and represent a yield on investment of ~25% in the year.

Dividends in 2021 benefited from iron ore prices trading at above recent average levels throughout the year, and in H1 2021 in particular.

Despite the increase in the dividends declared, Ecora’s income from LIORC decreased from $8.9m (C$12.0m) in 2020 to $4.9m (C$6.2m) in 2021. The decrease follows the Company’s disposal of 76% of its holding in LIORC between November 2020 and February 2021 to part fund the Voisey’s Bay acquisition.

Total proceeds generated by the  disposal were C$108.6m ($85.0m) and resulted in the Company realising a gain of C$24.7m ($17.7m) which when combined with the dividends received represents a total return on Ecora’s investment of ~60%.

Key facts

$4.9m

The Group’s income from LIORC was $4.9m (C$6.2m) in 2021

~60%

In 2021, the Group disposed of a further 55% of its holding to retain an interest of 1.6% in LIORC. Total proceeds generated by the Group’s disposal were £62.6m and resulted in the Group realising a gain of £14.3m which, when combined with the dividends received, represents a total return on the Group’s investment of ~60%

IOC : ESG

IOC produces a high-quality iron ore pellet which is highly sought after, which reduces the carbon footprint of the steel produced. Its quality is supported by its low levels of impurities, noticeably low in phosphorus, alumina and sulphur