What we own

Anglo Pacific acquired a 7.01% equity stake in Labrador Iron Ore Royalty Corporation (LIORC) between May 2018 and February 2020, investing a total C$109m (£64.4m). LIORC is a Toronto listed company which holds both a royalty and equity interest in the Labrador Iron Ore (IOC) project. This entitles LIORC to revenue fromits 7% gross revenue royalty (along with a small commission) on revenue from the operation, along with dividend income from its equity stake.

LIORC is effectively a pass-through vehicle in so much that it has limited mandate other than 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, Anglo Pacific considers this to effectively be a part ownership of the IOC royalty and accounts for this income as such.

Underlying operation

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 this on rail
to port at Sept-Iles 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, noticeably low in phosphorus, alumina and sulphur. These attributes are very desirable, particularly in Asia.

Performance

The Group earned income of £7.0m (C$12.0m) in 2020 from its investment in LIORC, compared to £8.0m (C$13.5m) in 2019.

The decrease due to the total dividends declared by LIORC reducing to C$3.05/share in 2020 from C$4.00/share in 2019. In addition to the decrease in the dividends declared by LIORC, the Group had sold 21% of its holding prior to the record date to receive the final dividend, as it prepared to fund the Voisey’s Bay acquisition. Subsequent to year end 31 December 2020, 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 C$108.6m (£62.6m) and resulted in the Group realising a gain of C$24.7m (£14.3m) which when combined with the dividends received represents a total return on the Group’s investment of ~60%.