Labrador Iron Ore (LIF) has a substantial position in Iron Ore Company of Canada (IOC) which produces iron and iron is the principal element in making steel and steel pipes like the one shown above.And yes it is a steal at these prices.My blog on Wordpress (Blogdaleup dated June 2,2021) stated that the stock price movement in LIF has been chiefly caused by the doubling of iron ore prices since Q2 2020.And the World Steel Association is calling for a 6% increase in steel production in 2021.It is true that LIF is a unique stock because it controls no production decisions as it is a royalty company.This has brought it's P/E ratio down to 6.2 times earnings.On the other hand, LIF has almost no operating expenses,no debt and is flush with cash.It certainly would be a good time for LIF to start diversification.
Iron Ore Company
All of LIF's revenue and earnings come from Iron Ore Company of Canada (IOC).So LIF gets production royalties of 7% and 10 cents a tonne and because it owns 15% of IOC it gets a sizeable dividend from IOC.Production has only increased slightly from Q2 2020 but iron ore prices have doubled as have royalties.However the iron ore price has come down from Q2 2021 when it hit a high of $219/tonne.The price quickly fell to $90/tonne but has recovered now to $115/tonne.Analysts expect the price to move up to $150/tonne until the second half of 2022.Equity earnings from IOC were $60 million compared to $35 million in Q3 2020.
Q3 Highlights
Aided by Q3 prices royalty revenues were $74 million compared to $52 million in Q3 2020.And as already mentionned equity earnings from IOC were $60 million. Consequently net income (including the IOC dividend) was $1.64 per share an 82% increase over Q3 2020. And despite a longer than expected maintenance shutdown LIF produced 12.3 million tonnes of iron ore in the first 9 months or about 4 million tonnes per quarter.LIF expects to produce 4-5 million tonnes in Q4.
No Debt and a Good Steel Market
The iron ore price is largely determined by exports to the Chinese market.And this market is expected to be stable unitl the seconf half of 2022.And in fact analysts expect the price of iron ore to greadually move up to $150/tonne.And LIF management expects that "IOC will pay a sizeable dividend but not as great as that in Q3".So it is likely that e.p.s. could be in a range of $1.50- $1.75 in Q4 and the Q4 dividend is expected to be $2.10 per share.This could send the share price back to the $45 price level if IOC sends a reasonable dividend.
This blog feels that the LIF share price is too volatile because of the fluctuating iron ore price and it's lack of control over production at IOC.Furthermore it has no debt and even has some cash on hand. My last blog on LIF suggested that it buy the 7% not needed for control of IOC from Rio Tinto.But failing that it could buy a chunk of of a steel maker that is starting to rebuild.Yes a 15% stake in Stelco would help to stabilize both company's earnings. Zacks Investment Research: Stock Research, Analysis, & Recommendations
Dale McIntyre M.S.Sc.(Econ) is a freelance writer that writes blogs for several brokers. 