Financial Performance
The Fund's adjusted cash flow (see Management's Discussion & Analysis for definition and calculation) for the year ended December 31, 2006 was $72.9 million or $2.28 per unit as compared to $74.6 million or $2.33 per unit for 2005. Iron ore sales of Iron Ore Company of Canada (IOC) amounted to 15.8 million tonnes compared to 15 million tonnes in 2005. Prices received were approximately neutral with decreases in pellet prices offsetting increases in concentrate pricing. Somewhat offsetting the increased sales volume was the continued strengthening of the Canadian dollar against its U.S. counterpart, averaging $1.13 for the year as compared to 2005's average of $1.21. The Fund's adjusted cash flow was increased by $20.9 million in dividends received from IOC (2005 - $24.1 million).
The Fund's consolidated net income for the year ended December 31, 2006 was $94.4 million or $2.95 per unit compared to $86.1 million or $2.69 per unit in 2005. The Fund's share of IOC's earnings amounted to $38.6 million compared to $42.3 million in 2005. The increase in net income was mainly due to the $10.5 million reduction in future income tax liabilities as a result of the 3% reduction in the federal corporate tax rate by 2010 and the elimination of surtax by January 1, 2008.
IOC Developments
On August 31, 2006 agreement was reached with IOC to simplify the Labrador Sublease dated February 25, 1953 between Labrador Mining Company Limited ("Labmin") and IOC, as amended, with Labmin granting IOC rights to mine 100% of the ore for a 7% royalty. The previously excluded Wabush 3 property is now included in the Labrador Sublease in consideration of a 7% royalty on sales of iron ore products derived from that property. Parts of the Knight deposit previously held exclusively by IOC are also now included in the Labrador Sublease and subject to the 7% royalty.
IOC is proceeding with a drilling program on the Wabush 3 deposit to evaluate it for inclusion in IOC's ore reserves. In 2006, IOC completed 3,583 meters of drilling on the Wabush 3 deposit and results of sample analysis are currently being evaluated for inclusion in IOC's geological models.
This is an important step in IOC's planning to increase production. An increase in production and sales of iron ore products from properties covered by the Labrador Sublease would increase the 7% royalty receivable by the Fund.
IOC continued to make progress on its cost reduction program, although price increases are offsetting some of the savings. Efforts to increase production are being realized and several production records were achieved during the year. The project to increase annual concentrate production to 17.5 million tonnes was largely completed during the year, with plans for further expansion currently under consideration.
The collective agreement with the United Steelworkers of America expired on February 28, 2007. On March 9, 2007, the employees at Labrador City rejected the most recent contract offer and voted to commence a legal strike.
Outlook
With expected price increases of around 5% for pellets and 9% for concentrates (based on settlement achieved to date by IOC's competitors) and potential further production and sales increases and with the strength of the Canadian dollar against its U.S. counterpart somewhat abated, barring a lengthy strike, 2007 is expected to be a positive year for the Fund.
I would like to take this opportunity to thank our unitholders for their interest and loyalty and my fellow Trustees for their wisdom and support. -- www.cnxmarketlink.com
Posted March 17th, 2007 by ruzik_tuzik
