Scotia Update and UpgradeLabrador Iron Ore Royalty Corp. Q1 Dividend Above Expectations; Upside Risk Continues
OUR TAKE: Positive. LIF reported largely in-line Q4/20 results. More importantly, the company declared a higher than anticipated Q1/21 dividend. Looking ahead, we continue to see significant upside risk to our dividend expectations given extremely elevated Fe spot prices. Overall, we view the update as positive for LIF shares. LIF shares are rated SO based on our very strong dividend outlook.
Our revised 12- month target of C$41.00 per share (from C$40.00) is based on a 50/50 weighting of 12.0x our average 2021E-22E dividends and 1.3x our updated 8% NAVPS estimate. KEY POINTS Q4/20 results in line; mixed guidance. Q4/20 adjusted EPS of $1.16 compared to our estimate of $1.23 and consensus of $1.16.
More important, adjusted cash flow per share of $1.82 was only marginally below our estimate of $1.91. Rio Tinto (RIO:L – not rated) had pre-released production and sales volumes for the Iron Ore Company of Canada (IOC); see our January note. LIF reaffirmed Rio's recently issued 2021 IOC Fe production guidance (100% basis) of 17.9-20.4Mt (+8% YoY).
However, IOC capex guidance of $460M was higher than our estimate of $350M (and vs. $288M in 2020). Q1 dividend above expectations. LIF declared a Q1/21 dividend of $1.00 per share, payable on April 26 to shareholders on record as of March 31. The dividend was well above our forecast of $0.45 per share, driven by a surprising $19M (or $0.30 per share) attributable partner dividend from IOC and markedly higher-than-forecast Fe prices.
We had not anticipated IOC to make quarterly distributions so early in the year. Significant upside risk to dividend outlook. Our revised 2021E-2023E CFPS estimates of $3.73, $2.59, and $2.16 compare to our previous estimates of $3.78, $2.50, and $2.14 (based on 62% Fe prices of US$115/t, US$85/t, and US$75/t). We now forecast 2021E-2023E declared dividends per share of $4.00, $2.50, and $1.80 vs. $3.75, $2.50, and $1.80, previously, reflecting current yields of 10.9%, 6.8%, and 4.9%, respectively (vs. the shares' 3- year and 5-year historical yields of 11.1% and 10.1%).
However, at current elevated spot prices (62%/65% Fe prices of US$178/t and US$203/ t; pellet premium of US$45/t; CAD of 0.79), we estimate a markedly higher 2021E CFPS of $7.19 per share (+88% above our estimate), suggesting a very compelling potential yield of ~20%. Alternatively, based on our 8% NAVPS, we estimate that LIF shares are currently implying a 62% Fe price of only US$73/t (or a 59% discount to spot).