17 September 2012 Americas/Canada Equity Research Steel Labrador Iron Ore Royalty Corp. (LIF_u.TO) Rating OUTPERFORM* Price (14 Sep 12, C$) 30.80 FORECAST REDUCTION Target price (C$) 40.00¹ 52-week price range 38.65 - 26.82 Market cap. (C$ m) 1,971.20 Iron Ore Company of Canada site visit Enterprise value (C$ m) 1,935.54 *Stock ratings are relative to the relevant country benchmark. ¹Target price is for 12 months. ■ On Friday 14 September we visited the Iron Ore Company of Canada (IOC) assets in Canada’s Labrador Trough. The visit was part of a week- Research Analysts long North American tour hosted by LIF_u.TO’s equity partner, Rio Tinto. Nathan Littlewood This was our tenth trip to the Labrador Trough in the past 12 months, and we 1 416 352 4585 [email protected] have now seen all of the operating iron ore mines in the region except for Yan Truong CLF’s Wabush. 1 416 352 4584 [email protected] ■ Key takeaways: 1) capex for CEP1 was revised up to US$628mn ($539mn) – we believe this compromises distributions to LIF_u.TO unitholders by around $0.21/sh. 2) The CEP3 (23.3 to 26mtpa) expansion is apparently less defined than we had previously understood and in the current market, its approval would seem far from a certainty. We trimmed our LT capacity forecasts from 26 to 23.3mtpa. 3) IOC has had far less contact with the junior mining companies in recent weeks with regard to infrastructure access – presumably a function of the iron ore market. ■ IOC is nearly finished with the CEP1 expansion (18 to 22mtpa), and with a 2H12 benefit from this project suggests that 2012 sales will be around 16mt (CSe 15.5mt, 1H12A 5.8mt). CEP2 (22 to 23.2mtpa) is expected to be complete by YE12, with commissioning in January 2013. ■ Our earnings changes to $1.39/sh reflect learnings from the recent site visit, as well as a 2H2012 mark to market on iron ore pricing – consistent with that already implemented in our CLF and LIM.TO models. Share price performance Financial and valuation metrics Daily Sep 19, 2011 - Sep 14, 2012, 9/19/11 = C$37.67 Year 12/11A 12/12E 12/13E 12/14E 41 EPS (CS adj.) (C$) 2.80 1.39 3.45 2.83 36 Prev. EPS (C$) — 2.09 3.66 2.98 P/E (x) 11.0 22.2 8.9 10.9 31 P/E rel. (%) 78.4 156.3 71.9 97.1 26 Revenue (C$ m) 162.1 121.7 194.8 178.8 Sep-11 Jan-12 May-12 EBITDA (C$ m) 159.9 119.1 192.8 176.8 Price Indexed Price Relative OCFPS (C$) 0.97 0.86 3.24 2.58 On 09/14/12 the S&P/TSX COMPS INDEX closed at 12499.47 P/OCF (x) 38.9 35.9 9.5 11.9 EV/EBITDA (current) 13.7 18.4 11.4 12.4 Net debt (C$ m) 207 -36 -108 -146 ROIC (%) 14.27 10.73 20.21 18.47 Quarterly EPS Q1 Q2 Q3 Q4 Number of shares (m) 64.00 IC (current, C$ m) 480.22 2011A 0.98 1.27 1.07 0.60 BV/share (Next Qtr., C$) 4.3 EV/IC (x) 4.3 2012E 0.24 0.46 0.36 0.32 Net debt (Next Qtr., C$ m) 210.3 Dividend (Next Qtr., C$) 0.38 Net debt/tot cap (Next Qtr., %) 70.1 Dividend yield (%) 1.2 2013E 0.69 0.92 0.95 0.89 Source: Company data, Credit Suisse estimates. DISCLOSURE APPENDIX CONTAINS ANALYST CERTIFICATIONS AND THE STATUS OF NON-US ANALYSTS. U.S. Disclosure: Credit Suisse does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. CREDIT SUISSE SECURITIES RESEARCH & ANALYTICS BEYOND INFORMATION™ Client-Driven Solutions, Insights, and Access 17 September 2012 Exhibit 1: Financial summary Metals and Materials - CANADA Labrador Iron Ore Royalty Corporation Nathan Littlewood +1 (416) 352-4585 LIF_u.TO Rating Price Target ROR(%) [email protected] OUTPERFORM C$ 30.8 C$ 40.0 30% Basic Industries - Steel Summary assumptions 2010 2011 2012 2013 2014 2015 CANADA 62 IODEX Fines (US$/t CFR) $132 $167 $121 $145 $128 $115 Price C$ 30.80 Pellet price (US$/t FOB) $106 $146 $100 $120 $103 $90 Ticker LIF_u.TO USDCAD 1.030 1.017 1.000 1.000 0.970 0.950 Shares outstanding (mn) Market Capitalization (C$ mn) Summary income statement (C$ mn) 2010 2011 2012 2013 2014 2015 Relative Index S&P/TSX Sales $164 $162 $122 $195 $179 $164 Year end Dec.31 Operating costs $0 $0 $0 $0 $0 $0 Pricing currency CAD$ EBIT $156 $155 $113 $184 $168 $154 Accounting currency C$ DD&A ($6) ($5) ($6) ($6) ($6) ($6) EBITDA $161 $160 $118 $190 $174 $159 Investment Case Net income (adjusted) $197 $174 $87 $218 $178 $149 - relatively low capex requirements EPS $6.15 $2.72 $1.36 $3.40 $2.78 $2.32 - strategic value of infrastructure Avg. shares - Common (mn) 32.0 64.0 64.0 64.0 64.0 64.0 Strengths & - established end markets Avg. shares - FD (mn) 32.0 64.0 64.0 64.0 64.0 64.0 Opportunities - backed by industry heavy weight (RIO) Summary cash flow statement (C$ mn) 2010 2011 2012 2013 2014 2015 Net income $197 $174 $87 $218 $178 $149 - low leverage to commodity price Non-cash items $6 $5 ($6) ($6) ($6) ($6) Weaknesses & - aging asset base Working capital changes $0 $9 ($2) $21 ($5) ($1) Threats Cash from operations $156 $122 $74 $230 $198 $178 Distributions to unitholders ($89) ($154) ($81) ($157) ($161) ($170) Net change in total debt $0 $0 $0 $0 $0 $0 Balance Sheet - (C$ mn) last reported Net change in common equity $0 $0 $0 $0 $0 $0 Cash and cash equivalents $34 Cash from financing activities ($89) ($154) ($81) ($157) ($161) ($170) Net working capital $35 Property and equipment $0 $0 $0 $0 $0 $0 Net PP&E $557 Cash from investing activities $0 $3 $2 $0 $0 $0 Total assets $630 Free cash flow $156 $122 $74 $230 $198 $178 Short term debt $0 Net change in cash $67 ($32) ($6) $73 $37 $9 Long term debt $0 Total shareholders' equity $234 Summary balance sheet (C$ mn) 2010 2011 2012 2013 2014 2015 Total liabilities & shareholder equity $630 Cash & equivalents $74 $41 $36 $108 $146 $154 Net debt (cash) ($34) Total current assets $125 $83 $42 $114 $152 $161 Shares outstanding - fully diluted 32.0 Fixed assets $540 $586 $615 $621 $626 $632 Book value per share $7.30 Total assets $665 $669 $657 $735 $778 $793 Net debt/net debt + equity (%) -17% STD $0 $0 $0 $0 $0 $0 Total current liabilities $89 $32 $30 $34 $33 $33 4.0 LTD $0 $248 $0 $0 $0 $0 Shareholder equity $219 $274 $509 $583 $627 $641 3.0 Total liabilties & equity $665 $669 $657 $735 $778 $793 Net debt (cash) ($74) $207 ($36) ($108) ($146) ($154) 2.0 Ratio analysis 2010 2011 2012 2013 2014 2015 P/E (NTM) 4.2 13.1 24.3 9.1 11.1 13.3 1.0 P/CF (NTM) 5.3 18.7 28.6 8.6 9.9 11.0 EV/EBITDA (NTM) 4.7 15.5 17.6 9.8 10.5 11.4 0.0 ROE 82% 62% 17% 36% 28% 23% 2010 2011 2012 2013 2014 2015 ROIC 71% 57% 22% 32% 27% 24% Concentrate Sales (mt) Pellet Sales (mt) Gearing (ND/ND+E) net cash 43% net cash net cash net cash net cash Production (100% basis) 2010 2011 2012 2013 2014 2015 Net Asset Value (NAV) Concentrate Sales (mt) 1.8 1.3 1.4 1.6 1.6 1.6 Pellet Sales (mt) 0.5 0.7 0.9 1.4 1.5 1.5 Projects & Mines C$mn C$/sh Total Sales (mt) 2.3 2.1 2.3 3.0 3.1 3.1 15.1% Equity Interest $2,839 $44.35 75% Cash Cost (US$/t) 60.4 59.4 66.7 66.5 69.2 70.4 7% Sales Royalty $1,129 $17.64 30% 10c/t commission $21 $0.33 1% Resources & Reserves (100% basis) Sub-Total $3,989 $62.33 106% In-situ Saleable Product Ore %Fe Contained Ore %Fe Contained Corporate C$mn C$/sh Reserves 578 65.0 376 Corporate ($210) ($3.29) -6% Resources (M&I) 1092 38.4 420 Corporate ($12) ($0.19) 0% Resources (M,I&I) 2464 38.1 939 Corporate ($223) ($3.48) -6% LOM assumption 867 65.0 622 Total $3,766 $58.85 Source: Company data, Credit Suisse estimates Labrador Iron Ore Royalty Corp. (LIF_u.TO) 2 17 September 2012 Key Takeaways Infrastructure ownership provides IOC and ArcelorMittal Mines Canada (AMMC) are to the Labrador Trough what BHP and RIO are to the Pilbara. ■ IOC and AMMC are the oldest, largest scale, and lowest costs assets in the region. ■ Both companies own their port/rail solutions directly, and therefore do not have to pay third party infrastructure access fees. Exhibit 2: CSe 2013 Labrador Trough cost curve relative to spot iron ore price Note: All costs have been normalized to 62% IODEX equivalent pricing terms 140 Wabush - Scheffervile Bloom Lake Bloom - 120 - DSO/hematite CLF CLF - CLF CLF Mont Wright Mont Carol Lake Carol 100 - - LIM.TO NML.TO NML.TO IOC 80 AMMC 60 40 Cash Costs (US$/t CFR) (US$/t Costs Cash 20 0 0 10 20 30 40 50 60 70 Sales (mt) Source: Company data, Credit Suisse estimates Even at iron ore’s recent lows of US$87/t CFR, we believe that IOC and AMMC were still making healthy margins.