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Asset hunting, Labrador Iron Ore Royalty not looking to become 'M&A specialists'

A base metal acquisition is still on the table for Labrador Iron Ore Royalty Corp. as it seeks to shift strategy and diversify revenues away from being solely sourced from the IOC iron ore operations in eastern Canada, Labrador Iron Ore President and CEO William McNeil said in an interview.

For years, Labrador Iron Ore Royalty's focus has been on distributing cash flow to shareholders that it receives as a part owner of IOC and holder of a royalty on the iron ore mine, which is majority-owned by Rio Tinto.

In June, Labrador Iron Ore Royalty signaled a significant course change, saying it wanted to buy a specific base metal asset it had identified. It has not named the target.

There was one big issue. To try to get a deal done, Labrador Iron Ore Royalty would need to go to shareholders to alter governance rules that hamstring its ability to pull the trigger on acquisitions.

In June and in subsequent filings, Labrador Iron Ore said rules that require, for example, 75% shareholder approval on "fundamental matters" make it difficult for it to convince potential asset sellers that the company's offers will succeed. To that end, it plans to hold a special meeting sometime this fall to put rule changes to a shareholder vote.

While the meeting has yet to happen, McNeil said the potential acquisition remains in the company's sights, and the plan for a shareholder meeting has not changed. "We still think it would be a very good opportunity for our shareholders."

McNeil did not elaborate on the target except to say it was a producing base metal asset in a jurisdiction the company considers low risk. "Obviously it's a competitive situation," he said, not wanting to name the mine.

The process of organizing the meeting is going slowly as the company is taking a wait-and-see approach about the rumored possibility, first reported in August, that Rio Tinto is looking to spin off its IOC stake. McNeil would not comment on the rumor. "We're awaiting events," he said.

Debt, not equity

McNeil expanded on Labrador Iron Ore's shift in strategy and how it might be funded.

He pointed to the benefits of diversification in adding revenue streams and making it less susceptible to issues, such as strikes, at IOC. But McNeil said several times that he expects the possible acquisition would not completely reshape how the company operates.

"We're not looking to become M&A specialists and start making big waves," he said. He said the plan was to focus on the base metal asset for the time being and remain a lean company with a staff of four.

"We're not going to be taking on the Francos in any serious sense," McNeil said, referring to royalty-sector heavyweight Franco-Nevada Corp. "I'm sure they're not losing any sleep over us."

For now, Labrador Iron Ore Royalty will also avoid early stage exploration assets."There's other people who play in that business, and they're very good at it, and we don't see competing with them," McNeil said. "That's not to say we will never do it, but our focus is producing assets, not in the gold and silver sectors; lower quartile, long life. What everybody looks for."

Whether the acquisition goes ahead will depend on what the company's shareholders decide at the planned meeting. McNeil cast the policies that curtail Labrador Iron Ore Royalty's activities as outdated. He said they were put in place when the company was launched as Canada's first income trust. Since then, numerous companies have emerged in the royalty sector, and now Labrador Iron Ore Royalty wants to be on a more even playing field.

One of the changes the company wants to make is to be allowed to issue equity without shareholder approval, although McNeil said there is no plan to raise money that way. "We do want the ability to be like any other CBCA corporation so that we can issue shares," he said, referring to the Canada Business Corporations Act. "That's the ask, and we'll see where we get to."

If Labrador Iron Ore Royalty does a deal, McNeil said it would likely be debt-financed.

"It would be a very plain vanilla kind of debt facility," he said. "We're not an exotic company."

McNeil said Labrador Iron Ore Royalty has talked with banks about a financing package that would not present a hurdle for the company. "We're talking about a bite-size acquisition, maybe up to C$300 million. There's not a real stretch on the balance sheet."