08/15/2012 02:10 EDT | Updated 10/15/2012 05:12 EDT

Labrador Iron Mines looking at capital spending as low ore prices hurt Q1 results

Labrador Iron Mines Holdings Ltd. is looking at cutting capital costs that don't hurt key development plans as depressed iron ore prices in China trim its revenues and makes it harder to find buyers for some types of the steelmaking material.

"Right now it's a buyer's market," chairman and CEO John Kearney said Wednesday during a conference call to discuss LIM's latest quarterly results.

The Toronto-based company missed expectations as it lost $10.6 million in its first quarter as a slowing global economy and high Chinese ore inventories caused a delay in shipments from the Port of Sept-Iles in eastern Quebec. The amount included $9.8 million in amortization charges.

On the Toronto Stock Exchange, its shares lost 19 cents, or 9.41 per cent, at $1.83 in afternoon trading.

Labrador Iron Mines (TSX:LIM) lost 16 cents per share, with $38 million of revenue recognized during the three-months ended June 30.

That compared to a loss of $4.7 million or nine cents per share a year earlier, before full-scale mining operations began or revenue was generated.

Analysts had been expecting Labrador Iron Mines to produce a profit of six cents per share on a net basis and five cents per share on an adjusted basis with about $57.6 million of revenue, according to estimates compiled by Thomson Reuters.

The company said it was only able to complete three shipments during the quarter, with a planned fourth shipment delayed until the current quarter. A fifth of some 13 planned shipments for the year will set sail in days.

Ore prices have fallen to US$111 per tonne, suppressing the generation of cash required to fund several key projects that are slated to increase annual production to three million tonnes in 2013 from 500,000 tonnes last year. Labrador said it remains on track to produce two million tonnes of ore this year.

"Obviously steelmakers are feeling the pain, their margins are being squeezed, port inventories in China are at very high levels and some very difficult times on the spot market in china," Kearney told analysts.

Market conditions are having an impact on large producers as well as some types of ore are getting fewer bids if any at all.

"Hopefully we will see an improvement in this going forward," he said, adding that it expects prices will increase to US$130 to US$140 per tonnes in the coming quarters.

In the meantime, Labrador is adjusting by reviewing all of its capital projects. Among the options is delaying planning railway siding for its Houston development that would save $10 million. The Houston project remains a key priority to double ore production in the coming years.

The company is also looking at financing opportunities aside from issuing equity to keep its capital spending on track, added president and chief operating officer Rod Cooper.

"At the moment we are taking each capital program in turn and looking at the ones we can defer without an impact on schedule," he added.

It has shifted its product mix exclusively to process lump and sinter and phased out of shipping direct rail ore.

Despite the challenges, Cooper described the quarter as a milestone as its James mine is operating at 32,000 tonnes per day and monthly railway volumes tripled from April to August.

Labrador Iron Mines is one of several companies developing mining operations near the Quebec-Labrador border, an area that has vast deposits of iron ore. Its new James mine began full-scale operations at the beginning of the quarter.

The mining companies and Canadian National Railway (TSX:CN) announced last week that they're taking a step towards building a new transportation link that analysts estimate would cost $5 billion.

"As we are currently the only iron ore producing company, we believe we are well-positioned to benefit from the potential development of this additional infrastructure which ultimately will reduce our operating costs and contribute to maximizing our shareholder value," Kearney said Wednesday.

Labrador Iron said Wednesday it sold three shipments totalling 486,000 tonnes at an average price of US$122 per tonne during the first quarter of its 2013 fiscal year.

Its ore is sold under provisional pricing arrangements subject to adjustments that typically occur one month after the ship has left the port.

Its ore is re-sold by the Iron Ore Company of Canada through the Rio Tinto marketing organization, on the Chinese spot market.

Robin Kozar of RBC Capital Markets said low iron ore prices were a drag on results but operations performed well in the quarter.

"With the exception of slightly lower than expected throughput and yields at the Silver Yards processing plant, Labrador's production ramp-up and operations are generally on track and performing well," he wrote in a report.