Mesabi Trust — Q3 2023 Form 10-Q
Reporting period: Fiscal quarter and nine months ended October 31, 2023; comparisons are to the periods ended October 31, 2022. Mesabi Trust is a pass-through royalty trust whose income depends primarily on Northshore Mining, operated by Cleveland-Cliffs (Cliffs). The Trust does not operate the mine.
Financial results and liquidity
| Metric | Three months ended Oct. 31, 2023 | Three months ended Oct. 31, 2022 | Nine months ended Oct. 31, 2023 | Nine months ended Oct. 31, 2022 |
|---|---|---|---|---|
| Total revenue | $4.90 million | $84,681 | $16.63 million | $9.91 million |
| Royalty income | $4.66 million | $0 | $16.11 million | $9.79 million |
| Expenses | $810,000 | $498,373 | $2.34 million | $1.59 million |
| Net income (loss) | $4.09 million | $(413,692) | $14.29 million | $8.32 million |
| Net income (loss) per unit | $0.3114 | $(0.0315) | $1.0894 | $0.6345 |
- For the nine months, operating cash flow was $8.95 million, down from $14.40 million. Royalties received were $10.99 million versus $15.86 million, despite higher accrued royalty revenue; working-capital movements included increases in receivables and contract assets.
- At October 31, cash and cash equivalents were $22.91 million, current assets were $26.01 million, and total liabilities were $4.87 million. The Trust reported no debt. The declared distribution payable was $4.59 million.
- Unallocated reserve was $21.14 million, compared with $11.44 million at January 31, 2023. The reserve includes accrued and estimated amounts not necessarily available for distribution.
- The Trustees declared $0.35 per unit, or $4.59 million total, payable November 20, 2023. Distributions declared per unit for the nine months were $0.35, versus $1.88 in the prior-year period; no distributions were paid during the current nine-month period.
Changes and operating developments
- Northshore’s partial restart in April 2023 drove the year-over-year improvement. For the three months, production and shipments from Trust lands were each 918,482 tons, versus zero in the comparable 2022 quarter. For the nine months, each totaled 2,123,063 tons, compared with 906,952 tons.
- Nine-month royalty income increased to $16.11 million from $9.79 million, reflecting higher shipments after the prior-year idling. The quarter’s royalty income was entirely new compared with the zero recorded in the prior-year quarter.
- Cliffs continues to describe Northshore as a swing operation and said it did not expect full operation during 2023. The Trustees said they had received no additional production or shipping outlook from Cliffs.
- Expenses rose, primarily because of legal fees related to the pending arbitration. The filing does not provide a separate amount for those fees.
Outlook, risks, and contingencies
- Royalty income and distributions depend on Northshore’s operating decisions, shipment volumes, sales prices, and the proportion of production attributed to Trust lands. The Trust cannot control mine operations and has limited information about future production.
- Some royalty calculations use estimated prices subject to interim and final adjustments under Cliffs customer contracts. Later negative adjustments could reduce or eliminate royalties otherwise expected for a quarter or year.
- Cliffs reported only two low-volume third-party pellet shipments during the twelve months ended September 30, 2023. The Trust is evaluating whether those sales meet the royalty agreement’s requirements for setting prices on shipments to Cliffs affiliates; limited arm’s-length sales could create uncertainty or disputes over royalties.
- The Trust initiated arbitration against Northshore and Cliffs in October 2022, alleging underpayment of royalties in 2020–2022 due to pricing of internal production. It seeks damages and declaratory relief concerning documentation and when royalty obligations accrue. The matter remained in discovery.
- The Trust is a grantor trust and does not pay federal or state income tax as a corporation; Unitholders generally report their pro rata share of taxable items whether distributed or retained.
Important facts for investors to verify
- Whether Northshore’s partial restart continues, and Cliffs’ updated production and shipment plans.
- Whether the limited third-party sales satisfy the royalty agreement’s pricing provisions and how the arbitration affects royalty calculations or recoveries.
- Final price adjustments on prior shipments, which may differ from estimated revenue and affect future cash receipts and distributions.
- The cash actually available for future distributions after reserve needs, expenses, and contingent liabilities.