Mesabi Trust — Form 10-Q Summary
Reporting period: Three months ended April 30, 2017. Mesabi Trust is a pass-through royalty trust whose revenue depends primarily on iron-ore production, shipments and pricing at Northshore Mining, a Cliffs Natural Resources subsidiary. The prior-year comparable quarter had no production or shipments because Northshore was temporarily idled.
Key financial results
| Metric | Q1 2017 | Q1 2016 |
|---|---|---|
| Royalty income | $3.650 million | $0 |
| Total revenue | $3.657 million | $1,679 |
| Expenses | $295,046 | $431,931 |
| Net income (loss) | $3.362 million | $(430,252) |
| Net income (loss) per unit | $0.2562 | $(0.0328) |
| Distributions declared per unit | $0.55 | $0.20 |
| Net cash from operating activities | $68,474 | $703,408 |
Net margin was approximately 92% of revenue. Q1 2017 royalty income included $1.232 million of accrued income receivable based on April shipments and estimated pricing; that accrual was not yet available for distribution. Cash royalties received during the quarter were $366,840. The Trust reported no debt. At April 30, 2017, cash and cash equivalents were $12.009 million, U.S. Government securities were $373,430, and current assets totaled $13.680 million. A $7.216 million distribution was payable; the reported unallocated reserve was $6.351 million.
Changes and operating developments
- Production from Trust lands was 1,397,947 tons and shipments were 692,176 tons, versus zero in the year-earlier quarter. Management attributed the return to customer demand; approximately 100% of Silver Bay shipments in the period originated from Trust lands.
- Royalty income consisted of $1.536 million in base overriding royalties, $1.966 million in bonus royalties and $148,495 in fee royalties. The increase reflected shipments, higher mining activity and anticipated positive pricing adjustments on previously produced pellets. Expenses fell $136,885, primarily due to lower legal and accounting costs.
- Operating cash flow was lower despite the return to profit, mainly reflecting the timing of accrued income and the reduction of deferred royalty revenue. Cash declined $1.686 million, to $12.009 million, during the quarter.
- The April 14 distribution of $0.55 per unit was payable May 20 to holders of record April 30. Distributions are based on royalties received and other reserve considerations, so they need not equal period net income.
Outlook, risks and unusual items
- No numerical production, shipment, revenue or distribution guidance was provided. Future distributions depend on royalties actually received, Northshore shipments and sales, expenses, and the reserve level. Shipping is seasonally reduced in winter.
- Northshore reported $1.061 million of negative pricing adjustments against royalties otherwise credited for the first calendar quarter of 2017; the resulting royalty payment was $366,840, including $138,659 paid to the Mesabi Land Trust. Northshore also indicated approximately $1.48 million of additional negative adjustments against future royalties.
- Royalty pricing is subject to interim and final adjustments under customer contracts to which the Trust is not a party. Adjustments may be positive or negative and could materially reduce future royalty receipts and distributions. The quarter’s accrued income includes estimates and anticipated positive adjustments that may not be finalized until later.
- The Trust has no control over Northshore’s operating decisions and relies substantially on information from Northshore and Cliffs. Other stated risks include iron-ore and steel price volatility, supply and demand, weather, environmental and regulatory matters, and reserve-estimation uncertainty. The filing reported no material change in risk factors.
- The Trust is treated as a grantor trust for tax purposes; taxable income may be attributed to unitholders whether or not distributed. The filing reported that disclosure controls were effective and no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether the approximately $1.48 million of expected negative pricing adjustments is applied, and how final pricing adjustments affect accrued income and subsequent royalty cash receipts.
- Northshore’s ongoing production, shipments and customer demand, including seasonal impacts and the share of shipments attributable to Trust lands.
- The timing and amount of cash royalties received relative to declared distributions, reserve needs and the Trust’s $7.216 million distribution payable.
- The assumptions supporting April accrued royalty income and the resulting impact on reported earnings versus distributable cash.
- Current Cliffs and Northshore disclosures on operations, pricing, mine safety and other risks; the Trust relies on their information and has no operational control.