Mesabi Trust — Form 10-Q Summary
Reporting period: Three and nine months ended October 31, 2016, compared with the corresponding 2015 periods. Mesabi Trust is a passive royalty trust whose income depends principally on Northshore Mining Company’s operations and shipments; it has no employees and does not control mining decisions.
Financial results and position
| Metric | Three months ended Oct. 31, 2016 | Three months ended Oct. 31, 2015 | Nine months ended Oct. 31, 2016 | Nine months ended Oct. 31, 2015 |
|---|---|---|---|---|
| Royalty income | $3,441,528 | $2,619,097 | $6,050,147 | $6,667,942 |
| Total revenues | $3,442,645 | $2,621,565 | $6,053,959 | $6,674,935 |
| Expenses | $234,494 | $219,498 | $855,814 | $848,958 |
| Net income | $3,208,151 | $2,402,067 | $5,198,145 | $5,825,977 |
| Net income per unit | $0.2445 | $0.1831 | $0.3962 | $0.4441 |
- Quarterly net income rose $806,084, while nine-month net income fell $627,832. No debt is reported.
- Operating cash flow was $2,960,748 for the nine months, versus $5,988,873 a year earlier. Cash and cash equivalents were $5,334,255 at October 31, 2016, compared with $2,587,165 at January 31, 2016. The Trust also held $506,370 in U.S. Government securities.
- Total assets were $8,988,597; total liabilities were $1,361,290, including $1,312,001 of distributions payable. Accrued income receivable was $3,056,198 and is not available for distribution until royalties are received.
- The Trust declared distributions of $0.10 per unit in October 2016, versus none in October 2015. Total distributions declared per unit for the nine months were $0.50 versus $0.04; distributions declared need not equal income earned.
Material changes and operating drivers
- For the three-month period, royalty income increased $822,431, mainly as shipments rose. Production from Trust lands was 1,219,430 tons and shipments were 1,293,411 tons, compared with 1,090,483 and 1,039,580 tons, respectively, in 2015.
- Quarterly bonus royalties increased to $872,981 from negative $75,479, reflecting higher sales prices; base royalties decreased to $2,433,687 from $2,577,681, partly because of a lower royalty rate.
- For the nine months, production and shipments from Trust lands declined to 2,350,880 and 1,887,675 tons from 3,143,019 and 2,815,257 tons. Management attributed the decline to weaker customer demand. Nine-month base royalties fell $1,727,617; bonus royalties rose $1,214,351, partly reflecting higher prices and anticipated positive pricing adjustments.
- The nine-month cash-flow decline reflects lower royalty receipts ($3,910,855 versus $6,872,800) and distributions paid of $5,904,005 versus $8,921,606.
- Unallocated Reserve was $7,627,304 at October 31, down from $8,989,164 at January 31, 2016. Management said the decrease primarily reflected a lower reserve for unexpected obligations; the reserve includes accrued income receivable as well as unallocated cash and securities.
Outlook, risks and unusual items
- No numerical earnings or distribution guidance was provided. Management expects future distributions to depend heavily on royalties actually received, anticipated expenses, reserve needs, shipment volume and sales prices. Shipping activity is typically lower during winter.
- Royalties use estimated contract prices that can be revised through interim and final adjustments. Such adjustments may be positive or negative; the filing warns that future negative adjustments could reduce or eliminate royalties otherwise expected in a period.
- Northshore/Cliffs controls operating, shipment and customer-contract information and mining decisions. The Trust relies on information supplied by the operator, consultants and external accountants; Northshore did not provide written certification of its disclosure and internal controls. Trustees nevertheless concluded the Trust’s disclosure controls were effective.
- For the quarter ended September 30, 2016, the operator reported royalty credits of $1,643,276 in base royalties and $571,691 in bonus royalties, reduced by $468,190 of negative pricing adjustments; total royalties received by October 30 were $1,880,334, including a payment to the Mesabi Land Trust.
- The Trust is a grantor trust: taxable income is generally attributed to unitholders whether or not distributed. The filing reported no material changes to previously disclosed risk factors.
Key facts for investors to verify
- Subsequent final price adjustments and their effect on royalties, cash receipts and distributions.
- Northshore shipment levels, sales prices and the proportion of shipments attributable to Trust lands.
- Whether accrued income receivable is collected and how reserve levels and future distributions change.
- Unitholders’ tax reporting obligations for retained trust income.