Mesabi Trust 10-Q Summary
Reporting period: Fiscal second quarter and six months ended July 31, 2015; comparisons are with the corresponding 2014 periods. Interim financial statements are unaudited. Mesabi Trust is a passive royalty trust whose income depends principally on Northshore Mining Company’s operations and iron-ore pricing.
Financial results and liquidity
| Metric | Three months ended July 31, 2015 | Three months ended July 31, 2014 | Six months ended July 31, 2015 | Six months ended July 31, 2014 |
|---|---|---|---|---|
| Royalty income | $2,732,892 | $7,858,104 | $4,048,845 | $8,359,404 |
| Total revenue | $2,735,361 | $7,860,360 | $4,053,370 | $8,363,795 |
| Expenses | $251,717 | $443,819 | $629,460 | $810,036 |
| Net income | $2,483,644 | $7,416,541 | $3,423,910 | $7,553,759 |
| Net income per unit | $0.1893 | $0.5653 | $0.2610 | $0.5757 |
- Net margin, calculated as net income divided by total revenue, was approximately 90.8% for the quarter and 84.5% for the six-month period, versus 94.4% and 90.3%, respectively, in 2014.
- Six-month operating cash flow was $3,134,341, down from $4,126,625. Cash and cash equivalents were $3,455,170 at July 31, 2015, compared with $8,717,943 at January 31, 2015. The Trust also held $766,640 in U.S. Government securities, current and noncurrent.
- Total assets were $5,124,046; total liabilities were $613,809, including $524,800 of distributions payable and $89,009 of accrued expenses. The filing reports no debt.
- The unallocated reserve was $4,510,234, up from $1,611,124 at January 31, 2015. Distributions declared were $0.04 per unit for the six months, versus $0.32 in the prior-year period.
Material changes versus prior period
- Quarterly royalty income fell $5,125,212, or about 65%, and six-month royalty income fell $4,310,559, or about 52%. The Trust attributed the declines primarily to lower average iron-ore pellet selling prices and weaker demand.
- Quarterly bonus royalties declined to $431,169 from $3,815,169; six-month bonus royalties declined to $1,099,641 from $3,998,624. Base overriding and fee royalties also decreased.
- Trust-land pellet production and shipments were 857,276 and 1,434,809 tons for the quarter, compared with 1,094,000 and 1,716,009 tons. For six months, production was 2,052,536 tons and shipments were 1,775,677 tons, versus 2,272,206 and 1,794,446 tons. Management attributed lower activity to anticipated demand and customer orders.
- Six-month expenses declined to $629,460 from $810,036, partly because the 2014 period included costs related to a trustee election.
Outlook, risks and unusual items
- No quantified earnings, production or distribution guidance is provided. Future distributions depend on royalties actually received, shipment volumes and prices, and the reserve level chosen by the Trustees.
- In April 2015, the Trustees ended their customary practice of generally keeping the reserve within $500,000 to $1,000,000. They will reassess the appropriate reserve quarterly, citing industry uncertainty, anticipated expenses and potential negative price adjustments. The reserve increase reflects, among other factors, decisions not to distribute in April and to make only a nominal distribution in July.
- Royalty pricing under customer contracts is estimated and subject to interim and final adjustments tied to market prices and indexes. Negative adjustments could materially reduce future royalties and distributions. Accrued income includes amounts not yet received and therefore not yet available for distribution.
- Cliffs reported plans to temporarily idle United Taconite following reduced customer nominations. Cliffs’ CEO also reportedly described a possible Northshore plant retooling to produce direct-reduced-iron-ready pellets; the Trustees could not assess its effect on royalty income.
- The Trust relies on Northshore and Cliffs for operational and royalty information and has no control over mining decisions. Northshore had not provided the Trustees a written quarterly certification concerning its disclosure and internal controls; the Trustees relied on annual certifications and external accountant and consultant reviews, and concluded the Trust’s disclosure controls were effective.
- The Trust is a grantor trust: retained net taxable income is generally attributable to unitholders whether or not distributed. Trustees expected a significantly greater amount of income to be retained in fiscal 2016 than in prior years, potentially increasing unitholders’ tax liability for calendar 2015 on undistributed income.
Important facts for investors to verify
- Subsequent Northshore shipments, iron-ore prices and any final contract price adjustments, including possible negative adjustments.
- Whether Cliffs’ customer demand, operating plans, or reported facility changes affect Northshore production and Trust royalty volumes.
- Trustee decisions on reserve levels and distributions; declared distributions are based on expected cash royalties and do not equal accounting net income.
- Cash collections and the timing of accrued royalties, as well as the potential tax consequences of retained income for individual unitholders.
- Reliability of operator-provided production, shipment and royalty data, given the Trust’s reliance on Northshore and Cliffs and its lack of operational control.