Mesabi Trust — Q2 2014 Form 10-Q
Business and period: Mesabi Trust is a pass-through trust whose income is primarily royalties tied to iron ore mined and shipped by Northshore Mining, a Cliffs Natural Resources subsidiary. The quarter and six-month periods ended July 31, 2014; figures are unaudited and compared with the corresponding 2013 periods.
Financial results and position
| Metric | Three months ended July 31, 2014 | Six months ended July 31, 2014 |
|---|---|---|
| Royalty income | $7.858 million; up 0.3% year over year | $8.359 million; down 19.3% |
| Total revenue | $7.860 million | $8.364 million |
| Expenses | $443,819; versus $209,935 | $810,036; versus $536,353 |
| Net income | $7.417 million; down 2.7% | $7.554 million; down 23.1% |
| Net income per unit | $0.5653; versus $0.5812 | $0.5757; versus $0.7490 |
| Distributions declared per unit | $0.32; versus $0.46 | $0.32; versus $0.54 |
| Operating cash flow | Not separately reported for the quarter | $4.127 million; versus $6.864 million |
At July 31, cash and cash equivalents were $4.368 million and U.S. Government securities totaled $716,019. Accrued income receivable was $3.371 million, including royalty income recognized for July shipments that was not yet available for distribution. Total assets were $8.599 million; liabilities were $4.260 million, principally distributions payable. The filing reports no debt. The unallocated reserve was $4.339 million, but only $885,407 was unallocated cash and securities; the balance was largely accrued income receivable.
Material changes and operating trends
- Quarterly royalty income increased slightly as higher average selling prices and increased Trust-land shipments lifted bonus royalties, offsetting lower base overriding royalties.
- Six-month royalty income fell $2.003 million, mainly because pellet shipments were lower; higher sales prices partly offset the volume decline. Net income also declined, while expenses rose.
- Trust-land pellet production rose to 2.272 million tons for six months from 1.862 million. Shipments fell to 1.794 million tons from 2.153 million, which management attributed to unfavorable first-quarter weather. For the quarter, shipments increased to 1.717 million tons from 1.585 million.
- Expenses included costs associated with the June 2014 special unitholder meeting and election of a new Trustee. Those costs drove most of the quarter’s $233,884 year-over-year expense increase.
- The Trust declared $0.32 per unit in July, compared with $0.46 in July 2013. Distributions are based on royalty cash received or expected, not accounting net income; cash distributions paid during the six months were $7.478 million.
Outlook, risks, and contingencies
The filing gives no numerical earnings or distribution guidance. Management expects future distributions to depend on royalties actually received, shipment volumes and prices, and Trust expenses; shipping activity is typically lower in winter. The Trustees generally seek to maintain $500,000–$1 million of unallocated cash and securities for liabilities.
Royalty estimates are exposed to interim and final pricing adjustments under customer contracts to which the Trust is not a party. Adjustments may be negative and could reduce or eliminate royalties otherwise payable in a quarter or year. Other risks include iron ore and steel market conditions, demand, weather, environmental and regulatory matters, and the Trust’s dependence on Northshore’s operating decisions and information. Trustees have no control over mine operations. They concluded disclosure controls were effective, while noting Northshore did not provide quarterly written certification of its controls; the Trust relies on annual certifications and external review procedures.
Investor verification priorities
- Confirm collection of the $3.371 million accrued royalty receivable and whether later price adjustments changed the amount.
- Review subsequent shipment volumes, realized pricing, and royalty calculations from Northshore, including any contract price true-ups.
- Track distributions declared and paid against royalty cash receipts, reserve needs, and the lower year-to-date distribution per unit.
- Assess whether the shipment shortfall attributed to weather, and the Trust’s reliance on Northshore-provided operating data, affect future royalty income.