Mesabi Trust — Form 10-Q Summary
Reporting period: Three and six months ended July 31, 2013; the comparative periods ended July 31, 2012. Mesabi Trust is a passive royalty trust whose income depends principally on iron ore production, shipments, and pricing at Northshore Mining, a Cliffs Natural Resources subsidiary. Interim statements are unaudited.
Financial results and liquidity
| Metric | Three months 2013 | Three months 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Royalty income | $7.83 million | $11.06 million | $10.36 million | $14.75 million |
| Total revenue | $7.83 million | $11.06 million | $10.36 million | $14.75 million |
| Expenses | $209,935 | $186,938 | $536,353 | $510,492 |
| Net income | $7.62 million | $10.87 million | $9.83 million | $14.24 million |
| Net income per unit | $0.5812 | $0.8288 | $0.7490 | $1.0856 |
| Distributions declared per unit | $0.460 | $0.640 | $0.540 | $0.705 |
- Cash flow: Six-month operating cash flow was $6.86 million, down from $9.50 million. Distributions paid were $7.48 million; cash and cash equivalents fell $514,000 to $6.21 million.
- Balance sheet at July 31, 2013: Total assets were $10.01 million, including $6.21 million cash, $543,000 of U.S. government securities, and $3.24 million accrued income receivable. Liabilities were $6.09 million, mainly $6.04 million distributions payable. The filing reports no debt.
- Reserve: Unallocated Reserve was $3.92 million, including $3.24 million accrued income receivable and $722,000 unallocated cash and securities. Trustees generally target $500,000–$1.00 million in unallocated cash and securities.
- The filing gives no formal margin guidance. Expenses were small relative to revenue; no material financing or debt obligations are reported.
Material changes and operating drivers
- Six-month royalty income declined $4.39 million (about 30%) and net income declined $4.42 million (about 31%) year over year. For the quarter, royalty income fell $3.23 million and net income fell $3.25 million.
- Management attributed the declines to lower average pellet selling prices and lower shipment volumes. Six-month production from Trust lands was 1.86 million tons versus 2.69 million; shipments were 2.15 million versus 2.41 million. In the quarter, production was 929,000 tons versus 1.29 million and shipments were 1.58 million versus 1.72 million.
- Trust-land shipments represented approximately 89.8% of Silver Bay shipments in the first six months, versus 94.2% in 2012. Expenses rose modestly, principally from higher mining consultant fees over six months and legal fees in the quarter.
- Two of Northshore’s four production lines had been idled since January 5, 2013 through the end of the quarter. Trustees had no information on when they would resume.
- On June 13, 2013, Cliffs announced an extension of its pellet sale agreement with Essar Steel Algoma through 2024, including minimum purchase volumes and pricing for 2013–2024. Northshore is a party; the Trust had not been advised what future volumes, if any, would come from Trust lands under the agreement.
Outlook, risks, and unusual items
- No quantified earnings, production, or distribution guidance was provided. Future distributions depend on royalties actually received, shipments, selling prices, and Trust expenses; winter shipping activity is typically reduced.
- Royalties use estimated prices subject to interim and final adjustments based on external price and inflation indexes. Negative adjustments could reduce or eliminate royalties otherwise payable and lower future distributions. Accrued income is recognized before cash is received and is not available for distribution until collected.
- The Trust has no control over Northshore’s operating, mining, or shipment decisions and relies on information supplied by Northshore and Cliffs. The filing identifies iron ore and steel market conditions, customer demand, operating and regulatory matters, litigation, environmental and safety conditions, and reserve-estimate uncertainty as risks. It reports no material change to previously disclosed risk factors.
- Distributions declared are not equivalent to net income because declarations are based on expected cash royalties and calendar-quarter shipments, while financial reporting uses an accrual basis. The six-month reserve increase from $1.18 million at January 31 to $3.92 million at July 31 was primarily due to higher accrued income receivable.
- Trustees concluded disclosure controls were effective; they noted Northshore does not provide a written certification of its disclosure controls and internal controls. The Trust reports no material change in its own internal control over financial reporting.
Important facts for investors to verify
- Whether and when the two idled production lines restart, and the resulting production and shipment levels.
- Actual royalty cash receipts and any final price adjustments, particularly the effect on accrued receivables and distributions.
- Northshore shipment volumes from Trust lands and the impact of lower customer orders, prices, or shipments from other lands.
- Whether the Essar agreement generates material Trust-land shipments or royalties.
- Reserve levels and distribution coverage, distinguishing distributions declared from cash distributions paid.