MSB

Mesabi Trust 10-Q Summary: Period Ended October 31, 2010

Business Context and Reporting Period

Mesabi Trust is a New York trust holding interests in iron ore leases, primarily the Peters and Cloquet Leases, operated by Northshore Mining Company (a subsidiary of Cliffs Natural Resources Inc.). The Trust has no employees and does not engage in business operations; its sole function is to collect royalties, pay expenses, and distribute net income to unitholders. This report covers the quarterly period ended October 31, 2010, and the nine-month period ended on the same date.

Key Financial Metrics

Liquidity and Debt: The Trust holds no debt. Liquidity is maintained through cash reserves and U.S. Government securities. As of October 31, 2010, the Unallocated Reserve consisted of $922,662 in cash/securities and $3,320,776 in accrued income receivable.

Material Changes vs. Prior Period

• Revenue Surge: Royalty income for the nine months ended October 31, 2010, increased by $21.3 million (329%) compared to the prior year period. This was driven by a 159% increase in iron ore pellet shipments and higher sales prices per ton.
• Production and Shipments: For the nine months ended October 31, 2010, pellet production from Trust lands totaled approximately 3.51 million tons, and shipments totaled 4.72 million tons, compared to 2.08 million tons produced and 1.82 million tons shipped in the same period in 2009.
• Deferred Revenue Elimination: A deferred royalty revenue liability of $2.77 million recorded as of January 31, 2010, was fully eliminated by October 31, 2010, due to negative price adjustments being offset against quarterly royalty payments.
• Expense Increase: Expenses increased slightly ($44,666 for the nine months) primarily due to compliance costs associated with the SEC's XBRL filing mandate and the Dodd-Frank Act.

Outlook, Risks, and Management Commentary

Management Commentary: The Trustees attribute the strong financial performance to increased orders from Cliffs' customers. Distributions are declared based on actual royalty payments received, which may differ from accrued net income due to timing differences and price adjustments.

Risks and Contingencies:

• Pricing Adjustments: Royalties are subject to interim and final price adjustments under Cliffs Pellet Agreements. Future negative adjustments could significantly reduce cash available for distribution.
• Arbitration Proceedings: Cliffs is engaged in arbitration with major customers ArcelorMittal and Essar Algoma Steel regarding pricing and shipment nominations. The outcome could impact future royalties, though the specific tonnage from Trust lands involved is unknown.
• Operational Dependence: The Trust has no control over Northshore's mining operations, production volumes, or marketing decisions. It relies entirely on information provided by Cliffs.
• Market Volatility: The shift from annual benchmark pricing to shorter-term flexible pricing in the global iron ore market introduces volatility and uncertainty regarding future contract terms.

Investor Verification Checklist

• Verify the status of Cliffs' arbitration proceedings with ArcelorMittal and Essar Algoma Steel, as these disputes directly impact royalty pricing mechanisms.
• Monitor Cliffs' quarterly reports for updates on iron ore shipment volumes and the resolution of price adjustment negotiations.
• Review the Trust's Unallocated Reserve composition to ensure the cash reserve remains within the prudent range of $500,000 to $1,000,000 as intended by the Trustees.
• Confirm that accrued income receivable ($3.32 million as of Oct 31, 2010) is collected in subsequent periods, as this amount is not yet available for distribution.
• Assess the impact of the changing international iron ore pricing system on Cliffs' North American term supply agreements.