MSB

Mesabi Trust 10-Q Summary: Quarter Ended April 30, 2010

Business Context and Reporting Period

Mesabi Trust is a New York trust holding interests in iron ore leases operated by Northshore Mining Company (a subsidiary of Cliffs Natural Resources Inc.). The Trust generates revenue primarily through leasehold royalties based on the volume and price of iron ore pellets shipped from Silver Bay, Minnesota. This report covers the quarterly period ended April 30, 2010. As of June 2, 2010, there were 13,120,010 Units of Beneficial Interest outstanding.

Key Financial Metrics

Liquidity and Debt: The Trust holds no debt. Liquidity is managed through an Unallocated Reserve, which increased significantly to $4.27 million, largely due to accrued income receivable ($3.73 million) and a cash reserve of $1.52 million. Cash flow from operations was $129,521, while financing activities used $7.22 million for distributions.

Material Changes vs. Prior Period

• Revenue Surge: Royalty income increased by $3.97 million (approx. 388%) compared to the prior year quarter. This was driven by a 356% increase in pellet shipments (1.08 million tons vs. 0.24 million tons) and higher sales prices per ton.
• Net Income Growth: Net income rose by $3.98 million to $4.78 million, reflecting the revenue increase and a slight decrease in operating expenses ($207,862 vs. $223,835).
• Distribution Decline: Despite the sharp rise in net income, distributions declared per unit dropped from $0.3800 to $0.1250. This discrepancy is due to:
  • A $2.8 million negative price adjustment applied by Northshore against prior year shipments, offsetting current royalty payments.
  • Approximately $3.73 million of net income was recorded as accrued receivable for April shipments, which will not be received in cash until July 2010.
• Deferred Revenue Adjustment: The deferred royalty revenue liability decreased from $2.77 million (Jan 31, 2010) to $972,000 (Apr 30, 2010) due to negative price adjustments and updated pricing estimates.

Outlook, Risks, and Management Commentary

Operational Outlook: Northshore operated three of four furnaces during the quarter, with the fourth expected to restart in July 2010. A scheduled four-week shutdown for repairs began May 30, 2010. Northshore has not provided a full-year shipment estimate for 2010.

Key Risks and Contingencies:

• Pricing Volatility: Royalties are subject to interim and final price adjustments under Cliffs Pellet Agreements. Future negative adjustments could offset current royalties, reducing cash available for distribution.
• Regulatory Litigation: Northshore successfully challenged a Minnesota Pollution Control Agency (MPCA) requirement for an Environmental Assessment Worksheet regarding a permit amendment. The MPCA's appeal was dismissed in April 2010, though the impact on future operations remains uncertain.
• Arbitration: Arbitration between Cliffs and customer ArcelorMittal regarding 2009 tonnage nominations was settled on April 14, 2010.

Management Commentary: Trustees maintain a prudent cash reserve (target $500k-$1M, currently higher at $1.52M) to cover liabilities given the unpredictability of price adjustments. Distributions are based on cash received, not accrual-based net income, leading to potential timing mismatches.

Investor Verification Checklist

• Cash vs. Accrual: Verify the distinction between the reported Net Income ($4.78M) and the cash actually available for distribution, noting the $3.73M accrued receivable not yet collected.
• Price Adjustments: Monitor future filings for the finalization of price adjustments under Cliffs Pellet Agreements, which could materially alter future royalty payments.
• Production Volumes: Track Northshore's furnace restart schedule and the impact of the May 2010 shutdown on Q2 and Q3 shipment volumes.
• Regulatory Status: Confirm the final status of Northshore's Title V operating permit following the dismissal of the MPCA appeal.