Mesabi Trust 10-Q Summary: Period Ended October 31, 2007
Business Context and Reporting Period
Mesabi Trust is a New York trust holding interests in iron ore leases (Peters and Cloquet Leases) in Minnesota. The Trust has no employees and relies on Northshore Mining Company (a subsidiary of Cleveland-Cliffs Inc.) as the lessee/operator. Revenue is derived primarily from leasehold royalties based on iron ore pellet production and shipments. This report covers the quarterly period ended October 31, 2007, and the nine-month period ended on the same date.
Key Financial Metrics
| Metric | Three Months Ended Oct 31, 2007 | Nine Months Ended Oct 31, 2007 |
|---|---|---|
| Total Revenues | $6,703,055 | $12,923,595 |
| Royalty Income | $6,690,125 | $12,896,302 |
| Interest Income | $12,930 | $27,293 |
| Expenses | $109,924 | $456,707 |
| Net Income | $6,593,131 | $12,466,888 |
| Net Income Per Unit | $0.5025 | $0.9502 |
| Distributions Declared Per Unit | $0.4800 | $0.8350 |
| Cash and Equivalents (End of Period) | $6,520,101 | |
| Net Cash Provided by Operating Activities (9mo) | $10,819,087 | |
| Unallocated Reserve | $2,651,353 |
Material Changes vs. Prior Period
- Revenue Decline: Total royalty income decreased 6.6% for the quarter and 14.6% for the nine-month period compared to 2006. This was driven by lower contract prices for iron ore and a reduction in shipments from Trust lands.
- Royalty Components: Base overriding royalties fell 7.0% (quarter) and 14.7% (nine months). Bonus royalties decreased 7.8% (quarter) and 15.9% (nine months) due to lower sales prices and a higher adjusted threshold price ($45.98/ton in 2007 vs. $44.60/ton in 2006). Fee royalties increased 50.2% (quarter) and 12.6% (nine months).
- Production and Shipments: For the quarter, production from Trust lands increased 39.7% to 1.33 million tons, and shipments increased 6.4% to 1.36 million tons. However, for the nine-month period, shipments decreased 9.1% to 2.95 million tons despite a 3.6% increase in production.
- Expenses: Trust expenses decreased 18.3% for the quarter due to lower legal and accounting fees, but increased 3.0% for the nine-month period.
Outlook, Risks, and Management Commentary
- Dependency on Lessee: The Trust has no control over mining operations, production volumes, or marketing decisions, which are solely determined by Northshore/Cleveland-Cliffs Inc. (CCI).
- Pricing Uncertainty: Royalties are subject to interim and final price adjustments based on CCI's contracts with customers. These adjustments depend on international benchmark prices and inflation indices and are not finalized until after the contract year ends, creating volatility in quarterly distributions.
- Recent Developments: CCI is restarting an idled pellet furnace at Northshore, expected to increase annual capacity by 600,000 tons starting in 2008. The impact on Trust royalties is uncertain. Additionally, the Mesabi Nugget Project (a reduced iron plant) was suspended at the Cliffs Erie site but is being evaluated for construction at the Empire Mine site in Michigan; the Trust is not a participant.
- Reserves: The Unallocated Reserve increased to $2.65 million, largely due to accrued revenue ($1.96 million) from October 2007 shipments expected to be received in January 2008.
Investor Verification Checklist
- Verify the final pricing adjustments for the 2007 contract year, as current royalties are based on estimates subject to change.
- Monitor CCI's quarterly reports for updates on the restart of the idled pellet furnace and its actual impact on shipment volumes from Silver Bay.
- Review the status of Northshore's administrative permitting proceedings with the Minnesota Pollution Control Agency and environmental litigation.
- Confirm the percentage of total iron ore shipments derived from Mesabi Trust lands versus other lands, as this ratio affects royalty calculations.
- Assess the timing of the January 2008 distribution, which is expected to include the accrued revenue currently held in the Unallocated Reserve.