Mesabi Trust 10-Q Summary: Period Ended October 31, 2006
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, 2006, and the nine-month period ended on the same date.
Key Financial Metrics
| Metric | Three Months Ended Oct 31, 2006 | Nine Months Ended Oct 31, 2006 |
|---|---|---|
| Total Revenue | $7,180,092 | $15,152,177 |
| Royalty Income | $7,159,704 | $15,106,855 |
| Net Income | $7,045,627 | $14,708,836 |
| Net Income Per Unit | $0.54 | $1.12 |
| Distributions Declared Per Unit | $0.585 | $1.29 |
| Cash and Equivalents | Balance Sheet (Oct 31, 2006): $7,871,337 | |
| Unallocated Reserve | ||
| Expenses | $134,465 | $443,341 |
Liquidity and Debt: The Trust holds no debt. Liquidity is maintained through cash balances and U.S. Government securities. An Unallocated Reserve of $2,834,647 was maintained as of October 31, 2006, consisting of cash, securities, and accrued revenue.
Material Changes vs. Prior Period
- Revenue Growth: Royalty income increased 29% for the quarter and 12% for the nine-month period compared to the prior year.
- Bonus Royalties: Bonus royalties surged 66% in the quarter and 21% for the nine months, driven by higher volumes of pellets shipped at prices exceeding the 2006 Adjusted Threshold Price of $44.60 per ton.
- Production and Shipments: For the quarter, production from Trust lands decreased 11% (0.95M tons vs 1.07M tons), while shipments increased 1% (1.28M tons vs 1.26M tons). For the nine months, production increased 5% and shipments increased 3%.
- Expenses: Quarterly expenses rose 8% due to administrative costs, while nine-month expenses decreased 9% due to lower legal and accounting fees.
Outlook, Risks, and Recent Developments
Recent Developments:
- Mesabi Nugget Project: Cleveland-Cliffs Inc. (CCI) suspended the joint venture to build a commercial nugget plant at the Erie site due to financing and commercial term disagreements. However, CCI and Kobe Steel intend to proceed with a reduced iron plant at the Northshore site.
- Capacity Expansion: CCI received permits to restart an idled pellet furnace at Northshore, expected to add 800,000 tons of annual production starting in early 2008.
- Supply Contracts: CCI signed long-term supply agreements with AK Steel (7 years) and Republic Engineered Products (5 years), committing virtually 100% of current North American pellet production.
Risks and Contingencies:
- Arbitration: Mesabi Trust filed a Demand in Arbitration on September 25, 2006, against CCI and Northshore seeking access to pellet supply agreements to verify royalty calculations.
- Operational Dependence: The Trust has no control over mining operations, production volumes, or marketing decisions, which are solely at the discretion of CCI/Northshore.
- Pricing Volatility: Royalties are subject to interim and final pricing adjustments under CCI Pellet Agreements, which can cause significant quarter-to-quarter variations.
Investor Verification Checklist
- Verify the status of the arbitration demand filed against CCI regarding access to royalty calculation data.
- Monitor CCI's progress on the restart of the idled pellet furnace and the revised plans for the reduced iron plant at Northshore.
- Track iron ore pricing trends and the Adjusted Threshold Price, as these directly impact the significant "bonus royalty" component of revenue.
- Review CCI's quarterly filings for updates on production volumes specifically attributed to Mesabi Trust lands versus off-trust lands.
- Confirm the timing of royalty payments, as a significant portion of the Unallocated Reserve ($1.9M) consists of accrued revenue anticipated for receipt in January 2007.