MSB

Mesabi Trust 10-Q Summary: Period Ended April 30, 2003

Business Context and Reporting Period

This is a Quarterly Report (Form 10-Q) for Mesabi Trust for the three months ended April 30, 2003. Mesabi Trust is a passive entity that generates income primarily through leasehold royalties from iron ore mining operations conducted by Northshore Mining Company (a subsidiary of Cleveland-Cliffs Inc.) on Trust lands. The Trust has no employees and relies on Northshore for operational data. As of May 31, 2003, there were 13,120,010 Units of Beneficial Interest outstanding.

Key Financial Metrics

Note: The Trust maintains an Unallocated Reserve of at least $1,000,000 in liquid assets to mitigate industry uncertainties. No distributions were declared for the quarter.

Material Changes vs. Prior Period

• Revenue Growth: Net income increased by 28.1% ($54,875) compared to the prior year quarter. Total revenues rose 41.9%.
• Royalty Composition: The increase in royalty income was driven by higher pellet shipments and crude ore mining volumes. Base overriding royalties surged from $73,835 to $234,378. Conversely, minimum advance royalty income recognized decreased from $112,802 to $45,089, as higher overriding royalties recouped the advance payments.
• Expense Increase: Expenses rose 79.5% ($56,772) primarily due to timing differences in legal/accounting fee payments and increased costs associated with Sarbanes-Oxley Act compliance.
• Liquidity: Cash on hand decreased significantly from $2,515,457 (Jan 31, 2003) to $91,371 (Apr 30, 2003). This reduction was largely due to a distribution payment of $2,492,802 made to unitholders during the quarter.

Outlook, Risks, and Management Commentary

Operational Risks and Disruptions:

• Production Delays: Cleveland-Cliffs Inc. (CCI) reported mineralization process difficulties at its Tilden mine, reducing 2003 production forecasts. Additionally, flooding in Michigan forced the shutdown of a power plant, idling CCI's Empire and Tilden mines. Each week of idling results in a loss of approximately 250,000 tons of pellets.
• Market Demand: CCI reduced its 2003 pellet sales forecast by approximately 5% due to declining operating rates in the North American steel industry. The bankruptcy filing of major customer Weirton Steel Corporation creates uncertainty regarding contract fulfillment.

Regulatory and Tariff Environment:

• Steel Tariffs: The WTO ruled U.S. steel tariffs in violation of global trade rules. While the U.S. intends to appeal, the future of these tariffs remains uncertain. The Trust cannot quantify the impact of tariff modifications or eliminations on iron ore demand and pricing.

Strategic Projects:

• Mesabi Nugget Project: A pilot plant for a new iron-making technology (Itmk3 process) was completed in May 2003. While successful test runs occurred, commercialization is uncertain, and it is not guaranteed that a commercial facility will be built on Trust lands.

Seasonality: Results for the first quarter are typically not indicative of full-year results due to Great Lakes shipping freezes in winter. Royalties are heavily weighted toward later quarters when shipping resumes and volume-based royalty rates increase.

Investor Verification Checklist

• Lessee Financial Health: Verify the financial stability of Northshore Mining Company and its parent, Cleveland-Cliffs Inc., particularly regarding the impact of Weirton Steel's Chapter 11 filing.
• Production Volumes: Monitor CCI's ability to resume full operations at the Empire and Tilden mines following the power plant shutdown and mineralization issues.
• Tariff Status: Track the outcome of the U.S. appeal of the WTO ruling on steel tariffs and any subsequent changes to the tariff schedule.
• Shipping Seasonality: Confirm the re-opening of Great Lakes shipping lanes and the volume of shipments in Q2 and Q3 to assess if the Q1 low-royalty trend reverses.
• Reserve Adequacy: Review the composition of the Unallocated Reserve to ensure it remains sufficient to cover potential distribution shortfalls if royalty income declines.