MSB

Mesabi Trust 10-Q Summary: Period Ended October 31, 2002

Business Context and Reporting Period

Mesabi Trust is a passive trust holding leasehold interests in iron ore lands in Minnesota. Its primary revenue source is royalties paid by Northshore Mining Company (a subsidiary of Cleveland-Cliffs Inc.) based on the volume and price of iron ore products shipped. This Form 10-Q covers the quarterly period ended October 31, 2002, and the nine-month period ended on the same date. As of November 29, 2002, there were 13,120,010 Units of Beneficial Interest outstanding.

Key Financial Metrics

Material Changes vs. Prior Period

• Quarterly Performance: Net income increased to $1,868,777 for the three months ended October 31, 2002, compared to $1,574,362 in the same period in 2001. This increase was driven by higher pellet shipments and resulting royalty income.
• Year-to-Date Performance: Net income decreased to $2,690,603 for the nine months ended October 31, 2002, compared to $2,976,631 in the prior year. The decline was primarily due to decreased pellet shipments compared to the comparable prior period.
• Expenses: Expenses for the nine-month period rose to $294,077 from $207,207 in the prior year, attributed mainly to increased legal fees.
• Liquidity: Cash on hand decreased significantly from $1,223,246 at January 31, 2002, to $182,142 at October 31, 2002, largely due to distributions to unitholders and net cash used in investing activities.

Outlook, Risks, and Management Commentary

Production and Sales Outlook: Cleveland-Cliffs Inc. (CCI) raised its 2002 pellet sales forecast to 15 million tons, up from a previous range of 14-14.5 million tons. Northshore's 2002 production is estimated at approximately 4.1 million tons. CCI operates at capacity and anticipates maintaining capacity levels in 2003. A potential shift in product mix from flux pellets to standard pellets could increase Northshore's annual production target to 4.8 million tons in 2003.

Mesabi Nugget Project: A pilot plant for a new iron-making technology (Itmk3 process) is under construction at the Northshore facility, expected to be operational in the first half of 2003. While the project may utilize Mesabi Trust lands, the Trust has no control over the project and cannot project future royalties from it.

Risks and Contingencies:

• Market Conditions: The steel industry faces uncertainty due to weak demand, consolidation, and high import volumes. While tariffs imposed in March 2002 initially helped, import levels have been rebuilding, potentially leading to price declines in late 2002 and 2003.
• Operational Dependence: The Trust has no control over Northshore's operations. Revenue is highly dependent on Great Lakes shipping conditions (freezing in winter) and Northshore's production volumes.
• Disclosure Limitations: The Trust relies entirely on Northshore for operational data. Northshore has declined to provide written certification regarding the accuracy of the data furnished to the Trust, creating a potential weakness in disclosure controls.

Key Facts for Investor Verification

• Verify the accuracy of Northshore's reported shipment volumes and sales prices, as the Trust relies solely on lessee data without independent certification.
• Monitor the impact of U.S. steel tariffs and import levels on iron ore pellet pricing, which directly affects royalty income.
• Assess the timeline and commercial viability of the Mesabi Nugget Project to determine potential future royalty streams.
• Review the Trust's cash position relative to upcoming distribution obligations, noting the significant drawdown in cash reserves during the nine-month period.
• Confirm the percentage of iron ore shipments originating from Mesabi Trust lands versus other lands, as this impacts the royalty calculation base.