Mesabi Trust — Form 10-Q Summary
Reporting period: Three and nine months ended October 31, 2014; financial statements are unaudited. Mesabi Trust is a passive iron-ore royalty trust whose income depends primarily on shipments and sales by Northshore Mining Company, a Cliffs Natural Resources subsidiary. The Trust has no employees and does not control mine operations.
Financial performance
| Metric | Three months ended Oct. 31, 2014 | Three months ended Oct. 31, 2013 | Nine months ended Oct. 31, 2014 | Nine months ended Oct. 31, 2013 |
|---|---|---|---|---|
| Royalty income | $11.78 million | $6.35 million | $20.14 million | $16.71 million |
| Total revenue | $11.78 million | $6.35 million | $20.15 million | $16.71 million |
| Expenses | $243,152 | $211,113 | $1.05 million | $747,465 |
| Net income | $11.54 million | $6.14 million | $19.09 million | $15.96 million |
| Net income per unit | $0.8795 | $0.4677 | $1.4553 | $1.2167 |
| Distributions declared per unit | $0.88 | $0.51 | $1.20 | $1.05 |
Quarterly revenue rose about 86% and net income about 88% year over year; nine-month revenue and net income increased about 21% and 20%, respectively. Net margin was approximately 98% for the quarter and 95% for the nine-month period. Management attributed higher royalty income and net income primarily to increased iron-ore shipment volumes. Nine-month expenses rose mainly because of a special unitholder meeting and proxy solicitation related to election of a Trustee; quarterly expenses also increased modestly due to legal and consulting fees.
Operations, cash flow and liquidity
- Pellet production from Trust lands was 1.20 million tons in the quarter and 3.47 million tons for nine months, up from 1.01 million and 2.87 million tons, respectively, in the prior-year periods. Shipments were 1.93 million and 3.72 million tons, compared with 1.09 million and 3.24 million tons.
- For the nine months, operating cash flow was $15.80 million versus $13.75 million. Distributions paid were $11.68 million versus $13.51 million. Cash and cash equivalents at October 31 were $11.85 million, compared with $7.72 million at January 31, 2014.
- Total assets were $15.96 million; total liabilities were $11.63 million, including $11.55 million of distributions payable. The filing reports no debt. Current assets were $15.33 million, including $3.31 million of accrued income receivable.
- Accrued income reflects October shipments and estimated pricing adjustments. It is included in income but is not available for distribution until royalties are received. Distributions therefore do not necessarily match reported net income.
- The Trust declared $0.88 per unit in October 2014, payable to holders of record October 30. The reported reserve table shows an unallocated reserve of $4.33 million at October 31, including $1.02 million of unallocated cash and U.S. Government securities and $3.31 million of accrued income receivable.
Outlook, risks and unusual items
The filing provides no formal earnings or distribution guidance. Management says future distributions will depend heavily on royalties actually received, shipment volumes, sales prices and Trust expenses. Shipping activity is greatly reduced during winter months, and economic conditions affecting steel demand may affect shipments and sales.
Royalty pricing is subject to interim and final adjustments under customer contracts to which the Trust is not a party. Adjustments may be positive or negative and depend on market and inflation indexes; future negative adjustments could reduce or eliminate royalties otherwise expected in a quarter or year. The Trust also relies on Northshore and Cliffs for operating, shipment, sales and reserve information, and has no control over their mining or land-use decisions. The Trustees report effective disclosure controls, while noting Northshore has not provided a written certification of its controls and relies instead on annual certifications and external-accountant due diligence.
The filing states there were no material changes to previously disclosed risk factors. Its interim financial statements received normal recurring adjustments; the Trust reported no changes in critical accounting policies or significant estimates.
Key facts for investors to verify
- Whether the increased shipment volumes and customer orders continue, particularly through the winter shipping period.
- Subsequent royalty receipts and pricing adjustments, including the collection of the $3.31 million accrued receivable and their effect on distributions.
- Distribution timing and amounts: declared distributions are based on expected cash royalties, not reported-period net income.
- The MD&A contains an apparent reserve inconsistency: one passage says the October 31 reserve increased to $5,030,445, while the financial statements and reserve tables report $4,333,448. Confirm the intended figure in the original filing.