Mesabi Trust — Form 10-Q Summary
Reporting period: Three and nine months ended October 31, 2017; interim financial statements are unaudited. Mesabi Trust is a pass-through royalty trust whose principal income depends on iron ore shipments and sales by Northshore Mining, a Cleveland-Cliffs subsidiary.
Financial performance and position
| Metric | Three months 2017 | Three months 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Royalty income | $12.17 million | $3.44 million | $29.16 million | $6.05 million |
| Total revenue | $12.19 million | $3.44 million | $29.20 million | $6.05 million |
| Expenses | $227,330 | $234,494 | $762,869 | $855,814 |
| Net income | $11.96 million | $3.21 million | $28.44 million | $5.20 million |
| Net income per unit | $0.9119 | $0.2445 | $2.1677 | $0.3962 |
- Nine-month operating cash flow was $23.49 million, compared with $2.96 million a year earlier. Cash and cash equivalents were $193,606 at October 31; the Trust held $26.29 million of U.S. Government securities.
- Current assets totaled $29.42 million. Liabilities totaled $8.48 million, including $8.40 million in distributions payable; the filing reports no debt.
- Unallocated reserve was $20.93 million, up from $10.21 million at January 31, 2017. It included $18.09 million of unallocated cash and government securities and $2.84 million of accrued income receivable.
- Distributions declared were $0.64 per unit for the quarter and $1.35 per unit for the nine months, versus $0.10 and $0.50, respectively, in the comparable 2016 periods. The $0.64 distribution was payable November 20, 2017.
Changes and operating drivers
- Revenue and net income rose sharply year over year, primarily due to higher customer demand and shipments; higher royalty rates and sales prices also lifted base and bonus royalties.
- For the three months, pellets produced from Trust lands declined to 963,121 tons from 1,219,430, while shipments increased to 1,567,734 tons from 1,293,411. For the nine months, production rose to 3,470,978 tons from 2,350,880 and shipments rose to 4,271,164 tons from 1,887,675.
- Quarterly base royalties were $7.92 million and bonus royalties $4.14 million. Nine-month totals were $15.83 million and $12.96 million, respectively. Fee royalties declined in the quarter but increased for the nine-month period.
- Nine-month distributions paid were $11.15 million; distributions declared were $17.71 million. Trust income is recorded on an accrual basis, while distributions depend on royalties received and trustees’ reserve decisions, so distributions need not match reported income.
Outlook, risks, and other items
- The Trust gave no earnings or distribution guidance. Future receipts and distributions depend on Northshore’s shipment volumes and sales, which are seasonal and affected by customer schedules, market conditions, and weather.
- Royalty calculations use estimated iron ore prices subject to interim and final adjustments. Negative adjustments could reduce or eliminate royalties otherwise payable in a quarter or year and reduce cash available for distributions.
- The Trust does not control Northshore’s operations and relies on information from Northshore and Cleveland-Cliffs, supplemented by consultant and accountant reviews. Trustees concluded the Trust’s disclosure controls were effective; they make no statement about the lessee’s internal controls.
- The Trust expected to adopt the new revenue-recognition standard in the quarter ending April 30, 2018 using full retrospective transition. It anticipated possible quarterly timing effects but no material change to annual revenue or royalty entitlements.
- Cleveland-Cliffs disclosed planned capital spending, including Northshore upgrades intended to increase DR-grade pellet production. The filing does not quantify any resulting effect on Mesabi Trust royalties.
- The Trust stated that there were no material changes to the risk factors in its latest Form 10-K. Its grantor-trust tax status means taxable income is allocated to unitholders whether or not distributed.
Investor facts to verify
- Whether Northshore’s shipment levels, pricing, and pellet mix sustain the period’s royalty growth.
- Any subsequent interim or final price adjustments, particularly negative adjustments that could affect cash distributions.
- Cash and securities available for distributions after payables and reserve requirements, and the trustees’ future distribution decisions.
- The effect of revenue-standard adoption on quarterly reporting and related disclosures.
- Northshore’s operating and capital plans and the reliability of operational data supplied to the Trust.