Business Context and Reporting Period
Mesabi Trust is a passive iron-ore royalty trust whose income depends primarily on Northshore Mining Company’s production, shipments, and sales from covered lands. This unaudited Form 10-Q covers the three months ended April 30, 2016, compared with the same period in 2015.
Financial Results and Liquidity
| Metric | Q1 2016 | Q1 2015 |
|---|---|---|
| Royalty income | $0 | $1,315,953 |
| Total revenue | $1,679 | $1,318,010 |
| Expenses | $431,931 | $377,744 |
| Net income (loss) | $(430,252) | $940,266 |
| Net income (loss) per unit | $(0.0328) | $0.0717 |
| Operating cash flow | $703,408 | $481,973 |
| Distribution declared per unit | $0.20 | $0 |
Cash and cash equivalents were $8.22 million at April 30, 2016, versus $2.59 million at January 31, 2016; U.S. Government securities totaled $611,477, versus $6.20 million. Current assets were $8.52 million and total assets $8.89 million. Total liabilities were $2.96 million, including $2.62 million of distributions payable and $257,064 of deferred royalty revenue. The filing reports no debt. The Trust’s unallocated reserve was $5.93 million, down from $8.99 million at January 31, 2016. No meaningful operating margin is reported; the Trust recorded no royalty revenue and a net loss.
Material Changes Versus Prior Period
Pellet production from Trust lands and shipments were both zero in the quarter, compared with 1,195,260 tons produced and 340,868 tons shipped in Q1 2015. The Trust attributed the decline to lower customer demand. Royalty income fell by $1.32 million to zero, and the Trust moved from net income to a loss. Expenses rose $54,187, primarily due to anticipated negative pricing adjustments on unconsumed pellets.
The Trust received approximately $1.173 million in April royalties, but recorded no royalty revenue for the quarter under its revenue-recognition policy. It recorded $195,731 as deferred excess cash royalties and $61,333 for anticipated negative pricing adjustments, totaling $257,064 deferred royalty revenue.
Outlook, Commentary, and Risks
Cliffs announced on March 14, 2016 that it planned to restart Northshore pellet production by May 15; the Trust says it was informed that production restarted in May. This restart occurred after the reporting quarter and does not establish future shipment or royalty levels. Cliffs also announced a long-term power arrangement for Northshore and a new ten-year pellet supply agreement with ArcelorMittal; the filing does not quantify the effect of these developments on Trust royalties.
Future distributions depend on royalties actually received, shipments and sales, expenses, and the Trustees’ reserve assessment. Iron-ore pricing adjustments may be positive or negative and may substantially reduce or eliminate royalties in a period. Other stated risks include steel and iron-ore market conditions, customer demand, operational decisions controlled by Northshore/Cliffs, environmental and regulatory matters, and uncertainty in reserve estimates. The Trust relies on information supplied by Northshore and Cliffs; Northshore does not provide the written certification on disclosure controls described in the filing. Trustees concluded the Trust’s disclosure controls were effective. No material changes to the previously disclosed risk factors were reported.
Most Important Facts to Verify
- Whether Northshore’s May 2016 restart translated into production and shipments from Trust lands and subsequent royalty receipts.
- Future interim and final pellet-price adjustments, including whether the $257,064 deferred royalty balance is offset against later payments.
- The sustainability of distributions relative to actual royalty cash receipts, expenses, and the Trust’s reserve needs.
- Northshore/Cliffs customer demand and operating plans, noting the Trust does not control these decisions and relies on their information.