Mesabi Trust — Form 10-Q Summary
Business context and reporting period. This New York trust holds mineral lease interests and receives royalties tied principally to iron ore production, shipments and pricing at Northshore Mining Company’s Silver Bay operations. The report covers the quarter and six months ended July 31, 2011; interim financial statements are unaudited. The Trust has no employees and does not control mine operations.
Key financial metrics
| Metric | Three months ended July 31, 2011 | Three months ended July 31, 2010 | Six months ended July 31, 2011 | Six months ended July 31, 2010 |
|---|---|---|---|---|
| Royalty income | $10.332 million | $11.228 million | $13.609 million | $16.216 million |
| Net income | $10.132 million | $11.009 million | $13.196 million | $15.794 million |
| Net income per unit | $0.7723 | $0.8391 | $1.0058 | $1.2038 |
| Distribution declared per unit | $0.60 | $0.80 | $0.65 | $0.925 |
- Cash flow: Six-month operating cash flow was $8.245 million, versus $9.944 million in 2010. Royalties received were $8.807 million, compared with $10.361 million. Cash distributions paid were $9.184 million, versus $8.856 million.
- Liquidity and assets: At July 31, cash and cash equivalents were $7.869 million; U.S. Government securities totaled $553,987 across current and other asset classifications; accrued income receivable was $6.025 million. Total assets were $14.592 million, compared with $9.646 million at January 31, 2011.
- Liabilities and reserve: Total liabilities were $8.937 million, including $7.872 million of distributions payable and $991,000 of deferred royalty revenue. The Unallocated Reserve was $5.655 million, including accrued income receivable and deferred royalties. No debt is reported.
- Margins: The filing does not present a conventional operating margin measure; Trust expenses were $200,981 for the quarter and $415,768 for the six-month period.
Material changes versus prior periods
- Quarterly royalty income and net income each declined about 8% year over year; six-month royalty income declined about 16% and net income about 16%. The Trust attributed the declines mainly to lower iron ore pellet shipment volume, despite slightly higher average selling prices.
- Trust-land pellet shipments were 1.757 million tons for the quarter, down from 1.936 million, and 2.227 million tons for six months, down from 3.018 million. Six-month production from Trust lands rose to 2.667 million tons from 2.251 million tons.
- For the six-month period, approximately 84.5% of Silver Bay shipments originated from Trust lands, compared with 93.9% a year earlier. The Trust cited lower customer orders and the reduced share of shipments sourced from Trust lands.
- Accrued income receivable rose to $6.025 million from $232,786 at January 31, largely for anticipated July shipments and pricing adjustments. This accrual is recognized as income before it is received and cannot be distributed until collected.
Outlook, risks and unusual items
- No shipment forecast was provided by Northshore. Management stated that future distributions depend on royalties actually received, shipment volumes, sales and pricing adjustments, expenses and reserve needs; winter shipping activity is typically lower.
- A $991,000 deferred royalty balance reflects payments under a minimum shipment threshold because the Trust-land share of year-to-date shipments was below the 90% threshold. Northshore may use credited shipments to offset fourth-quarter royalties if later Trust-land shipments exceed applicable thresholds.
- Royalties use estimated prices subject to later positive or negative adjustments under customer contracts. Final adjustments may be delayed and could materially reduce royalties or cash available for distributions. The Trust is not a party to those contracts.
- Cliffs reported a settlement with ArcelorMittal that included an approximately $275 million pricing true-up and changed pricing terms for one agreement. The Trust had received no related increase in royalty payments as of this filing and could not estimate the impact.
- Operational and regulatory risks include the Silver Bay Power Station’s emissions obligations under the EPA’s Cross State Air Pollution Rule, reported elevated PM-10 readings and anticipated MPCA enforcement, and dependence on power and natural-gas infrastructure. The Trust could not predict effects on operations or royalties.
- The Trustees concluded disclosure controls were effective. They rely on Northshore and Cliffs information, consultants and external accountant review; Northshore did not provide quarterly written certification of its controls or the accuracy and completeness of information supplied.
Important facts for investors to verify
- Whether accrued royalties and estimated pricing adjustments are ultimately collected, and whether later negative adjustments affect distributions.
- Northshore shipment volumes, the proportion sourced from Trust lands, and any fourth-quarter offset of the $991,000 deferred royalty.
- Any operational effects, penalties or compliance costs from power-station emissions rules and air-quality matters.
- Subsequent royalty and distribution announcements, noting that distributions are based on cash royalties received and do not necessarily match reported net income.