MSB

Mesabi Trust 10-Q Summary: Period Ended July 31, 2006

Business Context and Reporting Period

Mesabi Trust is a New York land trust organized to hold beneficial interests in iron ore mining leases. The Trust generates revenue primarily through leasehold royalties paid by Northshore Mining Company (a subsidiary of Cleveland-Cliffs Inc.) based on the volume and price of iron ore products shipped from Silver Bay, Minnesota. The Trust has no employees and does not engage in business operations; its activities are limited to collecting income, paying expenses, and distributing net income to unitholders. This report covers the quarterly period ended July 31, 2006, and the six-month period ended July 31, 2006.

Key Financial Metrics

Liquidity and Debt: The Trust holds no debt. Liquidity is maintained through cash balances and U.S. Government securities. The Unallocated Reserve, intended to cover future liabilities, stood at $3.46 million, with approximately 76% ($2.63 million) represented by accrued revenue receivable.

Material Changes vs. Prior Period

• Quarterly Performance: Net income increased approximately 14% to $6.19 million compared to the prior year quarter. This was driven by a 14% increase in royalty income due to higher shipment volumes and increased royalty bonuses resulting from higher pellet prices. Expenses decreased nearly 6% due to lower legal and accounting fees.
• Six-Month Performance: Net income increased approximately 2% to $7.66 million compared to the prior year period. Total royalty income increased slightly (less than 1%) due to small increases in bonus and fee royalties. Expenses decreased 15% year-over-year.
• Production and Shipments: For the three months ended July 31, 2006, pellet production from Trust lands was approximately 1.25 million tons (up from 1.04 million tons in 2005), and shipments were approximately 1.43 million tons (up from 1.35 million tons in 2005).

Outlook, Risks, and Management Commentary

Management Commentary: The Trustees note that future distributions are highly dependent on royalty income received and the level of Trust expenses. The Unallocated Reserve increased 29% year-over-year, primarily due to accrued royalties anticipated to be received in October 2006.

Recent Developments and Risks:

• Lessee Operations: Cleveland-Cliffs Inc. (CCI) is reevaluating plans to restart an idled pellet furnace, which could increase annual production by approximately 800,000 tons if market conditions improve. However, the Trust cannot project the impact on royalties.
• Pricing Uncertainty: Royalties are subject to adjustments based on the "CCI Pellet Agreements" and the "ISG Agreement" with Mittal Steel USA. Final pricing adjustments are often determined after the contract year ends, creating volatility in quarterly royalty receipts.
• Legal and Regulatory: Northshore received a Notice of Violation from the EPA regarding Clean Air Act violations from prior years. The Trust is not a party to the notice, and the impact on future royalties is undetermined. Additionally, a union organizing campaign by the USWA at Northshore has been postponed.
• Dependency: The Trust has no control over Northshore's mining operations, production volumes, or marketing decisions. Income is entirely dependent on the lessee's performance and the terms of the leases.

Key Facts for Investor Verification

• Revenue Source Concentration: Verify the continued stability of Northshore Mining Company's operations and its ability to meet minimum advance royalty obligations.
• Accrued Revenue: Note that a significant portion ($2.63 million) of the Unallocated Reserve is accrued revenue not yet received; verify the timing and certainty of the October 2006 payment.
• Pricing Adjustments: Monitor future filings for final pricing adjustments under the CCI Pellet Agreements and the ISG/Mittal Steel agreements, as these can significantly alter royalty calculations retroactively.
• Production Volume: Track actual shipment volumes versus CCI's forecasts, as royalties are tiered based on tonnage shipped (2.5% to 6% of gross proceeds).
• Regulatory Status: Monitor the resolution of the EPA Notice of Violation against Northshore to assess potential operational disruptions or fines that could indirectly affect royalty payments.