Business context and reporting period
Mesabi Trust is a pass-through royalty trust whose income depends principally on iron ore production and sales by Northshore Mining, a Cleveland-Cliffs subsidiary. This unaudited Form 10-Q covers the three and six months ended July 31, 2022; the comparable periods are 2021.
Financial and operating results
| Metric | Three months ended July 31, 2022 | Six months ended July 31, 2022 | Comparable 2021 period |
|---|---|---|---|
| Royalty income (loss) | $(4.40) million | $9.79 million | $27.74 million; $37.15 million |
| Total revenue (loss), including interest | $(4.37) million | $9.83 million | $27.74 million; $37.15 million |
| Expenses | $0.49 million | $1.09 million | $0.99 million; $1.82 million |
| Net income (loss) | $(4.86) million | $8.74 million | $26.76 million; $35.33 million |
| Net income (loss) per unit | $(0.3702) | $0.6660 | $2.0393; $2.6928 |
For the six months, operating cash flow was $14.67 million, versus $23.61 million in 2021. The Trust paid $36.60 million in distributions. At July 31, cash was $2.45 million and U.S. Government securities were $23.34 million; total assets were $26.10 million and liabilities $11.23 million, including $11.02 million of distributions payable. The filing reports no debt. The unallocated reserve was $14.87 million, down from $30.79 million at January 31, 2022.
Northshore production and shipments from Trust lands were zero in the three months ended July 31, 2022, versus 1.16 million tons produced and 1.45 million tons shipped in the comparable 2021 period. For the six-month periods, production and shipments were each 906,952 tons, compared with 2.29 million tons produced and 1.99 million tons shipped in 2021. Profit margins are not presented and are not a meaningful operating measure for this royalty trust.
Material changes versus prior periods
Six-month royalty income fell $27.35 million year over year and net income fell $26.59 million, principally because Northshore operations were idled and production declined. Second-quarter royalty income was negative: following Cliffs’ July 22 announcement that the idle would extend through at least April 2023, the Trust constrained its estimate of variable consideration and reversed expected base overriding royalties for the remainder of the fiscal year. Expenses declined, primarily because legal and arbitration costs were lower after the arbitration concluded in fiscal 2022.
Distributions declared were $0.84 per unit for the quarter and $1.88 per unit for the six months, compared with $0.09 and $0.98, respectively, in 2021. Distributions are determined principally by royalty cash received, reserves, and expected expenses—not by reported net income—and can therefore differ substantially from earnings.
Outlook, commentary, risks and unusual items
- Cliffs said Northshore would remain idle until at least April 2023, potentially longer. Cliffs controls operating decisions; the Trust cannot predict the idle’s duration. Reduced or eliminated production could materially reduce or eliminate future royalty income and distributions. A $1.03 million minimum advance royalty applies for calendar 2022, but it is credited against royalties earned later that year and is not necessarily incremental income.
- Royalties use estimated iron ore prices subject to interim and final adjustments tied to contract and market indexes. Future negative adjustments may offset or eliminate royalties otherwise payable. The Trust is not party to Cliffs’ customer contracts.
- The Trustees declared $0.84 per unit on July 15, payable August 20, 2022; the filing says it was paid. The Trust cited reserve needs and uncertainty in deciding distributions.
- On August 22, 2022, the Eighth Circuit found Northshore had flagrantly violated federal mine-safety law in connection with a 2016 walkway incident and remanded for reconsideration of the penalty. The court also found two managers individually liable. This was a subsequent event; the filing does not state the final penalty.
- The Trust reported no legal proceedings under Part II, Item 1. Trustees concluded the Trust’s disclosure controls were effective, while noting their reliance on information from Cliffs and Northshore; Northshore has not provided a written certification of its controls.
- The Trust is a grantor trust: taxable income is generally attributed to unitholders whether or not distributed. Individual tax consequences may vary.
Important facts for investors to verify
- Whether Northshore remains idle through or beyond April 2023, and subsequent production, shipment, and third-party sales data.
- How estimated iron ore prices and later contract adjustments affect royalty receipts, especially after the negative base-royalty estimate in this quarter.
- Cash, securities, reserve levels, and distributions in subsequent filings; distributions are not assured and can diverge from reported earnings.
- Further developments and any penalty reassessment in the Northshore mine-safety case.
- The filing’s different reporting periods: operating tonnage for the three months ended July 31 is not the same period as Cliffs’ calendar-quarter royalty report.