Mesabi Trust — Q2 2016 Form 10-Q
Business context and period: The Trust earns royalties from iron ore mined and shipped by Northshore Mining, a Cliffs Natural Resources subsidiary, under leases involving Trust lands. The report covers the three and six months ended July 31, 2016; the balance-sheet comparison is with January 31, 2016. The interim financial statements are unaudited.
Financial highlights
| Metric | Three months ended July 31, 2016 | Six months ended July 31, 2016 |
|---|---|---|
| Royalty income | $2.609 million, down 4.5% year over year | $2.609 million, down 35.6% |
| Total revenue | $2.610 million | $2.611 million |
| Expenses | $189,389 | $621,320 |
| Net income | $2.420 million, down 2.6% | $1.990 million, down 41.9% |
| Net income per unit | $0.1845 | $0.1517 |
- Six-month operating cash flow was $1.314 million, versus $3.134 million in 2015. Cash and cash equivalents at July 31 were $6.312 million. U.S. Government securities totaled $506,370; cash and securities together were $6.818 million.
- Current assets were $8.073 million and current liabilities were $2.716 million. The Trust reported no debt in the presented balance sheet.
- Unallocated Reserve was $5.731 million, down from $8.989 million at January 31, 2016. It included $1.494 million of accrued income receivable and $4.194 million of unallocated cash and securities.
- Distributions declared were $0.20 per unit for the quarter and $0.40 per unit for the six months, versus $0.04 per unit in each comparable 2015 period. The July distribution totaled $2.624 million and was payable August 20. Accrued income is not available for distribution until collected.
Operating trends and material changes
- Q2 pellet production from Trust lands rose to 1.131 million tons from 857,276 tons, while shipments fell to 594,264 tons from 1.435 million tons. The filing attributes higher production to anticipated customer demand and lower shipments to weaker current demand.
- For the six months, production fell to 1.131 million tons from 2.053 million and shipments fell to 594,264 tons from 1.776 million, attributed to lower customer demand. About 98.8% of Silver Bay shipments originated from Trust lands, compared with 93.4% in 2015.
- Q2 base overriding royalties declined $1.080 million year over year, partly offset by a $934,363 increase in bonus royalties and a $21,846 increase in fee royalties. For the six months, base royalties fell $1.584 million and fee royalties fell $122,494; bonus royalties increased $265,891.
Outlook, risks and notable developments
- Future distributions will depend principally on royalties actually received, shipment volumes and sales, and anticipated Trust expenses. The Trustees said they would continue to balance distributions against a prudent reserve; winter shipping activity is typically reduced.
- Royalty estimates are exposed to interim and final pricing adjustments under Cliffs customer contracts. Adjustments depend on price and inflation indexes, may be positive or negative, and are not final until after the contract year; negative adjustments could reduce or eliminate royalties otherwise payable in a period.
- The Trust has no control over Northshore’s mining and shipment decisions and relies on information supplied by Northshore and Cliffs. Other stated risks include iron ore and steel market conditions, competition, environmental and safety matters, regulation, litigation, and reserve-estimation uncertainty. The filing reported no material change to previously disclosed risk factors.
- Cliffs announced an underwritten share offering in August 2016, with proceeds intended partly for debt repayment; it also announced a restart of United Taconite in August, a long-term ArcelorMittal supply agreement through 2026, and a Minnesota Power arrangement involving $31 million in cash for a long-term Northshore power arrangement, subject to potential regulatory approval of related asset sales.
Most important facts to verify
- Whether Northshore’s shipment recovery and the announced operating restart translate into higher Trust-land shipments and royalties.
- How final pricing adjustments affect the $1.494 million accrued royalty receivable and future cash distributions.
- The Trust’s reserve decisions, cash receipts, and distribution levels, given the gap between accrued income and cash available for distribution.
- Cliffs’ financial and operating capacity to meet its obligations, since the Trust depends on information and royalty payments from Northshore and Cliffs.