Mesabi Trust — Form 10-Q Summary
Reporting period: Third fiscal quarter and nine months ended October 31, 2012; comparisons are with the corresponding 2011 periods. Mesabi Trust is a royalty trust whose income depends primarily on iron ore shipments and pricing at Northshore Mining, operated by Cliffs Natural Resources. Interim financial statements are unaudited.
Financial results and liquidity
| Metric | Three months ended October 31, 2012 | Three months ended October 31, 2011 | Nine months ended October 31, 2012 | Nine months ended October 31, 2011 |
|---|---|---|---|---|
| Royalty income | $11.814 million | $13.967 million | $26.567 million | $27.576 million |
| Net income | $11.624 million | $13.756 million | $25.867 million | $26.952 million |
| Net income per unit | $0.8860 | $1.0485 | $1.9716 | $2.0543 |
| Expenses | $190,394 | $212,068 | $700,887 | $627,836 |
| Distributions declared per unit | $1.130 | $1.120 | $1.835 | $1.770 |
- Quarterly royalty income fell $2.153 million and net income fell $2.132 million year over year. Nine-month royalty income declined $1.009 million and net income declined $1.085 million.
- Management attributed lower royalty income and net income to lower realized iron ore sales prices, partly offset by higher shipment volumes. Quarterly expenses declined, mainly due to lower legal and accounting fees; nine-month expenses rose, primarily from trustee and XBRL reporting fees.
- For the nine months, operating cash flow was $24.138 million, distributions paid were $19.221 million, and cash increased $4.748 million to $15.001 million. Prior-year operating cash flow was $8.305 million; distributions paid were $17.056 million and cash decreased $8.635 million.
- At October 31, cash and cash equivalents were $15.001 million, and U.S. government securities totaled $644,000. Accrued income receivable was $1.950 million; it is recorded as income but is not distributable until received. Distribution payable was $14.826 million. The unallocated cash and securities reserve was $819,288, within the trustees’ usual $500,000–$1 million target range. The balance sheet reports no debt.
- Distributions declared exceeded quarterly net income per unit. The Trust explains that distributions are based on royalty cash received, while income is recorded on an accrual basis; the two measures therefore need not match.
Operating activity and material changes
- Pellet shipments from Trust lands were 1.992 million tons for the quarter, up from 1.630 million; production was 1.485 million tons, up from 1.355 million. For nine months, shipments were 4.399 million tons versus 3.857 million, and production was 4.175 million versus 4.023 million.
- Despite higher shipments, lower average sales prices reduced base overriding and bonus royalties. Quarterly base royalties declined $873,000 and bonus royalties declined $1.325 million; nine-month declines were $451,000 and $668,000, respectively. Fee royalties increased in both comparisons.
- Trust unallocated reserve was $2.823 million at October 31, 2012, up from $1.032 million at January 31, 2012, principally reflecting higher accrued income receivable. Compared with October 31, 2011, the reserve declined from $4.717 million, primarily due to lower accrued receivables and negative pricing adjustments.
Outlook, risks and contingencies
- On November 19, 2012, Cliffs announced it would idle two of Northshore’s four production lines effective January 5, 2013. Trustees expect this to negatively affect Trust-attributable production; if the curtailment persists for a substantial part of 2013, shipments and royalties could be below 2012 levels. Cliffs did not quantify the Northshore impact, while maintaining its previously disclosed 2013 U.S. Iron Ore sales-volume outlook of 19–20 million tons.
- Cliffs reported Northshore production was affected by storm-related power outages and infrastructure failures; its total Northshore production declined 8.2% in the first nine months of 2012 versus 2011. The Trust has no control over Northshore’s operating or mining decisions.
- Royalty estimates are exposed to interim and final pricing adjustments under Cliffs customer contracts, to which the Trust is not a party. Adjustments depend on price and inflation indexes and can be positive or negative; future negative adjustments could reduce or eliminate royalties otherwise expected in a quarter or year.
- Northshore received a Minnesota pollution-control Notice of Violation concerning elevated pH in coal-ash landfill leachate. A proposed stipulation included additional corrective actions and an approximately $250,000 civil penalty; the final agreement was expected in fourth-quarter 2012. Trustees could not predict any effect on shipments or royalties.
- Future distributions depend on royalty receipts, shipments, sales prices and Trust expenses. Shipping activity typically falls during winter. The filing provides no specific Trust earnings or distribution forecast.
Investor verification points
- Check subsequent Northshore shipment and production reports for the effect and duration of the announced line idling.
- Verify actual royalty receipts and later pricing adjustments against the $1.950 million accrued receivable, which was not yet available for distribution.
- Track iron ore realized prices and the related base and bonus royalty calculations; shipment growth did not offset price declines in this period.
- Review subsequent distribution declarations and reserve levels, distinguishing cash received and distributions from accrued income and reported net income.
- Check for resolution of the coal-ash landfill matter and any resulting costs or operational effects.