Mesabi Trust — Q1 2020 Form 10-Q
Business context and reporting period. The Trust’s principal income is royalties tied to iron ore production, shipments and pricing at Northshore, operated by Cliffs’ subsidiary. This unaudited report covers the three months ended April 30, 2020; comparisons are with the three months ended April 30, 2019. The Trust has no employees and does not control Northshore’s operating decisions.
Financial results and liquidity
| Metric | Q1 2020 | Q1 2019 |
|---|---|---|
| Royalty income | $2.14 million | $5.36 million |
| Total revenue, including interest | $2.17 million | $5.47 million |
| Expenses | $557,142 | $556,585 |
| Net income | $1.61 million | $4.91 million |
| Net income per unit | $0.1228 | $0.3743 |
| Distributions declared per unit | $0.56 | $0.89 |
| Net cash from (used for) operations | $(42,447) | $2.37 million |
Royalty income fell 60% year over year, primarily because of lower iron ore pricing. Base overriding royalties declined $1.89 million and bonus royalties declined $1.33 million; fee royalties declined $13,044. Pellet production from Trust lands was 1.19 million tons versus 1.25 million; shipments were 559,000 tons versus 525,000.
At April 30, cash and cash equivalents were $14.28 million, with no U.S. Government securities reported, versus $10.18 million cash and $13.33 million in securities at January 31, 2020. Current assets were $14.39 million and total liabilities $8.30 million, including a $7.35 million distribution payable and $791,162 net contract liability. Unallocated reserve was $6.10 million, down from $11.83 million at January 31. The filing reports no debt. Operating cash flow was negative despite positive net income, primarily reflecting a $1.72 million decrease in contract liability; investing cash inflow included $26.90 million in securities maturities, partly offset by $13.57 million in purchases. Distributions paid were $9.18 million.
Material changes, outlook and risks
- Cliffs idled Northshore in mid-April 2020 in response to COVID-19 and market conditions. It continued limited shipments of stockpiled product. Cliffs indicated an expected August 2020 restart, but the timing and extent of resumed operations remained uncertain.
- For the calendar first quarter, Cliffs reported 340,617 tons credited to the Trust, compared with 126,568 tons a year earlier. However, a $2.50 million negative adjustment to base and bonus royalty calculations resulted in a minimum base royalty payment; total royalties received on April 30 were $449,496, versus $3.15 million in the prior-year comparison. Accrued royalty revenue and cash receipts differ because of timing and estimates.
- The Trust declared a $0.56-per-unit distribution, payable May 20, 2020. Distribution decisions depend on royalties actually received, expenses and reserve considerations, and therefore do not equal quarterly net income. Future distributions could decline or be suspended.
- Royalty prices under Cliffs’ customer contracts are estimated and subject to interim and final adjustments based on market and inflation indices. Future negative adjustments could reduce or eliminate royalties otherwise payable.
- The Trust initiated arbitration against Northshore and Cliffs in December 2019, disputing royalty calculations, including those related to DR-grade pellets. It seeks damages and other relief; the proceeding was described as being in its early stages.
- Cliffs’ COVID-related disruptions also affected steel facilities and construction of its Toledo hot-briquetted-iron project. The filing identifies uncertainty around operational restarts, project delays and costs, customer demand, pricing and shipments. No specific Trust earnings or distribution guidance was provided.
Investor verification points
- Check subsequent Cliffs and Trust filings for Northshore restart timing, shipments and the effect of COVID-19 on royalty receipts.
- Track final pricing adjustments under Cliffs’ pellet agreements and their impact on contract assets, liabilities and future royalties.
- Review updates to the arbitration and any resulting changes to royalty calculations or recoveries.
- Confirm future distributions against actual cash royalty receipts and reserve levels; distributions are not a direct proxy for reported earnings.
- Verify the distribution record date: the filing’s note states April 30, 2020, while one MD&A passage states May 30, 2020.