Business context and reporting period
Mesabi Trust is a pass-through iron-ore royalty trust whose principal revenue depends on shipments and sales by Northshore Mining, a subsidiary of Cleveland-Cliffs (Cliffs). The 10-Q reports the three and six months ended July 31, 2020, compared with the corresponding 2019 periods. Interim financial statements are unaudited.
Key financial results
| Metric | Three months ended July 31, 2020 | Six months ended July 31, 2020 |
|---|---|---|
| Royalty income | $7.22 million, down $7.08 million (49%) year over year | $9.35 million, down $10.31 million (52%) |
| Total revenue | $7.22 million | $9.39 million |
| Expenses | $542,382, up $109,845 | $1.10 million, up $110,403 |
| Net income | $6.68 million, down $7.24 million | $8.29 million, down $10.53 million |
| Net income per unit | $0.5088, versus $1.0603 | $0.6317, versus $1.4346 |
| Distributions declared per unit | $0.05, versus $0.21 | $0.61, versus $1.10 |
For the six months, net cash from operations was $3.62 million, versus $13.85 million in 2019. Distributions paid were $16.53 million, and cash and cash equivalents declined by $9.72 million to $458,957. At July 31, the Trust held $10.14 million of U.S. Government securities; current assets were $12.94 million and total liabilities were $822,712. The filing reports no debt. Unallocated cash and securities, after the distribution payable, totaled $9.94 million.
Material changes and operating drivers
- Northshore’s mine was idled in mid-April amid COVID-19-related disruptions and restarted in August. For the three months ended July 31, Trust-land pellet production was reported as negative 22,898 tons, reflecting a survey adjustment, and shipments were 973,744 tons, versus 1,101,669 and 1,596,113 tons, respectively, in 2019. For the six months, production fell to 1,164,566 tons from 2,355,332, and shipments fell to 1,532,378 tons from 2,120,819.
- Lower shipments drove the decreases in base and bonus royalties. Quarterly base royalties fell to $4.17 million from $8.33 million and bonus royalties to $3.04 million from $5.82 million. Six-month amounts were $5.36 million and $3.82 million, versus $11.39 million and $7.93 million.
- Higher legal fees primarily contributed to increased expenses. Interest income also fell sharply, to $24 for the quarter and $33,293 for the six months.
- Operating cash flow was below net income in part because of changes in accrued income and contract balances. The Trust’s contract position shifted from a $2.51 million net contract liability at January 31 to a $1.06 million net contract asset at July 31; the asset is not distributable until royalties are received.
Outlook, risks and unusual items
- The Trust provided no quantified shipment or earnings guidance. Northshore had not advised the Trust of expected 2020 shipments or the share expected to come from Trust lands.
- The Trust depends on Northshore and Cliffs, which control mine operations, shipments and customer contracts. COVID-19 disruptions, customer demand, market prices, and seasonal Great Lakes shipping can materially affect royalties and distributions.
- Royalty prices are provisional and subject to later adjustments under Cliffs’ customer agreements. In the July 2020 royalty payment, negative pricing adjustments of $1.48 million were partly offset by $71,957 of positive adjustments. Future negative adjustments could reduce or eliminate royalties otherwise payable in a quarter.
- On December 9, 2019, the Trust initiated arbitration against Northshore and Cliffs over royalty calculations, including for DR-grade pellets, seeking damages and specific performance and declaratory relief. The proceeding was described as being in its early stages; the filing does not provide a clear estimate of potential recovery or loss.
- The Trustees declared a $0.05-per-unit distribution payable August 20, 2020, which the filing says was paid. Distributions are based on cash royalties received and reserve considerations, not simply reported net income, and retained taxable income may still be attributable to unitholders.
Important facts for investors to verify
- Future Northshore shipment levels and the continued operating status of the mine following its August restart.
- Final price adjustments to provisional iron-ore sales prices and their effects on royalty receipts and distributable cash.
- Developments and potential financial outcomes in the royalty-calculation arbitration.
- The Trustees’ reserve and distribution decisions, including the difference between reported income, cash received and distributions declared.
- Cliffs’ disclosures about COVID-19 effects and other operational or project risks that could affect Northshore shipments.