Mesabi Trust — Form 10-Q Summary
Reporting period: Fiscal quarter and six months ended July 31, 2017; comparisons are with the periods ended July 31, 2016. Mesabi Trust is a passive royalty trust whose income depends principally on iron ore shipments and pricing reported by Northshore Mining, a Cleveland-Cliffs subsidiary. The interim statements are unaudited.
Financial performance
| Metric | Three months 2017 | Three months 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Royalty income | $13.35 million | $2.61 million | $17.00 million | $2.61 million |
| Total revenue | $13.35 million | $2.61 million | $17.01 million | $2.61 million |
| Expenses | $240,493 | $189,389 | $535,539 | $621,320 |
| Net income | $13.11 million | $2.42 million | $16.48 million | $1.99 million |
| Net income per unit | $0.9996 | $0.1845 | $1.2558 | $0.1517 |
| Distributions declared per unit | $0.16 | $0.20 | $0.71 | $0.40 |
Quarterly royalty income rose $10.74 million year over year; six-month royalty income rose $14.39 million. Higher shipments drove most of the increase. For the quarter, base overriding royalties were $6.38 million and bonus royalties were $6.86 million. The Trust reported no minimum advance royalty paid or recouped in either comparison period. The filing does not present a formal margin measure; expenses were small relative to revenue.
Pellet production from Trust lands was 1.11 million tons in the quarter and 2.51 million tons for six months. Shipments were 2.01 million and 2.70 million tons, respectively. The corresponding 2016 figures were 1.13 million and 1.13 million tons produced, and 594,264 tons shipped. The Trust reported that approximately 100% of Silver Bay shipments in both 2017 periods originated from Trust lands.
Cash flow, liquidity and distributions
- Six-month operating cash flow was $8.07 million, versus $1.31 million in 2016. Royalties received were $8.72 million, compared with $2.03 million; expenses paid were $670,622.
- After $1.91 million net purchases of U.S. Government securities and $9.05 million of distributions paid, cash decreased $2.90 million to $10.80 million. At July 31, cash and U.S. Government securities totaled $13.16 million.
- Current assets were $19.52 million, including $6.22 million of accrued income receivable. That accrual reflects July shipments and estimated pricing adjustments; it was not yet available for distribution until royalties were received.
- Unallocated reserve was $17.37 million, up $7.16 million from January 31, 2017 and up from $5.73 million at July 31, 2016. Net of the $2.10 million distribution payable, unallocated cash and government securities were $11.06 million.
- The balance sheet lists no debt. The Trust declared a $0.16-per-unit distribution payable August 20, 2017. Distributions are based on cash royalties received and reserve considerations, not simply reported net income.
Drivers, outlook and risks
Management attributed the earnings improvement to greater Northshore customer demand and shipments. Bonus royalties also benefited from anticipated positive pricing adjustments related to 2016 shipments; those adjustments were not final. Separately, the July 2017 royalty payment included a $1.33 million reduction for net negative adjustments to prior royalty calculations. These timing and estimate differences underscore that reported income, cash receipts and distributions can diverge.
The Trust provided no quantified operating or earnings guidance. It said shipments vary with customer delivery schedules, iron ore market conditions and Great Lakes weather, and are generally lower in winter. Final iron ore pricing adjustments may be positive or negative and could reduce or eliminate royalties otherwise expected in a period. The Trust depends on information and operating decisions controlled by Northshore and Cleveland-Cliffs and has no control over mining activity.
Cleveland-Cliffs announced plans for a Toledo hot-briquetted-iron plant with nominal capacity of 1.6 million tons annually, an estimated project investment of approximately $700 million, and expected commercial production beginning in mid-2020. The Trustees could not predict any effect on Trust shipments or royalties. The Trust reported no material change in its previously disclosed risk factors and no change in its own internal control over financial reporting; it noted it has no authority over Northshore’s or Cleveland-Cliffs’ controls.
Important facts for investors to verify
- Whether estimated positive pricing adjustments included in accrued royalty income are ultimately confirmed, and how future negative adjustments affect cash royalties.
- Northshore’s shipment volumes, pricing, and the portion of shipments attributable to Trust lands, given the Trust’s reliance on lessee-provided information and its dependence on one operator.
- The relationship between royalties received, the Trust’s reserve policy, and future distributions; accrued income is not necessarily distributable cash.
- The distribution record date is stated as July 30, 2017 in Note 4 but as July 31, 2017 in the MD&A; verify the correct date.
- Whether Cleveland-Cliffs’ proposed HBI project changes Northshore’s production, shipment patterns, or royalties; the filing provides no quantified impact estimate.