Mesabi Trust — Form 10-Q Summary
Reporting period: Three and nine months ended October 31, 2015; filed December 8, 2015. The Trust earns income primarily from royalties on iron ore produced and shipped by Northshore Mining Company, a Cliffs Natural Resources subsidiary. Financial statements are unaudited, except the January 31, 2015 balance sheet.
Financial performance and position
| Metric | Three months ended Oct. 31, 2015 | Nine months ended Oct. 31, 2015 |
|---|---|---|
| Royalty income | $2.62 million | $6.67 million |
| Total revenue | $2.62 million | $6.67 million |
| Expenses | $219,498 | $848,958 |
| Net income | $2.40 million | $5.83 million |
| Net income per unit | $0.1831 | $0.4441 |
| Cash flow from operations | Not separately presented for the quarter | $5.99 million |
| Distributions declared per unit | $0 | $0.04 |
At October 31, 2015, cash and cash equivalents were $5.78 million and U.S. government securities totaled $766,640. Total assets were $7.00 million; liabilities were $87,520. The filing reports no debt. The Trust’s unallocated reserve was $6.91 million, including $6.55 million in unallocated cash and U.S. government securities. No conventional operating margin is presented; the Trust’s income principally consists of royalty revenue less relatively modest expenses.
Changes versus prior comparable periods
- Third-quarter royalty income fell $9.16 million, or about 78%, from $11.78 million; net income declined $9.14 million, or about 79%, from $11.54 million.
- Nine-month royalty income fell $13.47 million, or about 67%, from $20.14 million; net income declined $13.27 million, or about 70%, from $19.09 million.
- For the quarter, pellet shipments from Trust lands decreased to 1.04 million tons from 1.93 million; nine-month shipments were 2.82 million tons versus 3.72 million. Management attributed lower production and shipments to reduced expected demand and customer orders.
- Lower shipment volumes and average selling prices reduced royalties. Negative pricing adjustments relating to earlier shipments also contributed; third-quarter bonus royalties were negative $75,479, compared with positive $4.29 million a year earlier.
- Nine-month operating cash flow declined to $5.99 million from $15.80 million. Cash and equivalents decreased $2.93 million from the fiscal-year opening balance, while distributions paid totaled $8.92 million.
- Expenses declined year over year, partly because the prior-year period included costs associated with electing a new Trustee.
Distributions, outlook, and risks
- No distribution was paid in November 2015. Cliffs delivered the royalty report for shipments through September 30 later than usual, and the Trust said it could not meet the notice timing required to consider a distribution by the Trust’s October 30 record date. The Trust reported $0.04 per unit declared for the nine-month period, versus $1.20 a year earlier.
- The Trustees no longer target an unallocated reserve of $500,000 to $1 million. They will reassess reserve needs each quarter; future distributions are expected to depend on royalties actually received and anticipated Trust expenses. Accrued royalty income is not available for distribution until collected.
- Cliffs announced on November 17, 2015 that Northshore production would be temporarily idled by December 1, with the idle expected to continue through the first quarter of 2016. Cliffs said it would meet existing customer demand from inventory. The Trust had no information on the exact restart date or expected 2015 shipments.
- Cliffs disclosed risks involving permits and possible additional financial assurance, which could constrain production, cash flow, profitability, or liquidity and indirectly affect Trust royalties.
- Royalty estimates depend partly on contract prices subject to interim and final adjustments. Negative adjustments could reduce or eliminate royalties otherwise payable in a quarter or at year-end. Other risks include iron ore and steel market conditions, customer demand, operating decisions, regulation, environmental and safety matters, and the Trust’s dependence on information and operations controlled by Cliffs and Northshore.
- The Trustees said disclosure controls were effective, while noting their reliance on Northshore’s shipment and royalty information and related consultant and accountant reviews. The Trust has no control over Northshore’s operating decisions.
Important facts for investors to verify
- Subsequent Northshore operating status, restart timing, and actual shipment volumes, particularly after the announced temporary idling.
- Whether Cliffs’ royalty reports are delivered on a timetable that permits timely distribution decisions.
- Actual cash royalties received and any final positive or negative contract-price adjustments, compared with accrued royalty income.
- The Trustees’ reserve decisions and future distribution declarations; reported net income per unit does not equal cash available for distribution.
- Cliffs’ filings for updates on customer demand, permit requirements, and financial-assurance risks that could affect Northshore operations.