Mesabi Trust 10-Q Summary: Period Ended July 31, 2010
Business Context and Reporting Period
Mesabi Trust is a New York trust holding interests in iron ore leases operated by Northshore Mining Company (a subsidiary of Cliffs Natural Resources Inc.). The Trust generates revenue primarily through leasehold royalties based on the volume and price of iron ore pellets shipped from Silver Bay, Minnesota. This report covers the quarterly period ended July 31, 2010, and the six-month period ended July 31, 2010. As of September 1, 2010, there were 13,120,010 Units of Beneficial Interest outstanding.
Key Financial Metrics
| Metric | Three Months Ended July 31, 2010 | Six Months Ended July 31, 2010 |
|---|---|---|
| Total Revenue | $11,233,980 | $16,226,807 |
| Royalty Income | $11,228,415 | $16,216,146 |
| Net Income | $11,009,294 | $15,794,259 |
| Net Income Per Unit | $0.8391 | $1.2038 |
| Distributions Declared Per Unit | $0.8000 | $0.9250 |
| Cash and Cash Equivalents | $10,074,143 (as of July 31, 2010) | N/A |
| Unallocated Reserve | $4,786,081 (as of July 31, 2010) | N/A |
| Debt | None reported | None reported |
Material Changes vs. Prior Period
- Revenue Surge: Royalty income for the three months ended July 31, 2010, increased by $10.8 million compared to the same period in 2009. For the six-month period, royalty income increased by $14.8 million.
- Volume and Price Drivers: The increase is attributed to a significant rise in iron ore pellet shipments (up 485% for the six-month period) and higher sales prices per ton.
- Shipments: Shipments from Trust lands totaled approximately 1.94 million tons in the quarter and 3.02 million tons for the six months, compared to 0.28 million tons and 0.52 million tons, respectively, in the prior year periods.
- Deferred Revenue Elimination: The Trust eliminated a $2.77 million deferred royalty revenue liability that existed as of January 31, 2010. This was offset by negative price adjustments applied to recent royalty payments.
- Accrued Income: Accrued income receivable increased to $3.96 million as of July 31, 2010, reflecting anticipated positive pricing adjustments and shipments for July.
Guidance, Outlook, and Risks
- Distribution Policy: Distributions are declared quarterly based on actual royalty payments received, not accrual-based net income. A distribution of $0.80 per unit was declared on July 15, 2010.
- Pricing Adjustments: Future royalties are subject to interim and final price adjustments under Cliffs Pellet Agreements. Negative adjustments could offset future royalties, reducing cash available for distribution.
- Operational Dependence: The Trust has no control over Northshore's mining operations. Production levels depend on Cliffs' decisions and market demand for steel.
- Legal Contingency: Cliffs is involved in arbitration and litigation with customer ArcelorMittal regarding 2010 pellet nominations and price reopeners. The impact on future shipments and royalties is currently unpredictable.
- Reserve Management: The Unallocated Reserve is intended to be maintained at a prudent level ($500,000 to $1,000,000 in cash/securities) to meet liabilities, though it currently includes significant accrued receivables.
Investor Verification Checklist
- Verify the status of the arbitration between Cliffs and ArcelorMittal and its potential impact on 2010 shipment volumes.
- Monitor future quarterly reports for negative price adjustments that could reduce cash distributions despite high reported net income.
- Confirm the timing of cash receipt for the $3.96 million in accrued income receivable, as this is not yet available for distribution.
- Review Cliffs Natural Resources' operational updates regarding furnace restarts and production schedules at the Northshore facility.
- Assess the stability of iron ore and steel prices, which directly drive the Trust's royalty rates.