Mesabi Trust 10-Q Summary: Period Ended October 31, 2009
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 October 31, 2009, and the nine-month period ended on the same date. As of December 3, 2009, there were 13,120,010 Units of Beneficial Interest outstanding.
Key Financial Metrics
| Metric | Three Months Ended Oct 31, 2009 | Nine Months Ended Oct 31, 2009 |
|---|---|---|
| Total Revenues | $5,042,739 | $6,490,557 |
| Royalty Income | $5,041,525 | $6,482,372 |
| Net Income | $4,900,869 | $5,922,928 |
| Net Income Per Unit | $0.3735 | $0.4514 |
| Distributions Declared Per Unit | $0.2200 | $0.6000 |
| Cash and Equivalents | $3,912,151 (as of Oct 31, 2009) | |
| U.S. Government Securities | ||
| Total Assets | $7,043,932 | |
| Unallocated Reserve | $1,843,102 |
Liquidity and Debt: The Trust holds no debt. Liquidity is maintained through cash, cash equivalents, and U.S. Government securities. The Unallocated Reserve, which includes cash, securities, and accrued receivables less deferred revenue, stands at $1.84 million.
Material Changes vs. Prior Period
- Revenue Decline: Royalty income for the nine months ended October 31, 2009, decreased 80.0% to $6.48 million compared to $32.39 million in the prior year. The three-month decline was 57.2%.
- Production and Shipments: Pellet production from Trust lands for the nine months ended October 31, 2009, fell 43.5% to 2.08 million tons. Shipments decreased 64.2% to 1.82 million tons. This was primarily due to a mine shutdown from April to early July 2009 and reduced customer demand.
- Net Income: Net income for the nine-month period dropped 81.4% to $5.92 million, driven by lower base overriding royalties and bonus royalties.
- Distributions: Distributions declared per unit for the nine months ended October 31, 2009, were $0.60, a significant decrease from $2.37 in the comparable 2008 period.
Outlook, Risks, and Unusual Items
- Deferred Royalty Revenue: The Trust recorded a $2.25 million liability for deferred royalty revenue. This arose because cash proceeds received in April 2009 exceeded recognized revenue due to subsequent decreases in estimated pellet pricing. This liability may reduce future royalty payments starting in the first quarter of 2010.
- Price Adjustments: Royalties are subject to interim and final price adjustments under Cliffs Pellet Agreements. Future negative adjustments could partially or completely offset royalties payable to the Trust.
- Operational Uncertainty: Northshore resumed production at reduced levels in July 2009. Cliffs estimates total 2009 production at 3.2 million tons, but the Trust cannot project future royalties due to lack of control over mining operations and volatile market conditions.
- Legal Proceedings: Cliffs has filed arbitration demands against ArcelorMittal regarding nomination and shipping schedules. The outcome is uncertain and could impact future shipments and royalties. Additionally, Northshore is challenging a Minnesota Pollution Control Agency requirement for an Environmental Assessment Worksheet regarding permit amendments.
- Reserve Policy: Trustees have increased the cash and securities portion of the Unallocated Reserve above the typical $500,000–$1,000,000 range to $2.07 million to mitigate risks associated with deferred revenue and economic volatility.
Investor Verification Checklist
- Verify the impact of the $2.25 million deferred royalty revenue liability on future cash distributions.
- Monitor Cliffs Natural Resources' quarterly reports for updates on Northshore production volumes and shipment schedules.
- Track the status of the arbitration between Cliffs and ArcelorMittal regarding 2009 tonnage nominations.
- Review future filings for final pricing adjustments under the Cliffs Pellet Agreements, which may significantly alter recognized revenue.
- Confirm the outcome of the administrative proceedings regarding Northshore's "control city" permit standard.