MSB

Mesabi Trust 10-Q Summary: Period Ended July 31, 2004

Business Context and Reporting Period

Mesabi Trust is a publicly-traded land trust listed on the NYSE that generates revenue primarily through leasehold royalties from iron ore products shipped by Northshore Mining Company (a subsidiary of Cleveland-Cliffs Inc.). The Trust has no employees and relies on Northshore for operational data. This report covers the quarterly period ended July 31, 2004, and the six-month period ended on the same date. As of September 10, 2004, there were 13,120,010 Units of Beneficial Interest outstanding.

Key Financial Metrics

Note: The Trust holds U.S. Government securities valued at approximately $3.1 million. There is no debt reported in the liabilities section.

Material Changes vs. Prior Period

• Revenue Growth: Royalty income increased significantly, driven by higher pellet shipments and increased selling prices. For the three months ended July 31, 2004, royalty income was $2.67 million compared to $1.10 million in the prior year (a 144% increase). For the six-month period, it rose to $3.60 million from $1.46 million (a 146% increase).
• Profitability: Net income for the quarter increased 159% to $2.50 million, and for the six-month period, it increased 175% to $3.34 million.
• Expense Increase: Expenses rose to $179,737 for the quarter (from $141,231) and $281,479 for the six months (from $269,393), primarily due to higher general and administrative costs.
• Reserve Growth: The Unallocated Reserve increased 32% to $1.79 million, reflecting higher income levels.

Outlook, Risks, and Management Commentary

Operational Outlook: Northshore reported 2.5 million tons of pellet production for the first six months of 2004, an increase of 100,000 tons over the prior year. Cleveland-Cliffs Inc. (CCI) plans to reactivate an idled furnace at Northshore, expected to begin production in 2005, adding approximately 800,000 tons of annual capacity.

Mesabi Nugget Project: CCI is proceeding with a 500,000-ton demonstration plant at its Cliffs Erie facility. While Northshore may supply concentrate to this project, the Trust cannot currently project royalties from these new modules. Efforts to permit commercial nugget modules at the Northshore facility have been terminated.

Risks and Contingencies:

• Dependency on Northshore: The Trust has no control over Northshore's operations. Revenue is entirely dependent on shipment volumes and prices determined by Northshore and market conditions.
• Seasonality: Shipping activity is heavily impacted by Great Lakes weather, with minimal activity in the first calendar quarter due to freezing.
• Market Volatility: Uncertainty exists regarding steel industry demand, global overcapacity, and potential price fluctuations.
• Regulatory Compliance: As a pass-through trust, Mesabi Trust cannot literally comply with certain Sarbanes-Oxley corporate governance rules (e.g., audit committees) due to its structure, though it attempts to comply where possible.
• Disclosure Limitations: The Trust relies on Northshore for data accuracy but cannot require Northshore to certify the accuracy of the information provided.

Investor Verification Checklist

• Verify the accuracy of Northshore's reported shipment volumes and sales prices, as the Trust relies entirely on this third-party data.
• Monitor the status of the furnace reactivation at Northshore and the permitting process for the Cliffs Erie nugget demonstration plant.
• Assess the impact of Great Lakes shipping conditions on Q4 2004 and Q1 2005 revenue, given the historical seasonality.
• Review the composition of the Unallocated Reserve ($1.79 million) to ensure it meets the Trustees' minimum liquidity requirements.
• Confirm the percentage of iron ore shipments originating from Mesabi Trust lands versus other lands, as this affects royalty calculations.