Mesabi Trust — Form 10-Q Summary
Business context and reporting period
Mesabi Trust is a pass-through royalty trust whose income depends principally on iron ore mined and shipped by Northshore Mining, a subsidiary of Cleveland-Cliffs. The filing covers the fiscal quarter and six months ended July 31, 2021; financial statements are unaudited.
Key financial metrics
| Metric | Three months ended July 31, 2021 | Six months ended July 31, 2021 |
|---|---|---|
| Royalty income | $27.74 million | $37.15 million |
| Net income | $26.76 million | $35.33 million |
| Net income per unit | $2.0393 | $2.6928 |
| Expenses | $988,185 | $1.82 million |
| Distributions declared per unit | $0.09 | $0.98 |
For the six months, operating cash flow was $23.61 million, versus $3.62 million a year earlier. Cash and cash equivalents were $28.31 million at July 31, compared with $12.50 million at January 31; accrued income receivable was $12.63 million. The unallocated reserve was $38.95 million. No debt is reported. The filing does not present conventional operating-margin measures; distributions are based on cash received and reserve considerations, not reported net income.
Material changes versus prior comparable period
- Quarterly royalty income rose from $7.22 million to $27.74 million, and net income rose from $6.68 million to $26.76 million. For six months, royalty income increased from $9.35 million to $37.15 million and net income from $8.29 million to $35.33 million. The Trust attributed the increases mainly to higher iron ore pricing and shipments.
- Northshore production from Trust lands was 1.16 million tons in the quarter, compared with a negative 22,898 tons in the prior-year quarter due to a survey adjustment and the mine shutdown. Quarterly shipments increased to 1.45 million tons from 973,744 tons. Six-month production and shipments were 2.29 million and 1.99 million tons, respectively, versus 1.16 million and 1.53 million tons.
- Six-month distributions declared increased to $0.98 per unit from $0.61. The July 2021 quarterly distribution was $0.09 per unit, versus $0.05 a year earlier.
- Six-month expenses increased to $1.82 million from $1.10 million, primarily due to legal fees and costs related to arbitration.
Outlook, risks, contingencies, and unusual items
- No shipment or royalty guidance was provided. Northshore had not advised the Trust of expected 2021 shipments or the expected share sourced from Trust lands. Management expects future distributions to depend heavily on royalties actually received, shipments, iron ore sales prices, expenses, and reserve decisions; winter shipping activity is typically lower.
- Royalties rely partly on estimated customer-contract prices that are subject to interim and final adjustments tied to market and inflation indexes. Subsequent negative adjustments could reduce or eliminate royalties otherwise expected in a quarter or year and reduce cash available for distribution.
- The Trust’s arbitration against Northshore and Cleveland-Cliffs concerns royalty calculations, including DR-grade pellet transactions, and access to information. The hearing took place in May 2021; post-hearing briefs and oral arguments occurred in July. The Trust seeks damages and other relief; no outcome or amount is stated.
- The Trust reported that Cliffs’ business fundamentals had rebounded strongly after COVID-19 disruption in 2020, but future mine, supply-chain, or operating disruptions remain uncertain. The Trust has no control over Northshore’s operating and mining decisions and relies on information provided by Northshore and Cliffs.
- On July 30, 2021, the Trust received $19.50 million in royalties, including a positive $747,261 pricing adjustment. The Trust cautioned that future pricing adjustments may be positive or negative.
Important facts for investors to verify
- Track actual Northshore shipments, Trust-land sourcing, and iron ore prices against the absence of 2021 shipment guidance.
- Monitor final customer-contract price adjustments and their effect on accrued receivables, royalty receipts, and distributions.
- Follow the arbitration for any decision, damages, or change in royalty calculation or information access.
- Distinguish reported net income from cash received and distributable amounts; accrued income receivable was $12.63 million and was not yet available for distribution.
- Review future reserve levels and distribution declarations; the Trust states that distributions are discretionary and may vary substantially.