Mesabi Trust — Q1 2021 Form 10-Q Summary
Business context and reporting period
Mesabi Trust is a passive royalty trust whose income depends primarily on iron ore production and sales by Northshore Mining Company, a Cleveland-Cliffs subsidiary. The filing reports the three months ended April 30, 2021, compared with the three months ended April 30, 2020. The interim financial statements are unaudited.
Key financial metrics
| Metric | Three months ended April 30, 2021 | Prior-year period |
|---|---|---|
| Total revenues | $9.403 million | $2.169 million |
| Royalty income | $9.402 million | $2.135 million |
| Expenses | $828,781 | $557,142 |
| Net income | $8.574 million | $1.612 million |
| Net income per unit | $0.6535 | $0.1228 |
| Net cash from (used for) operating activities | $5.357 million | $(42,447) |
| Distributions declared per unit | $0.89 | $0.56 |
Revenue increased about 334% and net income about 432% year over year, primarily reflecting higher iron ore pricing. Net income was approximately 91% of revenue, versus 74% in the prior-year quarter; this is a simple net-income-to-revenue ratio, not a separately reported operating margin.
At April 30, 2021, cash and cash equivalents were $11.904 million and U.S. Government securities were $9.826 million. Current assets totaled $27.434 million; total liabilities were $14.060 million, including $11.677 million of distributions payable and a $2.124 million net contract liability. The filing reports no borrowings or other debt. The unallocated reserve was $13.374 million, down from $16.477 million at January 31, 2021.
Material changes versus the prior comparable period
- Base overriding royalties rose to $5.639 million from $1.182 million; bonus royalties rose to $3.572 million from $780,000. Management attributed the increases principally to higher iron ore prices. Fee royalties were $191,000, versus $174,000.
- Expenses increased $272,000, primarily because of legal fees related to the arbitration with Northshore and Cliffs.
- Operating cash flow improved from a $42,000 use to $5.357 million provided. Cash declined by $597,000 during the quarter, compared with a $4.106 million increase in the prior-year quarter.
- Pellet production from Trust lands was 1,129,383 tons, down from 1,187,464; shipments from Trust lands were 547,704 tons, down from 558,634. The Trust said the decreases reflected anticipated customer demand.
- The distribution declared increased to $0.89 per unit from $0.56. Distributions are based on royalties received and other reserve considerations, and therefore do not equal net income for the reporting period.
Outlook, risks, contingencies and unusual items
- The Trust provided no shipment or royalty guidance. Northshore had not advised the Trust of expected 2021 shipments or the expected share from Trust lands. Future distributions depend on shipments, sales prices, receipts and Trust expenses.
- Royalty pricing uses estimates subject to interim and final adjustments under customer contracts to which the Trust is not a party. Adjustments may be negative and could reduce or eliminate royalties otherwise expected in a quarter or year. At April 30, accrued income receivable was $5.613 million; this amount was not yet available for distribution. The $2.124 million net contract liability largely reflects royalties received for iron ore not yet shipped.
- The Trust initiated arbitration in 2019 alleging improper royalty calculations involving DR-grade pellets and inadequate access to information. The hearing occurred in May 2021; post-hearing briefs and oral argument were scheduled for July 2021. The Trust seeks damages, specific performance and declaratory relief; the filing does not state an outcome or quantify a recovery.
- COVID-19 previously disrupted Northshore and Cliffs operations. Most temporarily idled facilities had restarted by August 2020, and Cliffs reported a strong business rebound, but future operational or supply-chain disruption remains uncertain.
- The Trust relies on Northshore and Cliffs for operational and royalty information and has no control over mine operating decisions. Northshore had not provided written certification of its disclosure and internal controls; the Trust relies on annual certifications and accountant and consultant reviews. Trustees concluded the Trust’s disclosure controls were effective.
Important facts for investors to verify
- Progress and outcome of the royalty arbitration, including any effect on future royalty calculations or cash receipts.
- Subsequent shipment volumes, the proportion attributable to Trust lands, and actual versus estimated royalty pricing and adjustments.
- Conversion of accrued income receivable and contract balances into cash, and the resulting implications for distributable funds.
- Future distributions and reserve levels, considering the Trust’s dependence on a single operator and volatility in iron ore and steel markets.