Business context and reporting period
Mesabi Trust is a pass-through royalty trust whose principal income comes from iron ore shipments by Northshore Mining, a Cleveland-Cliffs subsidiary. The Trust does not control mine operations. This unaudited Form 10-Q covers the three and nine months ended October 31, 2018; comparisons are with the corresponding 2017 periods. The Trust had 13,120,010 units outstanding.
Financial and operating results
| Metric | Three months ended Oct. 31, 2018 | Change vs. 2017 | Nine months ended Oct. 31, 2018 | Change vs. 2017 |
|---|---|---|---|---|
| Royalty income | $13.89 million | +27.5% | $39.66 million | +32.7% |
| Total revenue | $13.97 million | +27.9% | $39.81 million | +33.0% |
| Expenses | $388,781 | +$161,451 | $1.04 million | +$274,608 |
| Net income | $13.59 million | +27.0% | $38.77 million | +32.9% |
| Net income per unit | $1.0354 | +$0.2200 | $2.9552 | +$0.7321 |
| Distributions declared per unit | $0.94 | +$0.30 | $1.61 | +$0.26 |
Management attributed higher royalty income and net income mainly to higher anticipated iron ore selling prices. In the quarter, base royalties were $8.35 million and bonus royalties $5.42 million. Expenses rose year to date, primarily due to legal and other costs related to a special unitholder meeting. Net income was approximately 97% of revenue in both comparable periods.
Pellet production from Trust lands was 941,005 tons in the quarter, down from 963,121; shipments were 1,557,770 tons, down from 1,567,734. For nine months, production increased to 3,740,115 tons from 3,470,978, while shipments declined to 4,185,417 tons from 4,271,164. Trust-land ore represented approximately 84.9% of Silver Bay shipments for the quarter and 90.7% year to date.
For the nine months, operating cash flow was $33.34 million, versus $23.49 million in 2017. Distributions paid were $24.27 million, versus $11.15 million. Cash and cash equivalents increased to $605,436 from $314,835 at January 31, 2018. At October 31, the Trust held $32.57 million of U.S. Government securities, reported at amortized cost approximating market. Total assets were $40.75 million; liabilities were $12.49 million, primarily distributions payable. The filing reports no Trust debt.
Material changes, outlook and risks
Unallocated reserve increased to $28.26 million from $10.61 million at January 31, 2018, including $20.84 million of unallocated cash and government securities. Accrued income receivable was $6.11 million and the contract asset was $1.36 million; neither is available for distribution until royalties are received. The $0.94-per-unit distribution declared October 11 was payable November 20, 2018 to holders of record October 30.
The Trust adopted ASC 606 on February 1, 2018 using retrospective application. Adoption increased the January 31, 2018 unallocated reserve by approximately $99,000 and adjusted comparative 2017 revenue and net income. The filing reports no material change in risk factors.
No quantitative shipment or earnings guidance is provided. Northshore had not advised the Trust of expected 2018 shipments or the expected share sourced from Trust lands. Royalties and distributions depend on shipment volumes, iron ore prices, customer schedules and Northshore’s operating decisions. Prices are estimated and subject to later positive or negative adjustments under agreements to which the Trust is not a party; adverse adjustments could reduce or eliminate royalties otherwise expected in a period. Winter shipping is typically lower. The Trustees rely on information supplied by Northshore and Cleveland-Cliffs and do not control mine operations. Cleveland-Cliffs reported redeeming approximately $211 million of senior notes in October 2018; this is parent-company information, not Trust debt.
Important facts for investors to verify
- Subsequent royalty reports and final pricing adjustments, particularly any negative revisions to estimated iron ore prices.
- Northshore’s shipment levels and the proportion of Silver Bay shipments attributable to Trust lands.
- Cash actually received and available for distribution, distinguishing it from accrued income and the contract asset.
- Trustee distribution decisions and reserve levels; declared distributions are not equivalent to period net income.
- Whether information supplied by Northshore and Cleveland-Cliffs remains accurate and complete, given the Trust’s dependence on those parties.