Mesabi Trust — Q3 2013 Form 10-Q
Business and period: Mesabi Trust is a pass-through trust whose income is principally royalties from iron ore produced and shipped by Northshore Mining, an operator controlled by Cliffs Natural Resources. This unaudited report covers the three and nine months ended October 31, 2013, compared with the corresponding 2012 periods.
Financial performance
| Metric | Three months 2013 | Three months 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Total revenue | $6.35 million | $11.81 million | $16.71 million | $26.57 million |
| Net income | $6.14 million | $11.62 million | $15.96 million | $25.87 million |
| Net income per unit | $0.4677 | $0.8860 | $1.2167 | $1.9716 |
| Distributions declared per unit | $0.5100 | $1.1300 | $1.0500 | $1.8350 |
- Revenue declined 46% for the quarter and 37% for the nine-month period; net income fell 47% and 38%, respectively. Trust expenses were $211,113 for the quarter and $747,465 for nine months, modestly higher year over year, mainly due to legal and consultant fees.
- Net margin was approximately 96.7% for the quarter and 95.5% for nine months. The trust’s limited expense base makes this margin less comparable to an operating company’s margin.
- Operating cash flow was $13.75 million for nine months, down from $24.14 million. Distributions paid were $13.51 million, versus $19.22 million in the prior-year period. Cash and equivalents at October 31 were $7.22 million, compared with $15.00 million at October 31, 2012; U.S. Government securities totaled $386,238 across current and noncurrent assets.
- Current assets were $10.02 million and total liabilities were $6.74 million, including $6.69 million of distributions payable. No debt is reported. Accrued income receivable was $2.41 million, up from $218,053 at January 31, 2013.
Changes and operating drivers
- Third-quarter pellet production from Trust lands fell 32% to 1.01 million tons; shipments fell 46% to 1.09 million tons. For nine months, production declined 31% to 2.87 million tons and shipments declined 26% to 3.24 million tons.
- Management attributed lower royalties to both lower average pellet selling prices and reduced shipment volumes, reflecting weaker customer demand and orders. Nine-month shipments from Trust lands accounted for approximately 93.0% of Silver Bay shipments, versus 96.7% in 2012.
- Base overriding royalties and bonus royalties were the principal revenue sources. For nine months, they declined to $9.49 million and $6.83 million, respectively, from $15.53 million and $10.37 million.
Outlook, risks, and notable items
- Cliffs announced plans to reopen two of Northshore’s four production lines, idled since January 2013, citing new customer contracts and expected higher customer volume in 2014. No restart date was disclosed, and the Trustees said they could not predict when operations would resume.
- Cliffs extended its pellet sales agreement with Essar Steel Algoma through 2024, from an expected 2016 expiry. The Trust was not advised what future sales, if any, would come from Trust lands under the agreement.
- No specific financial guidance was provided. Distributions depend on royalties actually received, shipment volumes and sales, expenses, and reserve needs; they do not necessarily equal accrued net income. Winter shipping activity is typically reduced.
- Royalty pricing includes estimates and subsequent interim or final adjustments tied to contract pricing and index factors. Negative adjustments could materially reduce future royalties and distributions. The Trust depends on Northshore and Cliffs for operating and shipment information and has no control over their mining decisions.
- The unallocated reserve was $3.37 million at October 31, including $2.41 million accrued income receivable and $915,036 of unallocated cash and securities. Trustees generally target $500,000–$1 million for the cash and securities reserve portion. The interim financial statements were unaudited and included normal recurring adjustments.
Important facts for investors to verify
- Whether and when the idled Northshore production lines restarted, and whether expected 2014 customer volumes materialized.
- Subsequent royalty receipts and final pricing adjustments, particularly the collectability and timing of the $2.41 million accrued income receivable.
- Changes in pellet prices, shipment volumes, customer demand, and the share of Silver Bay shipments sourced from Trust lands.
- Future distribution amounts and reserve levels; declared distributions are based on expected cash royalties and may differ from reported earnings.
- Current disclosures from Cliffs and Northshore, which provide key operating data but are outside the Trust’s control.