Mesabi Trust — Form 10-Q Summary
Reporting period: Quarter and six months ended July 31, 2012; comparisons are to the same 2011 periods. Mesabi Trust is a royalty trust whose income depends primarily on Northshore Mining’s iron-ore operations and shipments. Its interim financial statements are unaudited.
Financial and operating results
| Metric | Three months ended July 31, 2012 | Six months ended July 31, 2012 |
|---|---|---|
| Royalty income | $11.06 million, up 7.0% year over year | $14.75 million, up 8.4% |
| Net income | $10.87 million, up 7.3%; $0.8288 per unit | $14.24 million, up 7.9%; $1.0856 per unit |
| Expenses | $186,938, down from $200,981 | $510,492, up from $415,768 |
| Distributions declared | $0.64 per unit for the July distribution | $0.705 per unit declared during the six-month period |
| Operating cash flow | Not separately reported | $9.50 million, versus $8.24 million |
At July 31, cash and cash equivalents were $8.86 million and U.S. Government securities totaled approximately $544,000. Current assets were $14.08 million, including $5.12 million of accrued income receivable; total liabilities were $8.51 million, principally distributions payable. The Trust reported no debt. The $5.12 million accrued royalty receivable was not available for distribution until collected. The unallocated reserve was $6.03 million, including $1.01 million of unallocated cash and securities.
Cash distributions to unitholders during the six months were $10.82 million. Distributions are based on royalty payments received and do not necessarily equal net income recognized for the period.
Changes versus prior periods
- Quarterly royalty income increased mainly because average selling prices rose, despite slightly lower shipment volume. Quarterly pellet production from Trust lands fell to 1.29 million tons from 1.53 million; shipments fell to 1.72 million tons from 1.76 million.
- For the six-month period, shipments from Trust lands increased to 2.41 million tons from 2.23 million, while production was nearly unchanged at 2.69 million tons versus 2.67 million. The filing attributes the shipment increase to stronger customer demand and a higher share of Silver Bay shipments originating from Trust lands (93.4% versus 84.5%).
- Six-month royalty growth reflected higher shipment volume and average selling prices. Expenses increased, primarily due to higher legal and accounting fees following a change in independent accounting firm and higher Corporate Trustee administration fees.
- The reserve increased from $1.03 million at January 31, 2012, primarily because accrued income receivable rose to $5.12 million from $388,000.
Outlook, risks and unusual items
Cliffs had not provided the Trustees an estimate of Northshore’s expected 2012 shipments. Production was adversely affected by storm-related power outages and infrastructure failures; Cliffs reported a 16.1% decline in Northshore production for the six months ended June 30, 2012. The Trust says future distributions depend on royalties actually received, shipments, sales, expenses and prudent reserve levels. Winter shipping seasonality and steel-industry conditions may affect shipment timing and volume.
Royalties include estimated prices subject to interim and final adjustments under customer contracts to which the Trust is not a party. Adjustments may be positive or negative, cannot be predicted by the Trust, and negative adjustments could reduce or eliminate royalties otherwise expected in a quarter or year.
Northshore received a Minnesota Pollution Control Agency notice alleging improper handling of coal-ash landfill leachate. Cliffs reported a proposed stipulation including additional corrective actions and an approximately $300,000 civil penalty; the final agreement was still to be negotiated. The Trustees could not predict any effect on shipments or royalties.
The Trust stated that it had no control over Northshore’s operating decisions and relies on information supplied by Northshore and Cliffs, supplemented by consultants and external accountants. Trustees concluded disclosure controls were effective; the Trust reported no material change in internal control over financial reporting. No new risk factors were reported in this filing.
Key facts investors should verify
- Whether accrued royalties and estimated price adjustments are ultimately collected, and whether later adjustments are negative.
- Northshore’s subsequent production, shipment levels and 2012 shipment outlook, including the effects of storm damage and customer demand.
- The final outcome and operational or financial consequences of the coal-ash landfill notice and proposed agreement.
- Future distribution amounts and reserve requirements, noting that reported income and cash distributions differ in timing.