Mesabi Trust — Q3 2021 Form 10-Q
Reporting period: Three and nine months ended October 31, 2021. Mesabi Trust is a pass-through royalty trust whose income depends primarily on Northshore Mining, a Cleveland-Cliffs subsidiary, and its iron ore operations.
Financial results and liquidity
| Metric | Three months ended Oct. 31, 2021 | Three months ended Oct. 31, 2020 | Nine months ended Oct. 31, 2021 | Nine months ended Oct. 31, 2020 |
|---|---|---|---|---|
| Royalty income | $15.84 million | $5.74 million | $52.98 million | $15.09 million |
| Total revenue | $16.36 million | $5.74 million | $53.51 million | $15.12 million |
| Expenses | $0.37 million | $0.61 million | $2.18 million | $1.71 million |
| Net income | $15.99 million | $5.13 million | $51.32 million | $13.41 million |
| Net income per unit | $1.2190 | $0.3907 | $3.9118 | $1.0224 |
| Distributions declared per unit | $1.42 | $0.36 | $2.40 | $0.97 |
For the nine months, operating cash flow was $42.35 million, compared with $9.08 million in 2020. Cash and cash equivalents were $45.86 million at October 31, 2021, versus $12.50 million at January 31, 2021; the Trust also held no U.S. Government securities at October 31, compared with $9.91 million at January 31. The balance sheet shows no debt. The unallocated reserve was $36.31 million, including accrued income receivable of $8.49 million and a net contract asset of $0.55 million. The contract asset is not available for distribution until royalties are received. The filing does not present conventional operating margins.
Nine-month distributions paid were $18.89 million; distributions declared were $31.49 million, including the $1.42-per-unit distribution payable November 20, 2021. Distributions are determined principally from royalties received and are not equivalent to reported net income.
Changes and operating drivers
- Q3 royalty income rose $10.10 million year over year; nine-month royalty income increased $37.89 million. Management attributed the increases to higher iron ore pricing and shipments and recognition of arbitration-related royalties.
- Nine-month pellet production from Trust lands was 3.40 million tons, versus 2.19 million; shipments were 3.17 million tons, versus 2.61 million. In Q3, production was 1.12 million tons and shipments 1.18 million tons, both above the prior-year quarter.
- The October 2021 royalty payment included a $6.08 million reduction for negative pricing adjustments to prior estimates. The Trust also received $2.83 million under the arbitration award, including $2.31 million in damages and $0.52 million in interest. Award-related proceeds are included in royalty income.
- Revenue recognition changed following the arbitration: royalties on pellets designated for Cliffs’ or its subsidiaries’ internal use are recognized upon production, deemed shipment under the royalty agreement; other pellets continue to be recognized upon shipment.
Outlook, risks and unusual items
- Cliffs’ CEO said it planned to shift DR-grade pellet production away from Northshore to Minorca, stop selling pellets to third parties in the coming years, and operate Northshore as a swing operation that could be idled. The Trust said Cliffs had not notified it of implementation. If carried out, these plans could materially reduce Trust royalties and distributions. The Trust has no control over Northshore’s operating decisions.
- The Trust did not provide a shipment or earnings forecast; Northshore had not advised it of expected 2021 shipments or the share expected to come from Trust lands. Shipping activity typically declines in winter.
- Royalties use estimated contract prices subject to later adjustments linked to market and inflation indexes. Future negative adjustments could reduce or eliminate royalties otherwise expected in a quarter or year. Q3’s $6.08 million negative adjustment illustrates this volatility.
- The arbitration concluded with a $2.31 million damages award plus interest and a favorable ruling on how intercompany sales are priced for royalty calculations: Northshore must reference third-party pellet sales of any grade and use the highest arm’s-length price from the preceding four quarters. The panel denied the Trust’s request for declaratory relief on access to information.
- Royalties remain exposed to iron ore and steel demand and prices, production interruptions, customer demand, supply-chain or pandemic disruptions, and Northshore’s operational and permitting risks. The Trust also relies on information provided by Cliffs and Northshore for its reporting.
Important facts for investors to verify
- Whether and when Cliffs implements the announced DR-grade production shift, reduced third-party sales, or Northshore idling plans.
- Subsequent Northshore production, shipments, and the proportion attributable to Trust lands.
- Final contract-price adjustments and their effect on accrued royalties, cash receipts, and distributions.
- How the arbitration ruling is applied to future intercompany sales and whether it changes royalty calculations materially.
- Future distribution decisions and reserve levels; reported accrued income and contract assets are not necessarily cash available for distribution.