Mesabi Trust — Form 10-Q Summary
Reporting period: Three months ended April 30, 2013. The interim financial statements are unaudited. Mesabi Trust is a royalty trust whose income depends primarily on iron ore operations and shipments by Northshore Mining Company.
Financial results
| Metric | Q1 2013 | Q1 2012 | Change |
|---|---|---|---|
| Royalty income | $2,528,417 | $3,693,121 | Down $1,164,704 (31.5%) |
| Total revenue | $2,528,807 | $3,693,446 | Down $1,164,639 |
| Expenses | $326,418 | $323,554 | Up $2,864 |
| Net income | $2,202,389 | $3,369,892 | Down $1,167,503 (34.6%) |
| Net income per unit | $0.1679 | $0.2569 | Down $0.0890 |
| Distribution declared per unit | $0.080 | $0.065 | Up $0.015 |
| Net cash from operating activities | $925,941 | $796,874 | Up $129,067 |
Lower royalty income reflected both lower average pellet selling prices and reduced shipment volumes. Base overriding royalties were $1,061,633 (versus $1,590,739), bonus royalties $1,312,360 (versus $1,883,482), and fee royalties $154,424 (versus $218,900). No minimum advance royalty was reported for either period.
Pellet production from Trust lands was 933,437 tons, down from 1,399,462; shipments were 568,548 tons, down from 689,443. The Trust attributed the declines to lower anticipated demand and customer orders.
Financial position and liquidity
At April 30, 2013, cash and cash equivalents were $1,225,217, current assets $3,340,315, and total assets $3,522,607. Total liabilities were $1,187,594, including $1,049,601 of distributions payable and $137,993 of accrued expenses. The balance sheet reports no debt. The Trust held $643,250 of U.S. Government securities at amortized cost.
Cash declined from $6,727,461 at January 31, primarily reflecting $6,428,805 of distributions paid during the quarter. The Trust’s unallocated reserve was $2,335,010, up $1,152,788 from January 31; it included $1,599,406 of accrued income receivable and $818,866 of unallocated cash and government securities net of distributions payable. The Trustees generally target $500,000–$1,000,000 for the cash and securities portion available for potential liabilities.
Changes, outlook, and risks
- Despite lower quarterly earnings, distributions declared per unit increased to $0.08, primarily because negative adjustments to previously received royalties were lower. Distributions are based on royalty cash expected or received, not the Trust’s accrual-basis net income.
- Accrued income receivable includes estimated royalties on April shipments and anticipated pricing adjustments; it is not available for distribution until cash is received. It can be affected by later positive or negative price adjustments.
- Two of Northshore’s four production lines had been idled since January 5, 2013 through the end of the quarter. The Trustees had no information on when they would restart.
- Cliffs reported a successful production test of direct reduced iron-grade pellets at Silver Bay. The Trust could not predict whether or when production would begin there or its effect on royalties.
- Management provided no quantitative earnings or distribution guidance. Future royalties and distributions depend on shipment volume, selling prices, steel-market conditions, and pricing adjustments under contracts to which the Trust is not a party. Negative adjustments could materially reduce royalties or cash available for distributions.
- The Trust has no control over Northshore’s operating decisions and relies on information from Northshore and Cliffs. The Trustees said disclosure controls were effective; they also noted Northshore does not provide a written certification of its disclosure and internal controls for information supplied to the Trust.
Important facts for investors to verify
- Whether Northshore’s idled production lines resumed operation and how subsequent production and shipments compared with the prior year.
- Actual versus estimated pellet prices and any interim or final contract price adjustments affecting royalties.
- Royalty cash receipts, accrued income receivable, and the timing and amount of future distributions.
- Cliffs’ demand, customer orders, and plans for direct reduced iron-grade pellet production at Silver Bay.
- Whether the Trust’s reserve remains adequate given operating uncertainty and potential liabilities.