Mesabi Trust 10-Q Summary: Period Ended July 31, 2009
Business Context and Reporting Period
Mesabi Trust is a New York trust holding interests in iron ore leases, primarily the Peters and Cloquet Leases, operated by Northshore Mining Company (a subsidiary of Cliffs Natural Resources Inc.). The Trust generates revenue through leasehold royalties based on the volume and price of iron ore pellets shipped from Silver Bay, Minnesota. This report covers the quarterly period ended July 31, 2009, and the six-month period ended July 31, 2009. As of September 3, 2009, there were 13,120,010 Units of Beneficial Interest outstanding.
Key Financial Metrics
| Metric | Three Months Ended July 31, 2009 | Six Months Ended July 31, 2009 |
|---|---|---|
| Total Revenue | $422,937 | $1,447,818 |
| Royalty Income | $419,135 | $1,440,847 |
| Expenses | $201,925 | $425,760 |
| Net Income | $221,012 | $1,022,058 |
| Net Income Per Unit | $0.0168 | $0.0779 |
| Distributions Declared Per Unit | $0.00 | $0.38 |
| Cash and Cash Equivalents | $858,218 (as of July 31, 2009) | |
| Unallocated Reserve (Deficit) |
Liquidity and Debt: The Trust holds no debt. Cash and cash equivalents totaled $858,218, and U.S. Government securities totaled $1,057,341. The Unallocated Reserve, which serves as a buffer for future liabilities, moved into a deficit of ($171,365) due to the recognition of deferred royalty revenue.
Material Changes vs. Prior Period
- Revenue Decline: Royalty income decreased approximately 97.5% for the quarter and 93% for the six-month period compared to the same periods in 2008. This was driven by an 89% decrease in shipment volume (278,000 tons vs. 2.55 million tons for the quarter) and lower realized sales prices per ton.
- Production Shutdown: Northshore Mining Company experienced an extended shutdown of mining operations from April 2009 through early July 2009, significantly reducing production and shipments.
- Net Income Drop: Net income fell 98.7% for the quarter and 94.9% for the six-month period year-over-year.
- Distribution Suspension: No distributions were declared for the quarter ended July 31, 2009, compared to $1.00 per unit in the prior year quarter. For the six months, distributions were $0.38 per unit versus $1.12 in the prior year.
- Deferred Revenue Liability: A new liability of $2,570,000 was recorded as "deferred royalty revenue." This arose because cash proceeds received in April 2009 exceeded recognized revenue due to subsequent decreases in estimated pellet pricing. This liability contributed to the Unallocated Reserve deficit.
Outlook, Risks, and Management Commentary
Management Commentary: Trustees noted that future distributions are highly dependent on royalty payments received, which are subject to volume and price volatility. The decision to suspend distributions for the quarter was driven by the deferred royalty revenue liability and the uncertain global economic climate affecting the steel industry.
Risks and Contingencies:
- Pricing Adjustments: Royalties are subject to interim and final price adjustments under Cliffs Pellet Agreements. Future negative adjustments could offset or eliminate royalties payable in future quarters.
- Operational Dependence: The Trust has no control over Northshore's mining operations, production volumes, or marketing decisions. Income is entirely dependent on Northshore's performance.
- Market Volatility: The iron ore and steel industries face significant demand fluctuations, impacting shipment volumes and pricing.
Guidance: The filing does not provide specific forward-looking guidance on future production or revenue, citing the inability to predict the impact of the temporary production shutdown or future price adjustments.
Investor Verification Checklist
- Deferred Revenue Impact: Verify how the $2.57 million deferred royalty revenue liability will be adjusted in future quarters and its potential to reduce future cash distributions.
- Production Resumption: Confirm the status of Northshore's mining operations post-July 2009 and whether production levels have returned to pre-shutdown capacity.
- Pricing Adjustments: Monitor Cliffs Natural Resources' filings for updates on iron ore pellet pricing and any final price adjustments that could materially alter royalty calculations.
- Distribution Policy: Review future trustee decisions regarding the Unallocated Reserve and the threshold required to resume regular distributions to unitholders.
- Shipment Volume: Track quarterly shipment volumes from Silver Bay to assess the correlation between operational activity and royalty income recovery.