MSB

Mesabi Trust 10-Q Summary: Quarter Ended April 30, 2006

Business Context and Reporting Period

Mesabi Trust is a New York land trust organized to hold iron ore mining leases. The Trust has no employees and does not engage in business operations; its income is derived solely from leasehold royalties paid by Northshore Mining Company (a subsidiary of Cleveland-Cliffs Inc.) based on iron ore production and shipments from Silver Bay, Minnesota. This report covers the quarterly period ended April 30, 2006.

Key Financial Metrics

Note: The Trust holds no debt. Liquidity is managed through cash, U.S. Government securities, and an Unallocated Reserve intended to cover future liabilities.

Material Changes vs. Prior Period

• Revenue Decline: Total royalty income decreased approximately 30% year-over-year. This was driven by slightly lower pellet prices and a net decrease in accrued income due to the finalization of contract pricing adjustments under the CCI Pellet Agreements.
• Net Income Decline: Net income fell approximately 31% to $1.47 million. This mirrors the revenue drop, partially offset by a reduction in operating expenses (primarily legal and accounting fees) from $218,922 to $171,117.
• Production and Shipments: Pellet production from Trust lands remained relatively stable at approximately 1.2 million tons, and shipments were approximately 0.5 million tons, comparable to the prior year.
• Cash Position: Cash on hand dropped significantly from $6.38 million to $110,551. This decrease is primarily due to the payment of distributions to unitholders ($6.17 million) and net investing activities (purchases of U.S. Government securities exceeding maturities).

Outlook, Risks, and Management Commentary

• Revenue Drivers: Future distributions are highly dependent on royalty income, which fluctuates based on iron ore shipment volumes and sales prices. The Trust has no control over Northshore's mining operations or pricing strategies.
• Pricing Adjustments: Royalties are subject to interim and final pricing adjustments based on the CCI Pellet Agreements. These adjustments can cause significant quarter-to-quarter variations in revenue and cannot be predicted by the Trustees.
• Legal and Operational Risks:
  • Mittal Steel Dispute: Cleveland-Cliffs (CCI) resolved a dispute with Mittal Steel regarding overpayment claims and supply agreements. The Trust is not a party to these agreements, and the impact on future royalties is currently undetermined.
  • EPA Violations: The EPA cited Northshore for alleged Clean Air Act violations regarding furnace restarts and permit compliance. The Trust was not named, and the financial impact is unknown.
  • Union Activity: The United Steel Workers Association initiated an organizing campaign at Northshore effective April 1, 2006.
• Reserve Policy: The Trustees maintain an Unallocated Reserve (currently $2.52 million) to meet liabilities. While the target range is typically $500,000 to $1,000,000, the current level reflects accrued royalties expected to be received in July 2006.

Investor Verification Checklist

• Royalty Calculation Accuracy: Verify the Trust's reliance on Northshore/CCI data for royalty calculations, as the Trust does not independently certify the lessee's internal controls.
• Contract Pricing Adjustments: Monitor future filings for final pricing adjustments under the CCI Pellet Agreements, which significantly impact quarterly revenue recognition.
• Shipment Mix: Confirm the percentage of shipments originating from Mesabi Trust lands versus other lands, as royalties are calculated based on aggregate shipments with specific weighting.
• Legal Settlements: Track the definitive agreement terms between CCI and Mittal Steel to assess potential retroactive effects on royalty payments.
• Environmental Compliance: Monitor the outcome of the EPA Notice of Violation against Northshore to assess potential operational disruptions.