Mesabi Trust (MSB) - Q2 2024 Filing Summary
Business Context and Reporting Period
Mesabi Trust is a pass-through royalty trust holding interests in iron ore lands leased to Northshore Mining Company (a subsidiary of Cleveland-Cliffs Inc.). The Trust earns royalties based on the volume and price of iron ore products shipped. This report covers the quarterly period ended July 31, 2024, and the six-month period ended July 31, 2024. As of September 5, 2024, there were 13,120,010 Units of Beneficial Interest outstanding.
Key Financial Metrics
| Metric | Three Months Ended July 31, 2024 | Six Months Ended July 31, 2024 |
|---|---|---|
| Total Revenues | $6,489,909 | $12,740,480 |
| Royalty Income | $6,254,719 | $12,265,326 |
| Net Income | $5,397,894 | $8,881,678 |
| Net Income Per Unit | $0.4114 | $0.6770 |
| Distributions Declared Per Unit | $0.3000 | $0.5900 |
| Cash and Cash Equivalents | $21,631,129 (as of July 31, 2024) | |
| Unallocated Reserve | $22,116,015 (as of July 31, 2024) | |
| Operating Cash Flow (6 Months) | $6,309,888 |
Material Changes vs. Prior Period
- Quarterly Revenue Decline: Total revenues decreased by approximately 34% compared to the three months ended July 31, 2023 ($6.49M vs. $9.89M). This was driven by a decrease in both iron ore pricing and shipment volumes (974,532 tons in Q2 2024 vs. 1,049,281 tons in Q2 2023).
- Six-Month Revenue Increase: Total revenues increased by approximately 8.5% for the six-month period ($12.74M vs. $11.74M). This increase is attributed to two full quarters of operations in 2024, whereas the prior year period included a facility idle from May 2022 until April 2023.
- Expense Increase: Expenses rose significantly to $3.86M for the six months ended July 31, 2024, compared to $1.53M in the prior year. The increase is primarily due to legal fees associated with pending arbitration against the operator.
- Distributions: The Trust declared a distribution of $0.30 per unit for the quarter ended July 31, 2024, compared to no distribution declared in the same quarter of 2023.
Outlook, Risks, and Management Commentary
- Arbitration Proceedings: Mesabi Trust initiated arbitration against Northshore and Cliffs in October 2022 regarding alleged underpayment of royalties for 2020, 2021, and early 2022. The evidentiary hearing concluded in March 2024, with final submissions completed in June 2024. The Trust is awaiting an award.
- Arms-Length Sales Concerns: A significant risk factor is the lack of arms-length third-party sales of iron ore pellets. Cliffs has shifted to selling primarily to its own affiliates. The Trust relies on the highest price from limited third-party sales to calculate royalties for internal sales. Recent reports show only two low-volume third-party sales in the last year, creating uncertainty in royalty calculations.
- Operational Status: Northshore remains a "swing operation." While partially restarted in April 2023, Cliffs has not provided specific guidance on full-year 2024 production volumes or the percentage of shipments originating from Mesabi Trust lands.
- Price Adjustments: Royalties are subject to interim and final price adjustments based on Cliffs' customer contracts. Future negative adjustments could offset current royalty income, impacting cash available for distribution.
Investor Verification Checklist
- Verify the status and potential outcome of the pending arbitration regarding royalty underpayments.
- Monitor Cliffs' announcements regarding Northshore's production levels and the volume of arms-length third-party sales used for royalty pricing.
- Review future quarterly reports for any negative price adjustments that may reduce cash distributions.
- Confirm the Trust's ability to maintain its Unallocated Reserve given the volatility in iron ore pricing and the "swing operation" status of the mine.