Business context and reporting period
Mesabi Trust is a pass-through royalty trust whose income depends on iron ore mining and shipments by Northshore Mining, a Cleveland-Cliffs subsidiary. This Form 10-Q covers the quarter and six months ended July 31, 2023; the interim financial statements are unaudited.
Financial performance and position
- Quarter: Revenue was $9.89 million, including $9.73 million of royalty income and $158,645 of interest. Net income was $9.18 million, or $0.6999 per unit, versus a net loss of $4.86 million, or $0.3702 per unit, in the prior-year quarter. Expenses were $705,901.
- Six months: Revenue was $11.74 million, including $11.44 million of royalty income and $296,178 of interest. Net income was $10.21 million, or $0.7779 per unit, versus $8.74 million, or $0.6660 per unit, a year earlier. Expenses were $1.53 million.
- Cash flow: Operating cash flow was $3.78 million for the six months, down from $14.67 million. Royalties received were $5.32 million versus $15.86 million; cash and cash equivalents increased to $17.75 million from $13.97 million at January 31. The filing reports no net investing cash flow in the current six-month period and no distributions paid.
- Liquidity and debt: Current assets were $21.90 million and current liabilities were $256,434 at July 31. The balance sheet reports no borrowings; the Trust’s reported liabilities consist of accrued expenses. Unallocated reserve was $21.64 million, up from $11.44 million at January 31.
- Revenue not yet collected: The balance sheet includes $1.81 million of accrued income receivable and a net $2.03 million contract asset. The contract asset reflects estimated royalty consideration and is not available for distribution until received.
Material changes versus the prior comparable period
- Northshore’s partial restart drove production and shipments from Trust lands to 1,049,281 tons in the quarter, compared with none in the prior-year quarter. For the six months, production and shipments were 1,204,581 tons versus 906,952 tons.
- Quarterly royalty income swung from a $4.40 million loss to $9.73 million of income. The prior-year loss included reversal of estimated base royalties after Cliffs extended Northshore’s idle period; current-period royalties include renewed estimated variable consideration.
- Six-month royalty income increased $1.65 million. Higher shipment volumes lifted base and fee royalties, while bonus royalties fell $924,383, which the Trust attributed to lower prices.
- Six-month operating cash flow fell despite higher net income, reflecting lower royalty receipts and changes in receivables and contract balances.
- No distribution was declared for the quarter or six-month period, compared with $0.84 per unit for the prior-year quarter and $1.88 per unit for the prior-year six-month period.
Outlook, risks, contingencies and unusual items
- Cliffs described Northshore as a swing operation and said it did not expect to operate the facility at full capacity during 2023. The Trust said it had not received further production, stockpiling or shipment expectations. Future distributions depend on royalties actually received, expenses and reserve decisions; the filing gives no quantified Trust guidance.
- Royalty amounts depend on Northshore’s operating and shipment decisions and on estimated iron ore prices. Contractual price adjustments may be positive or negative and could reduce or eliminate royalties otherwise payable in a period. Seasonal winter shipping reductions and steel and iron ore market conditions also affect results.
- The Trust’s arbitration against Northshore and Cliffs, begun in October 2022, remains in discovery. The Trust seeks damages for alleged royalty underpayments in 2020–2022 related to pricing internal production, and declaratory relief concerning documentation and royalty accrual timing. Legal costs related primarily to the arbitration contributed to higher expenses.
- Cliffs reported that Northshore’s approximately 430 represented employees ratified a new three-year labor agreement on September 9, 2023, after the quarter-end.
- Trustees declared no distribution on July 14, 2023. Distribution decisions are based on royalty cash received and reserve considerations, not simply reported net income. The Trust is a grantor trust; taxable income is generally attributable to unitholders whether distributed or retained.
Most important facts for investors to verify
- Northshore’s actual operating status, production, shipments and share of shipments sourced from Trust lands; the Trust relies on information supplied by Cliffs and Northshore.
- Whether estimated royalty prices and contract adjustments ultimately increase or reduce accrued income and the contract asset.
- Progress and potential financial effects of the arbitration, including any resulting damages, costs or changes to royalty calculations.
- Future royalty cash receipts, reserve levels and Trustees’ distribution decisions; reported income and cash available for distribution can differ materially.
- Cliffs’ plans for Northshore as a swing operation and the effect of the new labor agreement on operations.