Mesabi Trust — Form 10-Q Summary
Reporting period: Three months ended April 30, 2019, compared with the three months ended April 30, 2018. Mesabi Trust is a pass-through royalty trust whose income depends principally on iron ore operations and shipments by Northshore Mining Company, a Cleveland-Cliffs subsidiary.
Financial results and liquidity
| Metric | Q1 2019 | Q1 2018 |
|---|---|---|
| Royalty income | $5.362 million | $6.647 million |
| Total revenue, including interest | $5.467 million | $6.684 million |
| Expenses | $556,585 | $368,199 |
| Net income | $4.910 million | $6.316 million |
| Net income per unit | $0.3743 | $0.4814 |
| Net margin | 89.8% | 94.5% |
| Net cash from operating activities | $2.372 million | $2.715 million |
| Distributions declared per unit | $0.89 | $0.45 |
At April 30, 2019, cash and cash equivalents were $450,421 and U.S. Government securities were $16.689 million. Total current assets were $21.883 million; liabilities were $11.844 million, including $11.677 million of distributions payable. The filing reports no debt. The unallocated reserve was $10.039 million, including $5.463 million of unallocated cash and securities. The $0.89-per-unit distribution was declared April 12 for payment May 20, 2019 to holders of record April 30.
Changes versus the prior comparable period
- Royalty income fell $1.285 million, or about 19%, and net income declined $1.406 million, or about 22%. The Trust attributed the decreases principally to lower shipments.
- Pellet production from Trust lands decreased to 1,253,663 tons from 1,378,750; shipments decreased to 524,706 tons from 631,916. About 95.1% of Silver Bay shipments in the period originated from Trust lands.
- Base overriding royalties declined $789,466 and bonus royalties declined $527,274; fee royalties increased $31,860, attributed to a higher price per ton of ore mined.
- Expenses rose $188,386, primarily due to higher legal and consulting fees. Interest income increased to $105,083 from $37,377.
- Operating cash flow decreased to $2.372 million from $2.715 million. Cash and equivalents fell to $450,421 from $881,810 at January 31, 2019; U.S. Government securities also declined, largely in connection with distributions and the timing of royalty receipts.
Outlook, risks and notable items
- Northshore had not provided the Trust with expected total 2019 shipments or the expected share sourced from Trust lands. Management therefore gave no quantified Trust-level earnings or distribution guidance.
- Cliffs reported plans for 500,000 long tons of Northshore direct-reduction-grade pellets to be produced and shipped to its Toledo HBI plant in the third quarter of 2019; the plant was then expected to be completed by mid-2020. The Trust could not predict the effect on its royalties.
- Royalty amounts depend on shipments, selling prices and contract terms. Estimated prices are subject to interim and final adjustments based on market and inflation indices; negative adjustments could reduce or eliminate royalties otherwise expected in a quarter or year and reduce future distributions.
- For calendar-quarter shipments through March 31, 2019, the Trust reported receiving $3.150 million on April 30, including $2.103 million of positive pricing adjustments relating to prior 2018 estimates. Northshore credited the Trust with 126,568 tons shipped, versus 195,764 in the first calendar quarter of 2018.
- Accrued income receivable and contract assets are recognized before the related royalties are received and are not then available for distribution. Distributions are based on cash royalties received and Trustees’ reserve decisions, so they need not equal reported net income.
- The Trust reported no legal proceedings and no material changes to previously disclosed risk factors. Trustees concluded disclosure controls were effective; the Trust relies on information from Northshore and Cliffs and does not control their operations or internal controls.
Investor verification points
- Confirm actual Northshore shipments, Trust-land sourcing and production, and whether these differ from the reported period’s levels.
- Track final pricing adjustments under the Cliffs customer agreements, including potential reversals of prior estimated prices and the $2.103 million positive adjustment reported in April.
- Verify that accrued income receivable and the $1.295 million contract asset convert into received royalties, and monitor the effects on distributable cash.
- Review future distribution declarations against cash receipts, reserve levels, expenses and the Trust’s $10.039 million unallocated reserve.
- Assess whether the Northshore pellet shipments and Cliffs HBI project proceed as described and affect royalties; the Trust states it cannot predict that impact.