Mesabi Trust — Form 10-Q Summary
Reporting period: Three and nine months ended October 31, 2011; comparative periods ended October 31, 2010. The Trust earns leasehold royalties tied primarily to iron ore production, shipments, and realized prices at Northshore Mining Company’s Silver Bay operations. Financial statements are unaudited.
Financial and operating performance
| Metric | Three months 2011 | Three months 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Royalty income | $13.97 million | $11.57 million | $27.58 million | $27.79 million |
| Total revenue, including interest | $13.97 million | $11.58 million | $27.58 million | $27.80 million |
| Expenses | $212,068 | $179,747 | $627,836 | $612,295 |
| Net income | $13.76 million | $11.40 million | $26.95 million | $27.19 million |
| Net income per unit | $1.0485 | $0.8686 | $2.0543 | $2.0725 |
| Distributions declared per unit | $1.12 | $0.91 | $1.77 | $1.835 |
- Quarterly royalty income and net income rose about 20.7%, primarily because higher realized pellet prices more than offset lower shipments. Nine-month royalty income fell about 0.8% and net income fell about 0.9%; higher prices partly offset lower shipment volume.
- Nine-month pellet shipments from Trust lands were 3.86 million tons, down from 4.72 million tons (about 18%); production was 4.02 million tons versus 3.51 million tons. Management attributed lower shipments to weaker customer demand and a lower share of Silver Bay shipments originating from Trust lands.
- Nine-month operating cash flow was $8.31 million, down from $21.94 million, largely reflecting a $19.04 million increase in accrued income receivable. Cash and cash equivalents were $58,577 at October 31, 2011, versus $8.69 million at January 31, 2011. Distributions paid during the nine months totaled $17.06 million.
- Assets totaled $19.97 million, including $19.27 million of accrued income receivable. Liabilities totaled $15.25 million, including $14.69 million of distributions payable. The filing reports no debt. The cash and U.S. Government securities portion of the reserve was $610,468; the Trust states that this reserve is generally intended to be $500,000–$1 million.
Material changes, outlook, and risks
- The October 31 royalty payment was received on November 2 rather than by quarter-end. The related $14.74 million of July–September royalties was accrued at October 31 and was used to fund the $14.69 million distribution declared October 14 and payable November 20. Income recognition and cash distributions therefore do not necessarily coincide.
- The Trust recorded $467,000 of deferred royalty revenue because the proportion of Silver Bay shipments credited to Trust lands was below contractual minimum thresholds year to date. Northshore may offset some of these payments against fourth-quarter royalties if later shipments exceed the thresholds.
- Northshore had not provided the Trustees an estimate of expected 2011 shipments. The Trust cautions that winter shipping reductions, steel and iron ore market conditions, shipment volumes, and uncertain interim or final pricing adjustments may affect future royalties and distributions. Negative pricing adjustments could materially reduce cash available for distributions.
- The Trust cannot control Northshore’s operating, mining, or marketing decisions and relies on information supplied by Northshore and Cliffs. The filing notes that Northshore’s shipment and royalty information was not supported by a written certification of its disclosure controls; Trustees rely on annual certifications, external accountant review, and consultant checks.
- Cliffs’ settlement with ArcelorMittal included a pricing true-up, but the Trust had received no related royalty adjustment as of the filing date and could not determine any future effect. The Trust did not expect additional royalties from the Cliffs–Essar settlement. Northshore also faced a Minnesota pollution-control enforcement matter over elevated PM-10 readings; its effect on production, shipments, or royalties was uncertain.
- No specific Trust guidance or shipment forecast was provided. Trustees said future distributions depend on royalties actually received, pricing changes, shipments, and expenses. No changes to critical accounting policies were reported.
Key facts for investors to verify
- Subsequent receipt and collection of the accrued royalty balance, and the timing of distributions funded by it.
- Fourth-quarter shipments and whether the $467,000 deferred royalty balance results in any royalty offset.
- Final contract-price adjustments and any impact from the Cliffs–ArcelorMittal settlement.
- Developments in Northshore’s PM-10 enforcement matter and any consequences for operations or shipments.
- Future cash distributions relative to earned net income, given shipment seasonality, price uncertainty, and the Trust’s limited liquid reserve.