Business context and reporting period
Mesabi Trust is a pass-through royalty trust whose income depends principally on iron ore mining and shipments by Northshore Mining, a Cleveland-Cliffs subsidiary. The Trust does not control Northshore’s operating decisions. This unaudited Form 10-Q covers the three months ended April 30, 2018; the comparable period is the three months ended April 30, 2017.
Financial performance and position
| Metric | Q1 2018 | Q1 2017 |
|---|---|---|
| Royalty income | $6.647 million | $4.760 million |
| Total revenue, including interest | $6.684 million | $4.767 million |
| Expenses | $368,199 | $295,046 |
| Net income | $6.316 million | $4.472 million |
| Net income per unit | $0.4814 | $0.3408 |
| Distributions declared per unit | $0.45 | $0.55 |
Net income rose 41% year over year; net margin was approximately 94.5% of total revenue, versus 93.8% in the prior period. Cash from operations was $2.715 million, compared with $68,474. The Trust received $2.998 million in royalties during the quarter; reported royalty income exceeds receipts in part because of accruals. Cash and cash equivalents were $3.029 million at April 30, 2018, and U.S. Government securities were $8.316 million. After deducting the $5.904 million distribution payable, unallocated cash and securities were $5.441 million. The filing reports no debt.
Changes versus the prior period
- Royalty income increased $1.886 million, which management attributed mainly to anticipated higher iron ore sales prices. Base overriding royalties rose $1.211 million and bonus royalties rose $669,000; fee royalties increased $6,459.
- Pellet production from Trust lands was 1,378,750 tons versus 1,397,947; shipments from those lands were 631,916 tons versus 692,176. Approximately 93.1% of Silver Bay shipments in the quarter originated from Trust lands.
- The declared distribution fell from $0.55 to $0.45 per unit despite higher reported net income. Trustees base distributions on royalties actually received, expenses, reserves, and other considerations—not solely on accrued net income.
- The unallocated reserve increased $3.386 million from April 30, 2017 to $11.019 million, primarily reflecting higher accrued income receivable. It increased $412,000 from January 31, 2018.
Outlook, risks and unusual items
The Trust gave no distribution or earnings guidance. Future distributions depend on shipment volume, sales prices, receipts, expenses, and the Trustees’ reserve decisions; shipping activity is seasonally lower in winter. Estimated iron ore prices are subject to interim and final adjustments that may be negative and could reduce future royalties or distributions. Other stated risks include iron ore and steel market conditions, weather, environmental and regulatory matters, and the Trust’s reliance on information from Northshore and Cleveland-Cliffs.
The Trust adopted ASC 606 on February 1, 2018 using full retrospective application. Adoption increased the January 31, 2018 unallocated reserve by approximately $99,000 and increased the presented Q1 2017 comparison’s royalty income and net income by $1.110 million; the comparative figures are adjusted for this standard. Contract assets and accrued income receivable are not available for distribution until the applicable royalties are received.
On April 13, 2018, Trustees declared $0.45 per unit, payable May 20, 2018 to holders of record April 30. The April 2018 royalty receipt included $1.595 million of net positive pricing adjustments relating to prior 2017 periods. Cleveland-Cliffs separately forecast approximately $420 million of capital spending over the next 12 months, including Northshore upgrades and an HBI plant; these are parent-company plans, not Mesabi Trust guidance.
Important facts for investors to verify
- Subsequent Northshore shipment and royalty reports, and whether estimated iron ore prices lead to positive or negative final adjustments.
- Cash royalty receipts and the conversion of the $4.295 million accrued income receivable and $1.430 million contract asset into cash.
- Future distribution decisions, the distribution payable, and the Trustees’ reserve requirements.
- Northshore’s operating and shipment outlook, including the effect of Cleveland-Cliffs’ Northshore upgrade plans.
- The Trust’s dependence on operator-provided information; the filing says Northshore declined to provide written certification regarding its disclosure and internal controls.
- Unitholders’ tax treatment: the Trust is a grantor trust, and taxable income may be attributable to holders whether or not distributed.