Mesabi Trust — Form 10-Q Summary
Reporting period: Three months ended April 30, 2014. The Trust holds royalty interests tied to iron ore mining and shipments by Northshore Mining, a Cliffs Natural Resources subsidiary, and does not operate the mine.
Financial results
| Metric | Q1 2014 | Q1 2013 | Change |
|---|---|---|---|
| Total revenue | $503,435 | $2,528,807 | Down $2,025,372 |
| Royalty income | $501,300 | $2,528,417 | Down $2,027,117 |
| Expenses | $366,217 | $326,418 | Up $39,799 |
| Net income | $137,218 | $2,202,389 | Down $2,065,171 |
| Net income per unit | $0.0105 | $0.1679 | Down $0.1574 |
| Operating cash flow | $172,349 | $925,941 | Down $753,592 |
Net income was approximately 27% of revenue, compared with approximately 87% in the prior-year quarter; these percentages are calculated from reported figures. The Trust reported no debt. At April 30, cash and cash equivalents were $518,622, U.S. Government securities totaled $610,912, current assets were $700,437, and total liabilities were $107,717. The prior-year distribution payable of $7,478,406 was paid during the quarter, contributing to the decline in cash from $7,719,963 at January 31 to $518,622 at April 30.
Operating trends and material changes
- Pellet production from Trust lands increased to 1,178,206 tons from 933,437 tons. Shipments fell sharply to 77,837 tons from 568,548 tons; the Trust attributed the shipment decline to unfavorable weather and higher production to increased anticipated demand and customer orders.
- Base overriding royalties declined to $157,682 from $1,061,633 and bonus royalties to $183,455 from $1,312,360, primarily because of lower shipments. Fee royalties rose to $160,163 from $154,424, reflecting more ore mined under the Peters Lease.
- No distribution was declared for the quarter, compared with $0.08 per unit in the prior-year quarter. The Trust cited low anticipated royalty receipts, anticipated negative price adjustments, reserve needs, and expected costs associated with a June 4, 2014 special unitholder meeting.
- The Trust’s unallocated reserve was $1,121,312 at April 30, up $137,218 from January 31. Management generally targets $500,000 to $1,000,000 in unallocated cash and securities, while noting the reserve may fluctuate.
- Northshore restarted two production lines that had been idled since January 2013. Cliffs had expected the restart to add 1.3 million tons of production in calendar 2014.
Outlook, risks, and unusual considerations
The filing provides no quantified Trust distribution or earnings guidance. Future distributions depend on royalties actually received, shipment volumes and sales, expenses, and reserve decisions. Royalty estimates can be revised through interim and final contract-price adjustments based on factors including iron ore and steel prices and inflation indexes. Negative adjustments could reduce or eliminate royalties otherwise expected in a quarter or year. Winter shipping patterns, steel-market conditions, and Northshore’s operating and mining decisions also affect results; the Trust has no control over those decisions and relies substantially on information provided by Northshore and Cliffs.
The interim financial statements are unaudited, except for the January 31, 2014 balance sheet, and include normal recurring adjustments. Management reported no material change in risk factors or critical accounting policies. The Trustees concluded disclosure controls were effective, while noting Northshore did not provide quarterly written certification of its disclosure controls and internal controls.
Key facts for investors to verify
- Subsequent royalty receipts and any positive or negative contract-price adjustments, including their effect on distributions.
- Northshore shipment volumes, production levels, and the operating status and output of the restarted production lines.
- The Trust’s reserve level, anticipated special-meeting costs, and the basis for future distribution decisions.
- Cliffs and Northshore filings for updated operating, market, and mine-safety information.