Mesabi Trust — Form 10-Q Summary
Business context and period. Mesabi Trust is a pass-through royalty trust whose income depends principally on iron ore production and shipments by Northshore Mining, a subsidiary of Cleveland-Cliffs. This unaudited report covers the fiscal quarter and nine months ended October 31, 2020; comparisons are with the corresponding 2019 periods.
Financial and operating results
| Metric | Three months ended Oct. 31, 2020 | Nine months ended Oct. 31, 2020 |
|---|---|---|
| Royalty income | $5.74 million, down 11.6% year over year | $15.09 million, down 42.3% |
| Total revenue | $5.74 million | $15.12 million |
| Expenses | $610,856 | $1.71 million |
| Net income | $5.13 million; $0.3907 per unit | $13.41 million; $1.0224 per unit |
| Distributions declared | $0.36 per unit | $0.97 per unit |
| Net cash from operating activities | Not separately reported for the quarter | $9.08 million, versus $25.60 million in 2019 |
At October 31, 2020, cash and cash equivalents were $6.11 million and U.S. Government securities were $9.29 million. Current assets were $17.48 million and total liabilities were $4.96 million, including $4.72 million of distributions payable. The balance sheet reports no debt. Unallocated reserve was $12.52 million; unallocated cash and securities, net of distributions payable, were $10.68 million.
Pellet production from Trust lands was 1.02 million tons in the quarter and 2.19 million tons year to date; shipments were 1.08 million and 2.61 million tons, respectively. Year-to-date Trust-land production and shipments were down from 3.58 million and 3.35 million tons in 2019.
Material changes and drivers
- Quarterly net income fell $1.02 million from 2019; nine-month net income fell $11.56 million. The Trust attributed the declines mainly to lower pellet shipments. Year-to-date royalty income declined across base overriding, bonus, and fee royalties.
- Expenses rose $200,211 for the quarter and $310,614 year to date, primarily because of higher legal fees and expenses.
- Cash distributions paid during the nine months were $17.19 million, compared with $32.67 million in 2019. Distributions declared were $0.97 per unit year to date versus $1.97 in the comparable 2019 period. The $0.36-per-unit October distribution was payable November 20, 2020.
- On October 30, 2020, the Trust received $5.83 million in royalties for shipments in the calendar quarter ended September 30, including positive prior-quarter price adjustments; a separate $91,019 payment went to the Mesabi Land Trust.
Outlook, risks, and unusual items
- COVID-19 disruptions idled Northshore’s mine during part of 2020; it restarted in August. The Trust warns that further operating or supply-chain disruptions remain possible. Management provided no shipment forecast: Northshore had not advised the Trust of expected 2020 shipments or the expected share sourced from Trust lands.
- Royalties and distributions depend on shipment volumes, sales prices, and customer-contract pricing adjustments. Estimates can be revised, and future negative adjustments could reduce or eliminate royalties otherwise payable. Winter shipping activity is typically reduced.
- The Trust initiated arbitration in December 2019 against Northshore and Cliffs over royalty calculations, including for DR-grade pellets, seeking damages and specific performance and declaratory relief. The filing provides no resolution or quantified claim value.
- Cliffs completed its acquisition of substantially all ArcelorMittal USA operations on December 9, 2020, after the reporting date. The filing does not quantify its effect on Trust royalties.
- The Trust is a grantor trust: taxable income is generally reported by unitholders whether or not distributed. Trustees say distributions are based on cash royalties received and reserve needs, not simply reported net income.
Most important facts to verify
- Northshore shipment volumes, Trust-land sourcing, and operational plans, given the steep year-to-date shipment decline and the Trust’s dependence on one operator.
- Final iron ore pricing adjustments and their potential effect on royalties and future distributions.
- Progress and outcome of the royalty-calculation arbitration, including any damages or settlement exposure.
- How Cliffs’ acquisition and post-pandemic operating conditions affect Northshore activity and Trust income.
- Whether reserve levels and cash royalties support future distributions; distributions are variable and are not equivalent to reported net income.