Mesabi Trust — Form 10-Q Summary
Reporting period: Three months ended April 30, 2012, compared with the three months ended April 30, 2011. Mesabi Trust is a royalty trust whose income depends primarily on iron ore operations and shipments by Northshore Mining Company, operated by Cliffs Natural Resources.
Financial results and liquidity
| Metric | Q1 2012 | Q1 2011 | Change |
|---|---|---|---|
| Royalty income | $3,693,121 | $3,276,589 | +$416,532 |
| Total revenues | $3,693,446 | $3,278,048 | +$415,398 |
| Expenses | $323,554 | $214,787 | +$108,767 |
| Net income | $3,369,892 | $3,063,261 | +$306,631 |
| Net income per unit | $0.2569 | $0.2335 | +$0.0234 |
| Distributions declared per unit | $0.065 | $0.050 | +$0.015 |
| Operating cash flow | $796,874 | $575,471 | +$221,403 |
Royalty income rose 13%, primarily on higher average pellet selling prices and greater shipment volume. Pellet production from Trust lands increased to 1,399,462 tons from 1,137,298; shipments rose to 689,443 tons from 470,528. Base overriding, bonus and fee royalties all increased.
Cash and cash equivalents were $1.11 million at April 30, 2012, versus $10.25 million at January 31, 2012. Total assets were $4.52 million, compared with $11.17 million. The cash decline mainly reflects $9.97 million of distributions paid during the quarter. Distribution payable at quarter-end was $852,801. The Trust reported no debt in the supplied filing text.
Cash flow does not track reported income closely: $2.92 million of accrued income receivable was recognized for April shipments but was not available for distribution until royalties were received at the end of July. Operating cash flow was also reduced by the increase in this receivable. The Trust’s cash and U.S. Government securities available after distribution payable totaled $700,155, within the Trustees’ usual $500,000–$1,000,000 reserve range.
Changes, outlook and risks
- Expenses increased mainly because of higher accounting and legal fees following a change in the independent accounting firm, and higher Trust administration fees.
- Distributions are based on royalty cash received and are not equivalent to net income for the reported fiscal quarter. Cash distributions paid in Q1 2012 were $9,971,208; distributions declared during the quarter were $852,801.
- Cliffs provided no estimate of total Northshore pellet shipments for calendar 2012. Future royalties and distributions depend on shipment volumes, sales prices, steel-market conditions and the Trust’s expenses.
- Royalty calculations use estimated prices subject to interim and final contract adjustments. Negative adjustments could reduce or eliminate royalties otherwise expected for a quarter or year, lowering future cash available for distributions.
- Northshore received a Minnesota Pollution Control Agency notice alleging improper handling of coal-ash landfill leachate. Cliffs reported a proposed civil penalty of approximately $300,000 and ongoing negotiations; the Trustees could not predict any effect on Northshore shipments or Trust royalties.
- The Trust has no control over Northshore’s operating decisions and relies on information supplied by Northshore and Cliffs, with review support from consultants and external accountants. Trustees said disclosure controls were effective; they reported no material change in internal control over financial reporting and no material change in the previously disclosed risk factors.
Important facts for investors to verify
- Whether the $2.92 million April accrued royalty receivable was collected as expected and how subsequent price adjustments affected it.
- Northshore shipment volumes, realized pellet prices and royalty calculations, given the Trust’s reliance on operator-provided information.
- Any final outcome of the landfill notice and proposed penalty, including potential operational or royalty effects.
- Future distribution levels and reserve adequacy, particularly given seasonal shipping patterns and the Trust’s dependence on quarterly royalty receipts.
- Later disclosures on 2012 production and shipments, which were not forecast by Cliffs in this filing.