Mesabi Trust — Form 10-Q Summary
Reporting period: Three months ended April 30, 2024, compared with the three months ended April 30, 2023. Mesabi Trust is a pass-through royalty trust whose principal income depends on iron ore operations and shipments by Northshore Mining Company, owned by Cleveland-Cliffs (Cliffs).
Financial and operating results
| Metric | Q1 2024 | Q1 2023 |
|---|---|---|
| Total revenue | $6.251 million | $1.849 million |
| Royalty income | $6.011 million | $1.711 million |
| Expenses | $2.767 million | $0.826 million |
| Net income | $3.484 million | $1.023 million |
| Net income per unit | $0.2655 | $0.0780 |
| Operating cash flow | $2.504 million | $(0.864) million |
- Royalty income comprised $3.418 million of base overriding royalties, $2.450 million of bonus royalties and $0.143 million of fee royalties. Total royalty income increased $4.299 million year over year.
- Pellet production and shipments from Trust lands were each 978,498 tons, versus 155,300 tons in the comparable 2023 quarter. The Trust attributed the increase primarily to a full quarter of Northshore operations in 2024; the 2023 period included the facility’s restart only in late April.
- Expenses rose $1.941 million, primarily due to higher legal fees and expenses related to pending arbitration. Derived net income as a share of total revenue was approximately 55.7%, versus 55.3% in 2023.
- Cash and cash equivalents were $21.630 million at April 30, 2024, down from $23.980 million at January 31, 2024. The Trust reported $25.131 million in current assets and $4.477 million in total liabilities. No debt is reported on the balance sheet.
- Operating cash flow included $5.060 million of royalties received; the Trust paid $4.854 million in distributions during the quarter. A $0.29-per-unit distribution, totaling $3.805 million, was declared April 16 and was payable May 20, 2024.
- Unallocated reserve was $20.654 million, down 1.5% from January 31, 2024 and up 65.7% from April 30, 2023. Cash and cash equivalents less the distribution payable totaled $17.825 million at quarter-end.
Material changes and outlook
- Results improved substantially from the prior-year quarter as Northshore resumed operations. The Trust noted lower prices per ton partly offset the effect of greater shipments.
- Cliffs continues to treat Northshore as a swing operation. The Trustees reported receiving no specific update on 2024 production or shipment plans and said they had not been given anticipated shipment volumes or the expected share sourced from Trust lands. The filing provides no quantitative earnings or distribution guidance.
- Future royalties and distributions depend on Northshore’s operating decisions, shipment volumes and sales prices. Royalty income includes estimates and variable consideration; later price adjustments may be positive or negative and could reduce royalties or cash available for distributions. The Trust cautions that quarterly distributions are not equivalent to quarterly net income.
- The filing reports limited recent third-party arm’s-length pellet sales. Cliffs used the higher price from two low-volume June 2023 transactions to set royalty prices for subsequent shipments for affiliate internal use. Trustees are reviewing whether those transactions meet the Royalty Agreement requirements, creating uncertainty around royalty calculations.
- The Trust initiated arbitration against Northshore and Cliffs in October 2022, alleging royalty underpayments for 2020 through the first four months of 2022 and seeking related declaratory relief. The evidentiary hearing occurred in March 2024; post-hearing briefs were exchanged in May, with oral argument scheduled for June 2024. Legal costs contributed to the quarter’s higher expenses.
- Other disclosed risks include steel and iron ore market conditions, customer demand, operational curtailments, weather, environmental and permitting matters, and the Trust’s reliance on information supplied by Cliffs and Northshore. Trustees concluded the Trust’s disclosure controls and procedures were effective; Northshore has not provided a written certification regarding its own controls.
Important facts for investors to verify
- Subsequent arbitration developments, potential outcomes and associated costs.
- Whether the pricing basis for affiliate shipments complies with the Royalty Agreement and how any review or dispute affects royalties.
- Northshore’s actual production, shipments and use of Trust-land ore, given its swing-operation status and the absence of specific 2024 operating guidance.
- Final price adjustments and collection of accrued royalty income and the $1.560 million contract asset, which is not available for distribution until royalties are received.
- Future distributions and reserve needs, including the timing of cash receipts, expenses and potential negative price adjustments.