Mesabi Trust — Form 10-Q Summary
Reporting period: Three and six months ended July 31, 2018; balance sheet compared with January 31, 2018. Mesabi Trust is a pass-through royalty trust whose income depends primarily on iron-ore shipments and pricing at Northshore Mining, a Cleveland-Cliffs subsidiary. The Trust does not operate the mine or control its operations.
Financial performance
| Metric | Three months ended July 31, 2018 | Year-over-year change | Six months ended July 31, 2018 | Year-over-year change |
|---|---|---|---|---|
| Royalty income | $19.13 million | +$4.89 million (+34.4%) | $25.77 million | +$6.78 million (+35.7%) |
| Total revenue | $19.15 million | +$4.91 million (+34.5%) | $25.84 million | +$6.83 million (+36.0%) |
| Expenses | $280,497 | +$40,004 | $648,696 | +$113,157 |
| Net income | $18.87 million | +$4.87 million (+34.8%) | $25.19 million | +$6.72 million (+36.4%) |
| Net income per unit | $1.4384 | +$0.3716 | $1.9198 | +$0.5121 |
| Distributions declared per unit | $0.22 | vs. $0.16 | $0.67 | vs. $0.71 |
Management attributed higher royalty income and net income chiefly to higher anticipated iron-ore selling prices; higher fee royalties also reflected increased ore mined under the Peters Lease. Six-month expenses rose primarily because of legal expenses. The Trust reported no debt. Its July 31 assets included $196,826 cash and $17.90 million of U.S. Government securities; current assets totaled $30.03 million, current liabilities $3.03 million, and unallocated reserve $27.00 million.
Six-month operating cash flow was $15.37 million, compared with $8.07 million a year earlier. Royalties received were $16.06 million versus $8.72 million, while distributions paid were $21.39 million versus $9.05 million. Cash and cash equivalents ended the period at $196,826. Accrued income receivable of $8.78 million and a $3.01 million contract asset were recorded but were not available for distribution until the related royalties were received.
Operating trends and material changes
- For the three-month period, pellet production from Trust lands rose to 1.30 million tons from 1.11 million; shipments declined to 2.00 million tons from 2.01 million. For six months, production increased to 2.68 million tons from 2.51 million, while shipments decreased to 2.63 million tons from 2.70 million.
- Base overriding royalties and bonus royalties drove most of the revenue increase. Second-quarter royalties included $11.45 million of base royalties and $7.52 million of bonus royalties.
- For the quarter ended June 30, Northshore credited the Trust with 1,764,175 tons shipped, versus 1,722,243 in the prior-year quarter. The July 2018 royalty payment totaled $13.06 million, including positive pricing adjustments of $87,197.
- The Trust adopted ASC 606 on February 1, 2018 using the full retrospective method. Adoption increased the January 31, 2018 unallocated reserve by approximately $99,000 and adjusted prior-period reported royalty income and net income; it did not change reported cash flows.
Distribution, outlook and risks
On July 13, the Trustees declared $0.22 per unit, payable August 20 to holders of record July 30, compared with $0.16 for the comparable prior-year distribution. Trustees base distributions on royalties actually received, expenses, reserves, and other considerations—not accounting net income. The Trust stated future distributions depend on shipment volumes, sales values, receipt timing, expenses, and reserve decisions; it provided no specific earnings or distribution guidance.
Royalty prices are subject to interim and final adjustments under customer contracts to which the Trust is not a party. Adjustments may be negative and could reduce or eliminate royalties otherwise payable in a period. Other key exposures include iron-ore and steel market conditions, customer shipment schedules, winter shipping constraints, weather, regulation, environmental and safety matters, and uncertainty about reserves. The Trust relies on Northshore and Cleveland-Cliffs for important operating and royalty information; Northshore had not provided a written certification concerning its disclosure controls, although the Trust said its own disclosure controls were effective.
Cleveland-Cliffs announced it intended to redeem approximately $211 million of its senior notes due 2020 for about $220 million, using its cash. This concerns the parent/operator, not debt of Mesabi Trust. The Trust also reported a court ruling upholding Cleveland-Cliffs’ Nashwauk land acquisition; the filing does not describe a direct change to the Trust’s royalty arrangements from that ruling.
Most important facts for investors to verify
- Subsequent Northshore shipment volumes, realized pellet prices, and final contract-price adjustments, especially any negative adjustments.
- Cash royalties actually received versus accrued income and contract assets, and how receipts affect future distributions.
- Trustee distribution and reserve decisions; six-month declared distributions were lower year over year despite higher net income.
- The filing gives inconsistent July 31, 2017 reserve comparisons: one passage states $19,359,141, while a table reports $19,530,547. Verify the intended comparative figure.
- Whether Cleveland-Cliffs’ announced debt redemption and Nashwauk developments affect Northshore’s operations or the information available to the Trust.