Mesabi Trust 10-Q for FY2023 Q1
Mesabi Trust (MSB)
About this 10-Q
Mesabi Trust filed this 10-Q on June 13, 2022, covering the quarter ended April 30, 2022 (FY2023 Q1).
Headline figures
Quarter ended April 30, 2022, as reported in this filing, compared with the same period a year earlier where the filing states it.
- Revenue
- $14.2M
- up 51.0% from $9.4M a year earlier
- Net income
- $13.6M
- up 58.6% from net income of $8.57M a year earlier
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number:
(Exact name of registrant as specified in its charter)
| ||
(State or other jurisdiction of incorporation or organization) | | (I.R.S. Employer Identification No.) |
| | |
c/o Deutsche Bank Trust Company Americas Trust & Agency Services | | |
(Address of principal executive offices) | | (Zip Code) |
(
(Registrant’s telephone number, including area code)
Not applicable
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class |
| Trading Symbol(s) | Name of each exchange on which registered |
|
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer ☐ | | Accelerated Filer ☐ |
| Smaller Reporting Company | |
| | Emerging Growth Company |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes
As of June 10, 2022, there were
TABLE OF CONTENTS
Forward-Looking Statements
Certain information included in this Quarterly Report on Form 10-Q contains, or incorporates by reference, not only historical information, but also “forward-looking statements” within the meaning of Section 21E of the Securities Exchange Act of 1934. All such forward-looking statements, including those statements regarding estimation of iron ore pellet production, shipments, pricing, royalties and other matters, are based on information from the lessee/operator (and its parent corporation) of the mine located on the lands owned and held in trust for the benefit of the holders of units of beneficial interest of Mesabi Trust (“Mesabi Trust” or the “Trust”). These statements may be identified by the use of forward-looking words, such as “may,” “will,” “could,” “project,” “predict,” “intend,” “believe,” “anticipate,” “expect,” “estimate,” “continue,” “potential,” “plan,” “should,” “assume,” “forecast” and other similar words. Such forward-looking statements are inherently subject to known and unknown risks and uncertainties. Actual results and future developments could differ materially from the results or developments expressed in or implied by these forward-looking statements. These risks and uncertainties include, but are not limited to, volatility of iron ore and steel prices, market supply and demand, competition, environmental hazards, health and safety conditions, regulation or government action, litigation, uncertainties about estimates of reserves, general adverse business and industry economic trends, uncertainties arising from war, terrorist events and other global events, higher or lower customer demand for steel and iron ore, decisions by mine operators regarding curtailments or idling production lines or entire plants, environmental compliance uncertainties, difficulties in obtaining and renewing necessary operating permits, higher imports of steel and iron ore substitutes, processing difficulties, consolidation and restructuring in the domestic steel market, market inputs tied to indexed price adjustment factors found in Cliffs’ Customer Contracts (as defined below) resulting in future adjustments to royalties payable to Mesabi Trust, and other factors. Further, substantial portions of royalties earned by Mesabi Trust are based on estimated prices that are subject to interim and final adjustments, which can be positive or negative, and are dependent in part on multiple price and inflation index factors under agreements to which Mesabi Trust is not a party and that are not known until after the end of a contract year. It is possible that future negative price adjustments could partially or even completely offset royalties or royalty income that would otherwise be payable to the Trust in any particular quarter, or at year-end, thereby potentially reducing cash available for distribution to the Trust’s Unitholders (as defined below) in future quarters.
For a discussion of the factors, including without limitation, those that could materially and adversely affect Mesabi Trust’s actual results and performance, see “Risk Factors” set forth on pages 4 through 16 of Mesabi Trust’s Annual Report for the year ended January 31, 2022, as updated by Part II, Item 1A of this Quarterly Report on Form 10-Q. These risks and uncertainties are not exclusive and further information concerning the Trust, including factors that potentially could materially affect our operating results, financial condition or the market price of the Units, may emerge from time to time. Mesabi Trust undertakes no obligation, other than that imposed by law, to make any revisions to the forward-looking statements contained in this filing or to update them to reflect circumstances occurring after the date of this filing. We advise you, however, to consult any further disclosures we make on related subjects in our future Quarterly Reports on Form 10-Q, Annual Reports on Form 10-K and Current Reports on Form 8-K that we file with or furnish to the Securities and Exchange Commission.
2
PART I – FINANCIAL INFORMATION
Item 1. Financial Statements. (Note 1)
Mesabi Trust
Condensed Statements of Operations
Three Months Ended April 30, 2022 and 2021
| | Three Months Ended | | ||||
| | April 30, | | ||||
|
| 2022 |
| 2021 |
| ||
| | (unaudited) | | (unaudited) | | ||
A. Condensed Statements of Operations | | | | | | | |
| | | | | | | |
Revenues | | | | | | | |
Royalty income |
| $ | |
| $ | | |
Interest | |
| | |
| | |
| |
| | |
| | |
Total revenues | |
| | |
| | |
| | | | | | | |
Expenses |
| | |
| | | |
| | | | | | | |
Net income |
| $ | |
| $ | | |
| | | | | | | |
WEIGHTED AVERAGE NUMBER OF UNITS OUTSTANDING | | | | | | | |
Number of units outstanding | | | | | | | |
| | | | | | | |
Net income per unit (Note 2) | | $ | | | $ | | |
| | | | | | | |
Distributions declared per unit (Note 3) | | $ | | | $ | | |
See Notes to Condensed Financial Statements.
3
Mesabi Trust
Condensed Balance Sheets
April 30, 2022 and January 31, 2022
| | | | | | | |
|
| April 30, 2022 |
| January 31, 2022 |
| ||
| | (unaudited) | | | | | |
B. Condensed Balance Sheets | | | | | | | |
| | | | | | | |
Assets | | | | | | | |
| | | | | | | |
Cash and cash equivalents | | $ | | | $ | | |
| | | | | | | |
Accrued income receivable | |
| | |
| | |
Contract asset | | | | | | | |
Prepaid expenses | |
| | |
| | |
Current assets | |
| | |
| | |
| | | | | | | |
Fixed property, including intangibles, at nominal values | | | | | | | |
Assignments of leased property | | | | | | | |
| | | | | | | |
Amended assignment of Peters Lease | |
| | |
| | |
| | | | | | | |
Assignment of Cloquet Leases | |
| | |
| | |
| | | | | | | |
Certificate of beneficial interest for | |
| | |
| | |
| |
| | |
| | |
| | | | | | | |
Total assets | | $ | | | $ | | |
| | | | | | | |
Liabilities, Unallocated Reserve And Trust Corpus | | | | | | | |
| | | | | | | |
Liabilities | | | | | | | |
Distribution payable | | $ | | | $ | | |
Accrued expenses | |
| | |
| | |
Total liabilities | |
| | |
| | |
| | | | | | | |
Unallocated reserve | |
| | |
| | |
| | | | | | | |
Trust corpus | |
| | |
| | |
| | | | | | | |
Total liabilities, unallocated reserve and trust corpus | | $ | | | $ | | |
See Notes to Condensed Financial Statements.
4
Mesabi Trust
Condensed Statements of Cash Flows
Three Months Ended April 30, 2022 and 2021
| | Three Months Ended |
| ||||
| | April 30, | | ||||
|
| 2022 |
| 2021 |
| ||
| | | (unaudited) | | | (unaudited) | |
C. Condensed Statements of Cash Flows | | | | | | | |
| | | | | | | |
Operating activities | | | | | | | |
Royalties received | | $ | | | $ | | |
Interest received | |
| | |
| | |
Expenses paid | |
| ( | |
| ( | |
| | | | | | | |
Net cash from operating activities | |
| | |
| | |
| | | | | | | |
Investing activities | | | | | | | |
Maturities of U.S. Government securities | |
| — | |
| | |
Purchases of U.S. Government securities | |
| — | |
| ( | |
| | | | | | | |
Net cash from investing activities | |
| — | |
| | |
| | | | | | | |
Financing activity | | | | | | | |
Distributions to unitholders | |
| ( | |
| ( | |
| | | | | | | |
Net change in cash and cash equivalents | |
| ( | |
| ( | |
| | | | | | | |
Cash and cash equivalents, beginning of period | |
| | |
| | |
| | | | | | | |
Cash and cash equivalents, end of period | | $ | | | $ | | |
| | | | | | | |
Reconciliation of net income to net cash from operating activities | | | | | | | |
| | | | | | | |
Net income | | $ | | | $ | | |
Decrease (increase) in accrued income receivable | |
| | |
| ( | |
Decrease (increase) in contract asset | | | ( | | | | |
Decrease in prepaid expense | |
| | |
| | |
Increase (decrease) in accrued expenses | |
| | |
| ( | |
Increase in contract liability | | | — | | | | |
| | | | | | | |
Net cash from operating activities | | $ | | | $ | | |
| | | | | | | |
Non cash financing activity | | | | | | | |
| | | | | | | |
Distributions declared and payable | | $ | | | $ | | |
See Notes to Condensed Financial Statements.
5
Mesabi Trust
Notes to Condensed Financial Statements
April 30, 2022 (Unaudited)
Note 1. The financial statements and notes to the financial statements included herein have been prepared in accordance with the instructions to Form 10-Q pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted pursuant to such rules and regulations. In the opinion of the Trustees, all adjustments, consisting only of normal recurring adjustments, necessary for a fair statement of (a) the results of operations for the three months ended April 30, 2022 and 2021, (b) the financial position as of April 30, 2022 and (c) the cash flows for the three months ended April 30, 2022 and 2021, have been made. For further information, refer to the financial statements and footnotes included in Mesabi Trust’s Annual Report on Form 10-K for the year ended January 31, 2022.
Note 2. Net income per unit is based on
The Trust accounts for revenue in accordance with ASC 606, Revenue from Contracts with Customers. All revenue is recognized as the performance obligations are satisfied. In accordance with the royalty agreement, the Trust recognizes revenue upon providing access to the lands and minerals only after the consideration that is entitled to be received is determinable. Historically, the Trust was not considered entitled to consideration for base and bonus royalties until product was shipped from Northshore. After the outcome of the 2021 arbitration, Cliffs changed its payment and pricing practices to deem the Trust entitled to payment upon production of all pellet grades to be sold for internal use by facilities owned by Cliffs or its subsidiaries. Due to this change in practice, for revenue recognition purposes, the Trust now recognizes revenue for internal use pellets upon production of those pellets, which is when Cliffs deems these pellets to be shipped under the royalty agreement. Pellets that are not designated for internal use by Cliffs, or its subsidiaries, continues to be recognized as revenue upon shipment from Silver Bay, Minnesota.
Disaggregation of Revenues
The following tables represent a disaggregation of revenue for the three months ended April 30, 2022 and April 30, 2021.
| | Three Months Ended April 30, | ||||
| | 2022 | | 2021 | ||
Base overriding royalties | | $ | |
| $ | |
Bonus royalties | |
| | |
| |
Fee royalties | |
| | |
| |
Total royalty income | | $ | |
| $ | |
Base overriding royalties
The performance obligation for the base overriding royalty consists of providing Northshore access to the Peters Lands, Cloquet Lands, and Mesabi Lands and the right to mine on these lands. The consideration to be received from this access relates to the volume of iron ore actually shipped to third parties, or deemed shipped upon production for internal use, by Northshore. Cliffs considers pellets designated for internal use by Cliffs to be “deemed shipped” upon production, entitling the Trust to payment under the provisions of the royalty agreement at this time. Mesabi Trust receives royalties at the greater of (i) the aggregate quantity of iron ore products shipped, or deemed shipped, that were mined from Mesabi Trust Lands, and (ii) a portion of the aggregate quantity of all iron ore products shipped, or deemed shipped, that were mined from any lands, such portion being
6
recognizes base overriding royalties on a quarterly basis based on the actual third party shipments and deemed shipments for internal use, for the fiscal quarter at the estimated royalty percentage as described above and based on the estimated prices for iron ore products sold under Cliffs’ Customer Contracts.
Bonus royalties
The performance obligation for the bonus royalties consists of providing Northshore access to the Peters Lands, Cloquet Lands, and Mesabi Lands and the right to mine on these lands and the consideration to be received from this access relates to the volume of iron ore shipped, or deemed shipped, by Northshore. The Trust recognizes bonus royalties on a quarterly basis based on the actual third party shipments and deemed shipments for internal use, of the fiscal quarter at the actual royalty percentage for those shipments and based on the anticipated prices for iron ore products sold under Cliffs’ Customer Contracts.
Fee royalties
The fee royalties consists of the volume of crude ore mined on a quarterly basis. The Trust recognizes fee royalties on a quarterly basis based on the actual crude ore mined during the fiscal quarter.
Accrued income receivable
The accrued income receivable is included in net income per unit. The Trust recorded $
Contract asset and contract liability
The contract asset and contract liability are presented net in the accompanying condensed balance sheets as both the contract asset and contract liability are derived from
Note 3. The Trustees determine whether to declare a distribution each year in April, July, October and January. The Trust’s financial statements are prepared on an accrual basis and present the Trust’s results of operations based on each of the Trust’s fiscal quarters, which end
Note 4. On April 15, 2022, the Trustees declared a distribution of $
On April 29, 2022, the Trustees received the quarterly royalty report of iron ore product during the calendar quarter ended March 31, 2022 from Cliffs, the parent company of Northshore.
Each quarter, as authorized by the Agreement of Trust dated July 18, 1961, as amended (the “Agreement of Trust”), the Trustees evaluate all relevant factors, including all costs, expenses, obligations, and present and future liabilities of the Trust
7
(whether fixed or contingent) in determining the prudent level of unallocated reserve in light of the unpredictable nature of the iron ore industry and current economic conditions.
Pursuant to the Agreement of Trust, the Trustees make decisions about cash distributions to Unitholders based on the royalty payments it receives from Northshore when received, rather than as royalty income is recorded in accordance with the Trust’s revenue recognition policy. Refer to Note 3 for further information.
As of April 30, 2022 and January 31, 2022, the unallocated cash and U.S. Government securities portion of the Trust’s Unallocated Reserve was comprised of the following components:
| | April 30, 2022 | | January 31, 2022 | | ||
Cash and U.S. Government securities | | $ | | | $ | | |
Distribution payable | |
| ( | |
| ( | |
| | | | | | | |
Unallocated cash and U.S. Government securities | | $ | | | $ | | |
A reconciliation of the Trust’s Unallocated Reserve and Trust Corpus for the three months ended April 30, 2022 and 2021 is as follows:
| | | Unallocated | | | Trust | | | | |
| | | Reserve | | | Corpus | | | Total | |
Balances as of January 31, 2022 |
| $ | | | $ | | | $ | |
|
| | | | | | | | | | |
Net income | |
| | |
| — | |
| | |
Distributions declared - $ | |
| ( | |
| — | |
| ( | |
| | | | | | | | | | |
Balances as of April 30, 2022 | | $ | | | $ | | | $ | | |
| | | Unallocated | | | Trust | | | |
| | | Reserve | | | Corpus | | | Total |
Balances as of January 31, 2021 |
| $ | | | $ | | | $ | |
| | | | | | | | | |
Net income | |
| | |
| — | |
| |
Distributions declared - $ | |
| ( | |
| — | |
| ( |
| | | | | | | | | |
Balances as of April 30, 2021 | | $ | | | $ | | | $ | |
8
Item 2. Trustees’ Discussion and Analysis of Financial Condition and Results of Operations.
This discussion should be read in conjunction with the condensed financial statements and notes presented in this Quarterly Report on Form 10-Q and the financial statements and notes in the last filed Annual Report on Form 10-K for the year ended January 31, 2022 for a full understanding of Mesabi Trust’s financial position and results of operations for the three months ended April 30, 2022.
All references in this discussion and in this Quarterly Report on Form 10-Q to iron ore products “shipped” shall include iron ore products that Cliffs actually ships from Silver Bay, Minnesota and/or iron ore products Cliffs deems shipped upon production. Similarly, all references in this discussion and in this Quarterly Report on Form 10-Q to “shipments” shall include Cliffs’ actual shipments of iron ore products and/Cliffs’ production of iron ore products it deems shipped. After the outcome of the 2021 arbitration, Cliffs changed its payment and pricing practices to deem the Trust entitled to payment upon production of all pellet grades to be sold for internal use by facilities owned by Cliffs or its subsidiaries. Due to this change in practice, for revenue recognition purposes, the Trust now recognizes revenue for internal use pellets upon production of those pellets, which is when Cliffs deems these pellets to be shipped under the royalty agreement. Pellets that are not designated for internal use by Cliffs, or its subsidiaries, continues to be recognized as revenue upon shipment from Silver Bay, Minnesota.
Background
Mesabi Trust, formed pursuant to the Agreement of Trust, is a trust organized under the laws of the State of New York. Mesabi Trust holds all of the interests formerly owned by Mesabi Iron Company (“MIC”), including all right, title and interest in the Amendment of Assignment, Assumption and Further Assignment of Peters Lease (the “Amended Assignment of Peters Lease”), the Amendment of Assignment, Assumption and Further Assignment of Cloquet Lease (the “Amended Assignment of Cloquet Lease” and together with the Amended Assignment of Peters Lease, the “Amended Assignment Agreements”), the beneficial interest in a trust organized under the laws of the State of Minnesota to administer the Mesabi Fee Lands (as defined below) as the trust corpus in compliance with the laws of the State of Minnesota on July 18, 1961 (the “Mesabi Land Trust”) and all other assets and property identified in the Agreement of Trust. The Amended Assignment of Peters Lease relates to an Indenture made as of April 30, 1915 among East Mesaba Iron Company (“East Mesaba”), Dunka River Iron Company (“Dunka River”) and Claude W. Peters (the “Peters Lease”) and the Amended Assignment of Cloquet Lease relates to an Indenture made May 1, 1916 between Cloquet Lumber Company and Claude W. Peters (the “Cloquet Lease”).
The Agreement of Trust specifically prohibits the Trustees from entering into or engaging in any business. This prohibition applies even to business activities the Trustees may deem necessary or proper for the preservation and protection of the Trust Estate. Accordingly, the Trustees’ activities in connection with the administration of Trust assets are limited to collecting income, paying expenses and liabilities, distributing net income to the holders of Certificates of Beneficial Interest in Mesabi Trust (“Unitholders”) after the payment of, or provision for, such expenses and liabilities, and protecting and conserving the assets held by the Trust.
The Trustees do not intend to expand their responsibilities beyond those permitted or required by the Agreement of Trust, the Amendment to the Agreement of Trust dated October 25, 1982 (the “Amendment”), and those required under applicable law. Mesabi Trust has no employees, but it engages independent consultants to assist the Trustees in, among other things, monitoring the volume and sales prices of iron ore products shipped, based on information supplied to the Trustees by Northshore, the lessee/operator of the lands leased under the Peters Lease and Cloquet Lease (the “Peters Lease Lands” and “Cloquet Lease Lands,” respectively) and the 20% fee interest of certain lands that are particularly described in, and subject to a mining lease under, the Peters Lease (the “Mesabi Fee Lands,” and together with the Peters Lease Lands and Cloquet Lease Lands, the “Mesabi Trust Lands”), and its parent company, Cliffs. References to Northshore in this quarterly report, unless the context requires otherwise, are applicable to Cliffs as well.
Leasehold royalty income constitutes the principal source of the Trust’s revenue. The income of the Trust is highly dependent upon the activities and operations of Northshore. Royalty rates and the resulting royalty payments received by the Trust are determined in accordance with the terms of the Trust’s leases and assignments of leases.
Three types of royalties, as well as royalty bonuses, comprise the Trust’s leasehold royalty income:
| ● | Base overriding royalties. Base overriding royalties have historically constituted the majority of the Trust’s royalty income. Base overriding royalties are determined by both the volume and selling price of iron ore products shipped. Northshore is obligated to pay the Trust base overriding royalties in varying amounts, based on the volume of iron ore products shipped. Base overriding royalties are calculated as a percentage of the gross proceeds of iron ore products produced at Mesabi Trust Lands (and to a limited extent other lands) and shipped. The percentage ranges from 2-1/2% of the gross proceeds for the first one million tons of iron ore products shipped annually to 6% of the gross proceeds for all iron ore products in excess of four million tons so shipped annually. Base overriding royalties are subject to interim and final price adjustments under some of the contracts among Northshore, Cliffs and certain of their customers (the “Cliffs’ Customer Contracts”) and, as described elsewhere in this report, such adjustments may be positive or negative. |
9
| ● | Royalty bonuses. The Trust earns royalty bonuses when iron ore products shipped are sold at prices above a threshold price per ton. The royalty bonus is based on a percentage of the gross proceeds of product shipped. The threshold price is adjusted (but not below $30.00 per ton) on an annual basis for inflation and deflation (the “Adjusted Threshold Price”). The Adjusted Threshold Price was $58.58 per ton for calendar year 2021 and is $62.03 per ton for calendar year 2022. The royalty bonus percentage ranges from 1/2 of 1% of the gross proceeds (on all tonnage shipped for sale at prices between the Adjusted Threshold Price and $2.00 above the Adjusted Threshold Price) to 3% of the gross proceeds (on all tonnage shipped for sale at prices $10.00 or more above the Adjusted Threshold Price). Royalty bonuses are subject to price adjustments under Cliffs’ Customer Contracts and, as described elsewhere in this report, such adjustments may be positive or negative. |
| ● | Fee royalties. Fee royalties have historically constituted a smaller component of the Trust’s total royalty income. Fee royalties are payable to the Mesabi Land Trust, a Minnesota land trust, which holds a 20% interest as fee owner in the Amended Assignment of Peters Lease. Mesabi Trust holds the entire beneficial interest in the Mesabi Land Trust for which U.S. Bank N.A. acts as the corporate trustee. Mesabi Trust receives the net income of the Mesabi Land Trust, which is generated from royalties on the amount of crude ore mined after the payment of expenses to U.S. Bank N.A. for its services as the corporate trustee. Crude ore is the source of iron oxides used to make iron ore pellets and other products. The fee royalty on crude ore is based on an agreed price per ton, subject to certain indexing. |
| ● | Minimum advance royalties. Northshore’s obligation to pay base overriding royalties and royalty bonuses with respect to the sale of iron ore products generally accrues upon the shipment of those products. However, regardless of whether any shipment has occurred, Northshore is obligated to pay to Mesabi Trust a minimum advance royalty. Each year, the amount of the minimum advance royalty is adjusted (but not below $500,000 per annum) for inflation and deflation. The minimum advance royalty was $976,765 for calendar year 2021 and is $1,034,237 for calendar year 2022. Until overriding royalties (and royalty bonuses, if any) for a particular year equal or exceed the minimum advance royalty for the year, Northshore must make quarterly payments of up to 25% of the minimum advance royalty for the year. Because minimum advance royalties are essentially prepayments of base overriding royalties and royalty bonuses earned each year, any minimum advance royalties paid in a fiscal quarter are recouped by credits against base overriding royalties and royalty bonuses earned in later fiscal quarters during the year. |
The current royalty rate schedule became effective on August 17, 1989 pursuant to the Amended Assignment Agreements, which the Trust entered into with Cyprus Northshore Mining Corporation (“Cyprus NMC”). Pursuant to the Amended Assignment Agreements, overriding royalties are determined by both the volume and selling price of iron ore products shipped. In 1994, Cyprus NMC was sold by its parent corporation to Cliffs and renamed Northshore Mining Company. Cliffs now operates Northshore as a wholly owned subsidiary.
Under the relevant agreements, Northshore has the right to mine and ship iron ore products from lands other than Mesabi Trust Lands. Northshore alone determines whether to conduct mining operations on Mesabi Trust Lands and/or such other lands based on its current mining and engineering plan. The Trustees do not exert any influence over mining operational decisions. To encourage the use of iron ore products from Mesabi Trust Lands, Mesabi Trust receives royalties on stated percentages of iron ore shipped, whether or not the iron ore products are from Mesabi Trust Lands. Mesabi Trust receives royalties at the greater of (i) the aggregate quantity of iron ore products shipped that were mined from Mesabi Trust Lands, and (ii) a portion of the aggregate quantity of all iron ore products shipped that were mined from any lands, such portion being 90% of the first four million tons shipped during such year, 85% of the next two million tons shipped during such year, and 25% of all tonnage shipped during such year in excess of six million tons. The royalty percentage paid to the Trust increases as the aggregate tonnage of iron ore products shipped, attributable to the Trust, in any calendar year increases past each of the first four one-million ton volume thresholds. Assuming a consistent sales price per ton throughout a calendar year, shipments of iron ore product attributable to the Trust later in the year generate a higher royalty to the Trust, as total shipments for the year exceed increasing levels of royalty percentages and pass each of the first four one-million ton volume thresholds.
During the course of its fiscal year, some portion of royalties expected to be paid to Mesabi Trust is based in part on estimated prices for certain iron ore products sold under some of the Cliffs’ Customer Contracts. Some of the Cliffs’ Customer Contracts use estimated prices which are subject to interim and final pricing adjustments, which can be positive or negative, and which adjustments are dependent in part on multiple price and inflation index factors that are not known until after the end of a contract year. Even though Mesabi Trust is not a party to the Cliffs’ Customer Contracts, these adjustments can result in significant variations in royalties payable to Mesabi Trust (and, in turn, the resulting amount available for distribution to Unitholders by the Trust) from quarter to quarter and on a comparative historical basis, and these variations, which can be positive or negative, cannot be predicted by the Trust. In either case, these price adjustments will impact future royalties payable to the Trust and, in turn, will impact cash reserves that may become available for distribution to Unitholders.
According to Cliffs’ SEC filings, certain of Cliffs’ third party customer supply agreements specify provisional price calculations, where the pricing mechanisms generally are based on market pricing, with the final revenue rate based on certain market inputs at a specified period in time in the future, per the terms of the supply agreements. Market inputs are tied to indexed price adjustment factors that are integral to the iron ore supply contracts and vary based on the agreement. The pricing adjustments generally operate in the same manner, with each factor typically comprising a portion of the price adjustment, although the weighting
10
of each factor varies based upon the specific terms of each agreement. The price adjustment factors have been evaluated to determine if they qualify as embedded derivatives. The price adjustment factors share the same economic characteristics and risks as the host sales contract and are integral to the host sales contract as inflation adjustments; accordingly, they have not been separately valued as derivative instruments.
A portion of royalties expected to be paid to the Trust each year is also based on “spot“ sales of iron ore products sold by Northshore and Cliffs, where pricing is basically set at a fixed rate.
As also described elsewhere in this report, the Trust receives a bonus royalty equal to a percentage of the gross proceeds of iron ore products (mined from Mesabi Trust lands) shipped and sold at prices above the Adjusted Threshold Price. Although 99.5% of all the iron ore products shipped during calendar 2021 was sold at prices higher than the Adjusted Threshold Price, the Trustees are unable to project whether Cliffs will continue to be able to sell iron ore products at prices above the applicable Adjusted Threshold Price, entitling the Trust to any future bonus royalty payments.
Deutsche Bank Trust Company Americas, the Corporate Trustee of Mesabi Trust, performs certain administrative functions for Mesabi Trust. The Trust maintains a website at www.mesabi-trust.com. The Trust makes available (free of charge) its annual, quarterly and current reports (and any amendments thereto) filed with the SEC through its website as soon as reasonably practicable after electronically filing or furnishing such material with or to the SEC.
Results of Operations
Comparison of Iron Ore Pellet Production and Shipments for the Three Months Ended April 30, 2022 and April 30, 2021
As shown in the table below, during the three months ended April 30, 2022, production of iron ore pellets at Northshore from Mesabi Trust Lands totaled 906,952 tons, and shipments over the same period totaled 906,952 tons. By comparison, pellet production and shipments for the comparable period in 2021 were 1,129,383 tons and 547,704 tons, respectively. The decrease in production is attributable to the anticipated future demand from Northshore’s customers as compared to the prior period. The increase in shipments is attributable to the anticipated current demand from Northshore’s customers as compared to the prior comparable period. For the three months ended April 30, 2022, approximately 99.7% of shipments originated from Trust lands.
|
| Pellets Produced from |
| Pellets Shipped from |
|
| | Trust Lands | | Trust Lands |
|
Three Months Ended | | (Tons) | | (Tons) |
|
April 30, 2022 |
| 906,952 |
| 906,952 | |
April 30, 2021 | | 1,129,383 | | 547,704 | |
Comparison of Royalty Income for the Three Months Ended April 30, 2022 and April 30, 2021
As reflected in the table below, the Trust’s total royalty income for the three months ended April 30, 2022 increased by $4,793,322 to $14,195,489 as compared to the three months ended April 30, 2021. The increase in total royalty income is due to an increase in pricing and shipments of iron ore during the three months ended April 30, 2022, as compared to the three months ended April 30, 2021.
The table below shows that the base overriding royalties increased $2,593,068 and the bonus royalties increased by $2,149,986 for the three months ended April 30, 2022, as compared to the three months ended April 30, 2021. Fee royalties increased by $50,268 over the same period. The increase in the base overriding royalties and bonus royalties is attributable to an increase in pricing of iron ore and shipments as compared to the prior comparable period. The increase in the fee royalty amount is due to an increase in the amount of iron ore mined under the Peters Lease as well as an increase in the royalty rate in the current fiscal quarter as compared to the prior comparable period.
The table below summarizes the components of Mesabi Trust’s total royalty income for the three months ended April 30, 2022 and April 30, 2021, respectively:
| | Three Months Ended April 30, | | ||||
| | 2022 | | 2021 | | ||
Base overriding royalties | | $ | 8,232,221 |
| $ | 5,639,153 | |
Bonus royalties | |
| 5,722,327 | |
| 3,572,341 | |
Fee royalties | |
| 240,941 | |
| 190,673 | |
Total royalty income | | $ | 14,195,489 |
| $ | 9,402,167 | |
11
Comparison of Net Income, Expenses and Distributions for the Three Months Ended April 30, 2022 and April 30, 2021
Net income for the three months ended April 30, 2022 was $13,595,185, an increase of $5,021,315 as compared to the three months ended April 30, 2021. The increase in net income for the three months ended April 30, 2022 was primarily the result of an increase in pricing of iron ore and amount of shipments as compared to the three months ended April 30, 2021. The Trust’s expenses for the three months ended April 30, 2022 were $601,063, a decrease of $227,718 compared to the expenses for the three months ended April 30, 2021. The decrease in expenses was primarily attributable to a decrease in legal fees and expenses related to the arbitration that was completed during the fiscal year ended January 31, 2022. The table below summarizes the Trust’s income and expenses for the three months ended April 30, 2022 and April 30, 2021, respectively.
| | Three Months Ended April 30, |
| ||||
| | 2022 | | 2021 |
| ||
Total royalty income |
| $ | 14,195,489 |
| $ | 9,402,167 | |
Interest income | |
| 759 | |
| 484 | |
Total revenues | |
| 14,196,248 | |
| 9,402,651 | |
Expenses | |
| 601,063 | |
| 828,781 | |
Net income |
| $ | 13,595,185 |
| $ | 8,573,870 | |
As presented on the “Trust’s Condensed Statements of Operations” on page 3 of this quarterly report, the Trust’s net income per unit increased $0.3827 per unit to $1.0362 per unit for the fiscal quarter ended April 30, 2022 as compared to the fiscal quarter ended April 30, 2021. On April 15, 2022, the Trust declared a distribution of $1.04 per unit payable on May 20, 2022 to Unitholders of record on April 30, 2022. Comparatively, the Trust declared a distribution of $0.89 per unit to Unitholders in April 2021.
On a quarterly basis, the Trustees review a variety of financial and economic data and information impacting the Trust, and upon the Trustees’ determination, distributions may be declared approximately ten weeks after the Trustees receive a quarterly royalty report from Northshore and Cliffs and the Trust receives the actual royalty payment with respect to royalty income that is payable for iron ore shipments through the end of each prior calendar quarter. Royalty payments may include pricing adjustments with respect to shipments made during prior periods. The Trust accounts for and reports accrued income receivable based on shipments during the last month of each of the Trust’s fiscal quarters (April, July, October and January) and price adjustments under Cliffs’ Customer Contracts (which can be positive or negative and can result in significant variations in royalties received by Mesabi Trust and cash available for distribution to Unitholders) as reported to the Trust by Northshore. The Trust accounts for these amounts by using estimated prices and reports such amounts even though accrued income receivable is not available for distribution to Unitholders until it is received by the Trust. Accordingly, distributions declared by the Trust are not equivalent to the Trust’s net income during the periods reported in this quarterly report on Form 10-Q.
Comparison of Unallocated Reserve as of April 30, 2022, April 30, 2021 and January 31, 2022
As set forth in the table below, Unallocated Reserve increased from $13,374,107 as of April 30, 2021 to $30,745,124 as of April 30, 2022. The increase in Unallocated Reserve as of April 30, 2022, as compared to April 30, 2021, is primarily the result of an increase in the unallocated cash and U.S. Government securities and contract asset. The increase in the unallocated cash and U.S. Government securities is attributable to an increase in royalties received in the first quarter of 2022 as compared to the first quarter of 2021. The increase in the contract asset is the result of revenue recognized on the base overriding royalties as the uncertainty associated with the variable consideration is resolved over the course of the calendar year.
| | April 30, | | % increase | | ||||
|
| 2022 |
| 2021 |
| (decrease) | | ||
Accrued Income Receivable | | $ | 2,313,994 | | $ | 5,612,832 |
| (58.8)% | |
Contract Asset | | | 4,402,490 | | | — | | 100.0% | |
Unallocated Cash and U.S. Government Securities | | | 24,221,207 | | | 10,052,951 |
| 140.9% | |
Prepaid Expenses and (Accrued Expenses), net | |
| (192,567) | |
| (167,537) |
| 14.9% | |
Contract Liability | | | — | | | (2,124,139) | | (100.0)% | |
Unallocated Reserve | | $ | 30,745,124 | | $ | 13,374,107 |
| 129.9% | |
It is possible that future negative price adjustments could offset, or even eliminate, future royalties or royalty income that would otherwise be payable to the Trust in any particular quarter, or at year end, thereby potentially reducing cash available for distribution to the Trust’s Unitholders in future quarters. See the discussion under the heading “Risk Factors” beginning on page 4 of the Trust’s Annual Report on Form 10-K for the fiscal year ended January 31, 2022 (filed April 27, 2022), as updated by Part II, Item 1A of this Quarterly Report on Form 10-Q.
The Trust’s Unallocated Reserve as of April 30, 2022 decreased by $49,625 to $30,745,124, as compared to the fiscal year ended January 31, 2022. The decrease in the Unallocated Reserve as of April 30, 2022, as compared to January 31, 2022, is primarily the result of a decrease in the unallocated cash and U.S. Government securities and accrued income receivable. The decrease in the unallocated cash and U.S. Government securities is attributable to a decrease in royalties received in the first quarter of 2022 as
12
compared to the fourth quarter of 2021. The decrease in the accrued income receivable portion of the Unallocated Reserve is attributable to a decrease in shipments for the month ended April 30, 2022 as compared to the month ended January 31, 2022.
| | | | | | | | % increase |
|
|
| April 30, 2022 |
| January 31, 2022 |
| (decrease) | | ||
Accrued Income Receivable | | $ | 2,313,994 | | $ | 4,631,510 |
| (50.0)% | |
Contract Asset | | | 4,402,490 | | | 1,431,633 |
| 207.5% | |
Unallocated Cash and U.S. Government Securities | |
| 24,221,207 | |
| 24,767,504 | | (2.2)% | |
Prepaid Expenses and (Accrued Expenses), net | | | (192,567) | | | (35,898) |
| 436.4% | |
Unallocated Reserve | | $ | 30,745,124 | | $ | 30,794,749 |
| (0.2)% | |
Each quarter, as authorized by the Agreement of Trust, the Trustees will reevaluate all relevant factors including all costs, expenses, obligations, and present and future liabilities of the Trust (whether fixed or contingent) in determining a prudent level of unallocated reserve in light of the unpredictable nature of the iron ore industry, current and projected future mining operations and current economic conditions. Although the actual amount of the Unallocated Reserve will fluctuate from time to time and may increase or decrease from its current level, it is currently anticipated that future distributions will be highly dependent upon royalty income as it is received and the level of Trust expenses. The amount of future royalty income available for distribution will be subject to the volume of iron ore product shipments and the dollar level of sales by Northshore. Shipping activity is greatly reduced during the winter months. The current idling of Northshore operations, which commenced May 1, 2022 and will continue until at least Fall 2022 and maybe beyond according to Cliffs, will reduce the Trust’s royalty income. Economic conditions, particularly those affecting the iron ore and steel industry arising from the COVID-19 pandemic, may adversely affect the amount and timing of such future shipments and sales. The Trustees will continue to monitor the economic and other circumstances of the Trust to strike a responsible balance between distributions to Unitholders and the need to maintain adequate reserves at a prudent level, given the unpredictable nature of the iron ore and steel industry, the Trust’s dependence on the actions of the lessee/operator, and the fact that the Trust essentially has no other liquid assets.
Recent Developments
Receipt of Quarterly Royalty Report and Royalty Payment
On April 29, 2022, the Trustees of Mesabi Trust received the quarterly royalty report of iron ore shipments out of Silver Bay, Minnesota during the quarter ended March 31, 2022 (the “Royalty Report”) from Cliffs, the parent company of Northshore, the owner.
As reported to Mesabi Trust by Cliffs in the Royalty Report, based on shipments of iron ore products by Northshore during the three months ended March 31, 2022, Mesabi Trust was credited with a base royalty of $6,032,086. For the three months ended March 31, 2022, Mesabi Trust was also credited with a bonus royalty in the amount of $7,055,223. The royalty payment received on April 29, 2022 also included an increase of $176,283 as a result of positive pricing adjustments to base and bonus royalty calculations related to changes in price estimates made in prior quarters. In addition, a royalty payment of $278,850 was paid to the Mesabi Land Trust. Accordingly, the total royalty payments received by Mesabi Trust on April 29, 2022 from Cliffs were $13,542,442.
The royalties paid to Mesabi Trust are based on the volume of iron ore pellets and other products produced or shipped during the quarter and the year to date, the pricing of iron ore product sales, and the percentage of iron ore pellet production and shipments from Mesabi Trust lands rather than from non-Mesabi Trust lands. In the first calendar quarter of 2022, Cliffs credited Mesabi Trust with 1,069,456 tons of iron ore shipped, as compared to 919,457 tons shipped during the first calendar quarter of 2021.
The volume of shipments of iron ore pellets (and other iron ore products) by Northshore varies from quarter to quarter and year to year based on a number of factors, including the requested delivery schedules of customers, general economic conditions in the iron ore industry, and weather conditions on the Great Lakes. Further, the prices under certain of Cliffs’ Customer Contracts, to which Mesabi Trust is not a party, are subject to interim and final pricing adjustments, dependent in part on multiple price and inflation index factors, some of which are not known until after the end of a contract year. These multiple factors can result in significant variations in royalties received by Mesabi Trust (and in turn, the resulting funds available for distribution to Unitholders by Mesabi Trust) from quarter to quarter and from year to year. These variations, which can be positive or negative, cannot be predicted by the Trustees of Mesabi Trust. Royalty payments anticipated to be received during the current year will continue to reflect pricing estimates for shipments of iron ore products that will be subject to positive or negative pricing adjustments. Based on the above factors, and as indicated by Mesabi Trust’s historical distribution payments, the royalties received by Mesabi Trust, and the distributions paid to Unitholders, if any, in any particular quarter are not necessarily indicative of royalties that will be received, or distributions that will be paid, if any, in any subsequent quarter or full year.
With respect to calendar year 2022, neither Northshore nor Cliffs has advised Mesabi Trust of its expected production or shipments of iron ore products, or what percentage of 2022 shipments will be from Mesabi Trust iron ore.
13
In the Cliffs’ Royalty Report, Cliffs stated that the royalty payments reported April 29, 2022 were based on estimated iron ore pellet prices under the Cliffs Pellet Agreements, which are subject to change. It is possible that future negative price adjustments could offset, or even eliminate, royalties or royalty income that would otherwise be payable to Mesabi Trust in any particular quarter, or at year end, thereby potentially reducing cash available for distribution to Mesabi Trust’s Unitholders in future quarters.
Commencement of Idling at Northshore Mining Company
As previously projected by Cliffs, on May 1, 2022 Cliffs commenced the idling of Northshore Mining Company at its operations in Babbitt and Silver Bay, Minnesota. Cliffs’ previous disclosures announced the idling would be for approximately four months, until at least fall 2022, and maybe beyond. This current idling of Northshore operations will reduce the Trust’s royalty income which, in turn, will reduce funds available for cash distributions to Unitholders.
Mesabi Trust Distribution Announcement
On April 15, 2022, the Trustees of Mesabi Trust declared a distribution of one dollar and four cents ($1.04) per Unit of Beneficial Interest payable on May 20, 2022 to Mesabi Trust Unitholders of record at the close of business on April 30, 2022. The distribution was paid as announced.
The amount of the Trust’s distribution declared in its April 15, 2022 announcement also reflected the Trustees’ determination that Mesabi Trust had sufficient cash reserves available to make such a distribution, while also increasing the Trust’s level of unallocated reserves in order for the Trust to be positioned to meet current and future expenses, and present and future liabilities (whether fixed or contingent) that may arise, including expenses that would be incurred by the Trust during any potentially prolonged period of idling of Northshore Mining operations based on Cliffs’ announcement to idle Northshore’s operations starting Spring 2022 and continuing through at least Fall 2022, and maybe beyond. The Trustees’ April 2022 determination to increase the Trust’s unallocated reserve also accounted for numerous other considerations, including uncertainties resulting from Cliffs’ announcement to make Northshore a swing operation as Cliffs’ Minorca operation becomes increasingly utilized, potential volatility in the iron ore and steel industries generally, national and global economic uncertainties, possible further disturbances from global unrest and potential impacts from possible further outbreaks of the coronavirus (COVID-19) pandemic.
Important Factors Affecting Mesabi Trust
The Agreement of Trust specifically prohibits the Trustees from entering into or engaging in any business. This prohibition seemingly applies even to business activities the Trustees deem necessary or proper for the preservation and protection of the Trust’s assets. Accordingly, the Trustees’ activities in connection with the administration of Trust assets are limited to collecting income, paying expenses and liabilities, distributing net income to Mesabi Trust’s Unitholders after the payment of, or provision for, such expenses and liabilities, monitoring royalties and protecting and conserving the held assets.
Neither Mesabi Trust nor the Trustees have any control over the operations and activities of Northshore, except within the framework of the Amended Assignment of Peters Lease. Cliffs alone controls (i) historical operating data, including iron ore production volumes, decisions to reduce or idle the Northshore plant and mining operations, marketing of iron ore products, operating and capital expenditures as they relate to Northshore, environmental and other liabilities and the effects of regulatory changes; (ii) plans for Northshore’s future operating and capital expenditures; (iii) geological data relating to ore reserves; (iv) projected production of iron ore products; (v) contracts between Cliffs and Northshore with their customers; and (vi) the decision to mine off Mesabi Trust and/or state lands, based on Cliffs’ current mining and engineering plan. The Trustees do not exert any influence over mining operational decisions at Northshore, nor do the Trustees provide any input regarding the ore reserve estimated at Northshore as reported by Cliffs. While the Trustees request relevant information from Cliffs and Northshore in accordance with the royalty agreement for use in periodic reports as part of their evaluation of Mesabi Trust’s disclosure controls and procedures, the Trustees do not control this information and they rely on the information in Cliffs’ periodic and current filings with the SEC to provide accurate and timely information in Mesabi Trust’s reports filed with the SEC.
In accordance with the Agreement of Trust and the Amendment, the Trustees are entitled to, and in fact do, rely upon certain experts in good faith, including (i) the independent consultants with respect to monthly production and shipment reports, which include figures on crude ore production and iron ore pellet shipments, and discussions concerning the condition and accuracy of the scales and plans regarding the development of Mesabi Trust’s mining property; and (ii) the accounting firm they have contracted with for non-audit services, including reviews of financial data related to shipping and sales reports provided by Northshore and a review of the schedule of leasehold royalties payable to Mesabi Trust.
For a discussion of additional factors, including but not limited to those that could adversely affect Mesabi Trust’s actual results and performance, see “Risk Factors” set forth on pages 4 through 16 of Mesabi Trust’s Annual Report on Form 10-K for the fiscal year-ended January 31, 2022 (filed April 27, 2022).
14
Iron Ore Pricing and Contract Adjustments
During the course of its fiscal year some portion of the royalties paid to Mesabi Trust is based in part on estimated prices for certain iron ore products sold under some of the Cliffs’ Customer Contracts. Mesabi Trust is not a party to any of the Cliffs’ Customer Contracts. These prices are subject to interim and final pricing adjustments, which can be positive or negative, and which adjustments are dependent in part on a variety of price and inflation index factors, including but not limited to various benchmark pellet prices, hot band steel prices and various Producer Price Indexes. Although Northshore makes interim adjustments to the royalty payments on a quarterly basis, these price adjustments cannot be finalized until after the end of a contract year. This may result in significant and frequent variations in royalties received by Mesabi Trust (and in turn the resulting amount of funds available for distribution to Unitholders by the Trust) from quarter to quarter and on a comparative historical basis. These variations, which can be positive or negative, cannot be predicted by Mesabi Trust. It is possible that future negative price adjustments could partially or even completely offset royalties or royalty income that would otherwise be payable to the Trust in any particular quarter, or at year-end, thereby potentially reducing cash available for distribution to the Trust’s Unitholders in future quarters.
Effects of Securities Regulation
The Trust is a publicly traded, pass-through royalty trust with its Trust Certificates listed on the New York Stock Exchange (“NYSE”) and is therefore subject to extensive regulation under, among others, the Securities Act of 1933, the Securities Exchange Act of 1934, the Sarbanes-Oxley Act of 2002 (“Sarbanes-Oxley”), each as amended, and the rules and regulations of the NYSE. Issuers failing to comply with such authorities risk serious consequences, including criminal as well as civil and administrative penalties. In most instances, these laws, rules and regulations do not specifically address their applicability to a publicly-traded pass-through royalty trust such as Mesabi Trust. In particular, Sarbanes-Oxley mandated the adoption by the SEC and NYSE of certain rules and regulations that are impossible for the Trust to literally satisfy because of its nature as a pass-through royalty trust. Pursuant to NYSE rules, as a pass-through royalty trust, the Trust is exempt from many of the corporate governance requirements that apply to other publicly traded corporations. The Trust does not have, nor does the Agreement of Trust provide for, a board of directors, an audit committee, a corporate governance committee, a compensation committee or executive officers. The Trust has no employees. The Trustees closely monitor the SEC’s and NYSE’s rulemaking activities and will comply with their rules and regulations to the extent applicable.
The Trust’s website is located at www.mesabi-trust.com.
Critical Accounting Policies and Estimates
This “Trustees’ Discussion and Analysis of Financial Condition and Results of Operations” is based upon the Trust’s financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires the Trustees to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. These estimates form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. The Trustees base their estimates and judgments on historical experience and on various other assumptions that the Trustees believe are reasonable under the circumstances. However, because future events and their effects cannot be determined with certainty, actual results could differ from our assumptions and estimates, and such differences could be material. Critical accounting policies are those that have meaningful impact on the reporting of the Trust’s financial condition and results of operations, and that require significant judgment and estimates.
There have been no material changes in the Trust’s critical accounting policies or significant accounting estimates during the three months ended April 30, 2022. For a complete description of the Trust’s significant accounting policies, please see Note 2 to the financial statements included in the Trust’s Annual Report on Form 10-K for the year ended January 31, 2022 (filed April 27, 2022).
Certain Tax Information
The Trust is not taxable as a corporation for federal or state income tax purposes and is instead qualified as a nontaxable grantor trust. Since the Trust’s inception, all net taxable income is annually attributable directly to Unitholders for tax purposes regardless of whether the income is distributed or retained by the Trust in its reserve account. As such, in lieu of the Trust paying income taxes, Unitholders report their pro rata share of the various items of Trust income and deductions on their income tax returns. This reporting is required whether or not the earnings of the Trust are distributed as to Unitholders. During calendar year 2021, any funds retained to increase the Trust’s unallocated reserve, which were derived from reportable royalty income, will nonetheless become taxable as reportable income to Unitholders, depending on each individual’s personal tax situation. Information regarding the background on the changes in the Trust’s unallocated reserve is described above under “Results of Operations — Comparison of Unallocated Reserve as of April 30, 2022, April 30, 2021 and January 31, 2022” beginning on page 12. Unitholders are encouraged to consult with their own tax advisors to plan for any financial impact related to this and to review their personal tax situations related to investing in, holding or selling units of beneficial interest in Mesabi Trust.
15
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Not applicable.
Item 4. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures. The Trust maintains a system of disclosure controls and procedures designed to ensure that information required to be disclosed by the Trust in the reports that it furnishes or files under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the rules and regulations of the SEC. Due to the pass-through nature of the Trust, the Trust’s disclosure controls and procedures include controls and procedures designed to ensure that information required to be disclosed by the Trust is received from Cliffs and its wholly-owned subsidiary, Northshore. In order to help ensure the accuracy and completeness of the information required to be disclosed in the Trust’s periodic and current reports, the Trust employs certified public accountants, geological consultants, and attorneys. These professionals hired by the Trust advise the Trust in its review and compilation of the information in this Form 10-Q and the other periodic reports filed by the Trust with the SEC.
As part of their evaluation of Mesabi Trust’s disclosure controls and procedures, the Trustees rely on quarterly shipment and royalty calculations provided by Northshore and Cliffs. Because Northshore has declined to provide a written certification attesting to whether Northshore has established disclosure controls and procedures and internal controls sufficient to enable it to verify that the information furnished to the Trustees is accurate and complete, the Trustees also rely on (a) an annual certification from Northshore and Cliffs, certifying as to the accuracy of the royalty calculations, and (b) the related due diligence review performed by the Trust’s accountants. In addition, Mesabi Trust’s consultants review the schedule of leasehold royalties payable, and shipping and sales reports provided by Northshore against production and shipment reports prepared by Eveleth Fee Office, Inc., an independent consultant to Mesabi Trust (“Eveleth Fee Office”). Eveleth Fee Office performs inspections of the Northshore mine and its pelletizing operations, observes production and shipping activities, gathers production and shipping information from Northshore and prepares monthly production and shipment reports for the Trustees. Furthermore, as part of its engagement by Mesabi Trust, Eveleth Fee Office also attends Northshore’s calibration and testing of its crude ore scales and boat loader scales which are conducted on a periodic basis.
As of the end of the period covered by this report, the Trustees carried out an evaluation of Mesabi Trust’s disclosure controls and procedures. Based on this evaluation, the Trustees have concluded that such disclosure controls and procedures are effective.
Changes in Internal Control over Financial Reporting. To the knowledge of the Trustees, there were no changes in the Trust’s internal control over financial reporting that occurred during the Trust’s last fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Trust’s internal control over financial reporting. The Trustees note for purposes of clarification that they have no authority over, and make no statement concerning, the internal controls of Northshore or Cliffs.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
None.
Item 1A. Risk Factors
The following Risk Factors supplement the Trust’s Risk Factors as described in “Risk Factors” as set forth in pages 4 to 16 of Mesabi Trust’s Annual Report on Form 10-K for the fiscal year ended January 31, 2022 (filed April 27, 2022).
Cliffs’ announced intentions to shift DR-grade pellet production away from Northshore, use Northshore as a swing operation and idle Northshore operations from time to time, including from Spring to at least Fall of 2022 (which commenced May 1, 2022), will, if and when each is implemented, reduce royalty income and, in turn, will reduce or potentially eliminate, funds available for distribution to unit holders.
On October 22, 2021, Cliffs, parent of Northshore, the lessee/operator of the leased lands upon which Mesabi Trust is dependent for its royalties, held a conference call to discuss its third-quarter 2021 earnings. During the call, Lourenco Goncalves, Chairman, President, Chief Executive Officer of Cliffs, disclosed “…we will soon be shifting our DR-grade pellet production away from Northshore and into Minorca, where we will not have to deal with the unreasonable royalty structure at Northshore.” Mr. Goncalves also indicated that “As we plan to no longer sell pellets to third parties in the coming years, Northshore will become a swing operation, which we will keep idle every time we decided to do so. In any event, we will continue to be able to feed our Toledo plant with a consistent feed of DR-grade pellets but from Minorca and not from Northshore.”
16
On February 11, 2022, Cliffs held a conference call to discuss Cliffs’ full year and fourth-quarter 2021 earnings. During the call, Lourenco Goncalves disclosed “…with the use of additional scrap in our BOF’s [basic oxygen furnaces], our iron ore needs are not as high as before, and we no longer need to run our mines full out. When determining where to adjust production, our first look is at our cost structure. Because we are now able to produce DR-grade pellets at Minorca, and mainly due to the ridiculous royalty structure we have in place with the Mesabi Trust, we will be idling all production at our Northshore mine, starting in the Spring, carrying through at least to the Fall period, and maybe beyond. At Northshore, no production, no shipments, no royalty payments. We also acknowledge that our strategy to stretch hot metal, by adding increased amounts of scrap to the BOF’s is working extremely well. With more scrap in the BOF’s, we need fewer tons of hot metal to produce the same tonnage of liquid steel. As a consequence, the Northshore idle could go longer than currently planned.”
During Cliffs’ February 11, 2022 earnings call, Mr. Goncalves also said that, “Going forward, [Cliffs] will be limiting the tonnage of iron ore pellets we sell to third parties.”
Cliffs’ most recent Form 10-K for the fiscal year ended December 31, 2021 (filed with the SEC on February 11, 2022, the same day as Cliffs’ earnings call announcement about idling Northshore from spring to at least the fall period), described the planned idling at Northshore as follows:
“As announced in February 2022, it is anticipated that the Northshore mine will be temporarily idled for approximately four months during 2022.”
On May 1, 2022, Cliffs commenced the idling of Northshore Mining Company at its operations in Babbitt and Silver Bay, Minnesota, which will continue until at least Fall 2022 and maybe beyond, according to Cliffs. The current idling of Northshore operations will reduce the Trust’s royalty income which, in turn, will reduce funds available for cash distributions to unitholders.
Cliffs had not previously notified the Trust of any of the aforementioned operational changes. Separately, Cliffs had not recently requested any changes to the royalty structure and has historically failed to engage in meaningful negotiations requested by Mesabi Trust to address the interpretation of the royalty structure. Pursuant to the Agreement of Trust, any change to the royalty structure would require an amendment to the royalty agreement, which would require the approval of the Trustees as well as approval of 66 2/3% in interest of the Trust Certificate Holders.
Under the Royalty Agreement, Northshore’s obligation to pay base overriding royalties and royalty bonuses with respect to the sale or use of iron ore products generally accrues upon production or shipment of those products from Silver Bay. However, regardless of whether any shipment has occurred, Northshore is obligated to pay to Mesabi Trust a minimum advance royalty. Each year, the amount of the minimum advance royalty is adjusted (but not below $500,000 per annum) for inflation and deflation. The minimum advance royalty was $949,295 for calendar year 2019, $964,659 for calendar year 2020 and $976,765 for calendar year 2021.
Operational decisions about when, how often and for how long to idle Northshore operations are solely in the control of Cliffs and Northshore. The Trustees are not notified in advance of such decisions to idle Northshore operations, and the Trustees cannot predict the frequency or duration of such idling events.
Accordingly, the announced future plans, if and when implemented by Cliffs, as well as the current idling could have a material adverse effect on Mesabi Trust’s future royalty revenue and could materially reduce or potentially eliminate funds available for cash distributions. In addition, the market price of the Trust’s Units, which are listed for trading on the New York Stock Exchange, could be negatively impacted, and the Trust’s ability to continue to meet the continued listing criteria of the NYSE could be compromised, and could result in delisting of our Units.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None.
Item 3. Defaults upon Senior Securities
None.
Item 4. Mine Safety Disclosures
None.
17
Item 5. Other Information
Mine Safety and Health Administration Safety Data. Pursuant to §1503(a) of the Dodd-Frank Wall Street Reform and Consumer Protection Act, Cliffs started reporting information related to certain mine safety results at Northshore. This information is available in Part II, Item 4 of Cliffs’ Quarterly Report on Form 10-Q for the quarter ended March 31, 2022, filed with the SEC on April 26, 2022.
18
Item 6. Exhibits.
(a)Exhibits
The following exhibits are being filed or furnished with this Quarterly Report on Form 10-Q:
Exhibit No. |
| Exhibit |
| Filing Method |
| | | | |
31 | | | Filed herewith | |
| | | | |
32 | | | Furnished herewith | |
| | | | |
99.1 | | | Filed herewith | |
| | | | |
101 | | Inline XBRL Instance Document | | Filed herewith |
| | | | |
104 | | Cover Page Interactive Data File | | Embedded within the Inline XBRL document and contained in Exhibit 101 |
19
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| MESABI TRUST | ||
| (Registrant) | ||
| | ||
| By: | DEUTSCHE BANK TRUST COMPANY AMERICAS | |
| | Corporate Trustee | |
| Principal Administrative Officer and duly authorized signatory:* | ||
| | | |
| | | |
| | | |
June 13, 2022 | | By: | /s/ Chris Niesz |
| | Name: Chris Niesz* | |
| | Title: Vice President | |
* There are no principal executive officers or principal financial officers of the registrant.
20
Exhibit 31
CERTIFICATION
I, Chris Niesz, certify that:
1. | I have reviewed this quarterly report on Form 10-Q of Mesabi Trust, for which Deutsche Bank Trust Company Americas acts as Corporate Trustee; |
2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, distributable income and changes in trust corpus of the registrant as of, and for, the periods presented in this report; |
4. | I am responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)), or for causing such controls and procedures and internal control over financial reporting to be established and maintained, for the registrant and have: |
a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under my supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to me by others within those entities, particularly during the period in which this report is being prepared;
b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under my supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report my conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. I have disclosed, based on my most recent evaluation of internal control over financial reporting, to the registrant’s auditors:
a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b) any fraud, whether or not material, that involves persons who have a significant role in the registrant’s internal control over financial reporting.
In giving the foregoing certifications in paragraphs 4 and 5, I have relied to the extent I consider reasonable on information provided to me by Northshore Mining Company/Cleveland-Cliffs Inc. and Eveleth Fee Office, Inc.
Date: June 13, 2022 | By: | /s/ Chris Niesz |
| | Chris Niesz* |
| | Vice President |
| | Deutsche Bank Trust Company Americas |
| | Corporate Trustee |
* There are no principal executive officers or principal financial officers of the registrant.
1
Exhibit 32
PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
I, the Corporate Trustee of Mesabi Trust, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to the best of my knowledge, the Quarterly Report of Mesabi Trust on Form 10-Q for the quarter ended April 30, 2022 fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that information contained in such Form 10-Q fairly presents in all material respects the financial condition and results of operations of Mesabi Trust.
/s/ Chris Niesz | | June 13, 2022 |
Chris Niesz* | | |
Vice President | | |
Deutsche Bank Trust Company Americas | | |
Corporate Trustee | | |
* There are no principal executive officers or principal financial officers of the registrant.
1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Unitholders and Trustees of
Mesabi Trust
Results of Review of Interim Financial Statements
We have reviewed the accompanying condensed balance sheet of Mesabi Trust (the “Trust”) as of April 30, 2022, and the related condensed statements of operations and cash flows for the three month periods ended April 30, 2022 and 2021, and the related notes (collectively referred to as the “interim financial statements”). Based on our reviews, we are not aware of any material modifications that should be made to the accompanying condensed financial statements referred to above for them to be in conformity with accounting principles generally accepted in the United States of America.
We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the balance sheet of the Trust as of January 31, 2022, and the related statements of operations, unallocated reserve and trust corpus, and cash flows for the year then ended (not presented herein); and in our report dated April 27, 2022, we expressed an unqualified opinion on those financial statements. In our opinion, the information set forth in the accompanying condensed balance sheet as of January 31, 2022, is fairly stated, in all material respects, in relation to the balance sheet from which it has been derived.
Basis for Review Results
These condensed interim financial statements are the responsibility of the Trust's Trustees. We conducted our review in accordance with the standards of the PCAOB. A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the PCAOB, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.
/s/ Baker Tilly US, LLP
Minneapolis, Minnesota
June 13, 2022
1