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MSB > SEC Filings for MSB > Form 10-Q on 6-Sep-2013All Recent SEC Filings

Show all filings for MESABI TRUST

Form 10-Q for MESABI TRUST


6-Sep-2013

Quarterly Report


Item 2. Trustees' Discussion and Analysis of Financial Condition and Results
of Operations.

Forward-Looking Statements

Certain information included in this Quarterly Report on Form 10-Q contains "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 and pricing, 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. 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 and uncertainties about estimates of reserves. 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 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 3 through 8 of Mesabi Trust's Annual Report on Form 10-K for the year ended January 31, 2013, as updated by Part II, Item 1A of this Quarterly Report on Form 10-Q. 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.

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 filed for the period ended January 31, 2013 for a full understanding of Mesabi Trust's financial position and results of operations for the six month period ended July 31, 2013.

Background

Mesabi Trust ("Mesabi Trust" or the "Trust"), formed pursuant to an Agreement of Trust dated July 18, 1961 (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.

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 from Silver Bay, Minnesota, 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 Natural Resources Inc. ("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 the Trust lands (and to a limited extent other lands) and shipped from Silver Bay, Minnesota. The percentage ranges from 2-1/2% of the gross proceeds for the first one million tons of iron ore products so shipped annually to 6% of the gross proceeds for all iron ore products in excess of 4 million tons so shipped annually. Base overriding royalties are impacted by, among other things, price adjustments under the Cliffs Pellet Agreements and, as described elsewhere in this report, such adjustments may be positive or negative.

Royalty bonuses. The Trust earns royalty bonuses when iron ore products shipped from Silver Bay 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 from Silver Bay and sold at prices above a threshold price. 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 $50.65 per ton for calendar year 2012 and is $51.55 per ton for calendar year 2013. 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 iron ore tonnage shipped for sale at prices $10.00 or more above the Adjusted Threshold Price). Royalty bonuses are subject to price adjustments under the Cliffs Pellet Agreements 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 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 from Silver Bay. However, regardless of whether any shipment has occurred, under the terms of the Amended Assignment Agreements, Northshore is obligated to pay to the 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 in accordance with the Amended Assignment Agreements. The minimum advance royalty was $844,452 for calendar year 2012 and is $859,429 for calendar year 2013. 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.

Under the relevant documents, Northshore may mine and ship iron ore products from lands other than Mesabi Trust lands. Northshore is obligated to make quarterly royalty payments to the Trust in January, April, July and October of each year based on shipments of iron ore products from Silver Bay, Minnesota during each calendar quarter. In the case of base overriding royalties and royalty bonuses, these quarterly royalty payments are to be made whether or not the related proceeds of sale have been received by Northshore by the time such payments become due. Northshore alone determines whether to mine off Trust 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 mining of iron ore products


from Mesabi Trust lands, Mesabi Trust receives royalties, in part, based on the greater of the following two methods of calculating royalty payments, (i) the aggregate quantity of iron ore products shipped that were produced using iron ore mined from Mesabi Trust lands, and (ii) a portion of the aggregate quantity of all iron ore products shipped from Silver Bay that were mined from any lands, such portion being 90% of the first four million tons shipped from Silver Bay during the calendar year, 85% of the next two million tons shipped during the calendar year, and 25% of all tonnage shipped from Silver Bay 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 iron ore products sold under term contracts between Northshore, Cliffs and certain of their customers (the "Cliffs Pellet Agreements"). The Cliffs Pellet Agreements 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 Pellet Agreements, these adjustments can result in significant variations in royalties received by 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 Mesabi Trust. In either case, these price adjustments will impact future royalties received by the Trust that become available for distribution to Unitholders.

Deutsche Bank Trust Company Americas, the Corporate Trustee, 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 Securities and Exchange Commission (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 and Six Months Ended July 31, 2013 and July 31, 2012

As shown in the table below, production of iron ore pellets at Northshore from Mesabi Trust lands during the fiscal quarter ended July 31, 2013 totaled 928,983 tons, and shipments over the same period totaled 1,584,684 tons. By comparison, pellet production and shipments for the comparable period in 2012 were 1,290,272 tons and 1,717,287 tons, respectively. The decreases in production and shipments at Northshore in 2013, as compared to those during the comparable period in 2012, are the result of decreases in anticipated demand and actual orders from Cliffs' customers.

                       Pellets Produced from   Pellets Shipped from
Fiscal Quarter Ended    Trust Lands (tons)      Trust Lands (tons)
   July 31, 2013                     928,983              1,584,684
   July 31, 2012                   1,290,272              1,717,287

As shown in the table below, during the six months ended July 31, 2013, production of iron ore pellets at Northshore from Mesabi Trust lands totaled 1,862,420 tons, and shipments over the same period totaled 2,153,232 tons. By comparison, pellet production and shipments for the comparable period in 2012 were 2,689,734 tons and 2,406,730 tons, respectively. The decrease in shipments at Northshore for the six months ended July 31, 2013 is the result of decreases in orders from Cliffs' customers. For the six months ended July 31, 2013, approximately 89.8% of shipments from Silver Bay, Minnesota originated


from Trust lands, whereas during the same period in 2012 approximately 94.2% of shipments originated from Trust lands.

                   Pellets Produced from   Pellets Shipped from
Six Months Ended    Trust Lands (tons)      Trust Lands (tons)
 July 31, 2013                 1,862,420              2,153,232
 July 31, 2012                 2,689,734              2,406,730

Comparison of Royalty Income for the Three and Six Months Ended July 31, 2013 and July 31, 2012

Total royalty income for the fiscal quarter ended July 31, 2013 decreased by $3,225,447 to $7,834,425, as compared to the fiscal quarter ended July 31, 2012. The decrease in total royalty income is due to the lower average sales price per ton of iron ore pellets sold and the decrease in the total volume of iron ore pellets shipped during the three months ended July 31, 2013, each as compared to the three months ended July 31, 2012.

The table below shows that the base overriding royalties and the bonus royalties decreased by $1,953,592 and $1,194,958 respectively, for the three months ended July 31, 2013, as compared to the three months ended July 31, 2012. Fee royalties decreased by $76,897 over the same period. The decreases in the base overriding royalties and the bonus royalties are both attributable to lower sales prices per ton of iron ore pellets sold and the decrease in the volume of iron ore pellets shipped during the three months ended July 31, 2013, as compared to the three months ended July 31, 2012.

The table below summarizes the components of Mesabi Trust's royalty income for the three months ended July 31, 2013 and July 31, 2012, respectively:

                                              Three Months Ended July 31,
                                                 2013              2012
Base overriding royalties                   $     4,293,532    $  6,247,124
Bonus royalties                                   3,401,057       4,596,015
Minimum advance royalties paid (recouped)                 -               -
Fee royalties                                       139,836         216,733
Total royalty income                        $     7,834,425    $ 11,059,872

The Trust's total royalty income for the six months ended July 31, 2013 decreased by $4,390,151 to $10,362,842 as compared to the six months ended July 31, 2012. The decrease is the result of the lower average sales price per ton of iron ore pellets sold and the lower volume of iron ore pellets shipped.

The table below shows that the base overriding royalties, and the bonus royalties decreased by $2,482,697 and $1,766,081 to $5,355,166 and $4,713,416, respectively, and the fee royalties decreased by $141,373 to $294,260 for the six months ended July 31, 2013, from the comparable period in 2012. The decreases in the base overriding royalties and the bonus royalties are attributable to the lower sales price per ton of iron ore pellets sold and the decrease in the volume of iron ore pellets shipped as compared to the six months ended July 31, 2012.

The table below summarizes the components of Mesabi Trust's royalty income for the six months ended July 31, 2013 and July 31, 2012:


                                              Six Months Ended July 31,
                                                 2013            2012
Base overriding royalties                   $    5,355,166   $  7,837,863
Bonus royalties                                  4,713,416      6,479,497
Minimum advance royalties paid (recouped)                -              -
Fee royalties                                      294,260        435,633
Total royalty income                        $   10,362,842   $ 14,752,993

Comparison of Net Income, Expenses and Distributions for the Three and Six Months Ended July 31, 2013 and July 31, 2012

Net income for the fiscal quarter ended July 31, 2013 was $7,624,780, a decrease of $3,248,506 compared to the fiscal quarter ended July 31, 2012. The decrease in net income for the fiscal quarter ended July 31, 2013 was the result of the lower average sales price per ton of iron ore pellets sold and the decrease in the total volume of iron ore pellets shipped. The Trust's expenses increased by $22,997 to $209,935 for the fiscal quarter ended July 31, 2013, as compared to the fiscal quarter ended July 31, 2012, as a result of a slight increase in legal fees. The table below summarizes the Trust's income and expenses for the fiscal quarter ended July 31, 2013 and July 31, 2012, respectively.

                         Three Months Ended July 31,
                            2013              2012
Total royalty income   $     7,834,425    $ 11,059,872
Interest income                    290             352
Total revenues               7,834,715      11,060,224
Expenses                       209,935         186,938
Net income             $     7,624,780    $ 10,873,286

Net income for the six months ended July 31, 2013 was $9,827,169, a decrease of $4,416,009 as compared to the six months ended July 31, 2012. The decrease in net income for the six months ended July 31, 2013 was the result of the lower average sales price per ton of iron ore pellets sold and the decrease in the total volume of iron ore pellets shipped. The Trust's expenses of $536,353 for the six months ended July 31, 2013 increased when compared with the Trust's expenses for the six month period ended July 31, 2012. The primary factor resulting in the higher expenses was increased mining consultant fees. The table below summarizes the Trust's income and expenses for the six months ended July 31, 2013 and July 31, 2012, respectively.

                         Six Months Ended July 31,
                            2013            2012
Total royalty income   $   10,362,842   $ 14,752,993
Interest income                   680            677
Total revenues             10,363,522     14,753,670
Expenses                      536,353        510,492
Net income             $    9,827,169   $ 14,243,178

As presented on the Trust's Condensed Statements of Income on page 2 of this quarterly report, the Trust's net income per unit decreased by $0.2476 per unit to $0.5812 per unit for the fiscal quarter ended July 31, 2013, as compared to that during the comparable period in 2012. For the six months ended July 31, 2013, the Trust's net income per unit decreased by $0.3366 per unit to $0.7490 per unit, as


compared to that during the comparable period in 2012. On July 16, 2013, the Trust declared a distribution of $0.46 per unit payable to Unitholders of record on July 30, 2013. Comparatively, the Trust declared a distribution of $0.64 per unit to Unitholders in July 2012. During the six months ended July 31, 2013 and July 31, 2012, the Trust had declared total distributions per unit of $0.54 and $0.705, respectively.

Distributions are declared after receiving notification from Northshore as to the amount of royalty income that is expected to be paid to the Trust based on shipments through the end of each calendar quarter and such royalty payments may include pricing adjustments with respect to shipments 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 the Cliffs Pellet Agreements (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 July 31, 2013, July 31, 2012 and January 31, 2013

As set forth in the table below, Unallocated Reserve, which is comprised of accrued income receivable, unallocated cash and U.S. Government securities for potential fixed or contingent future liabilities, and prepaid expenses and accrued expenses decreased from $6,025,079 as of July 31, 2012 to $3,924,585 as of July 31, 2013. The decrease in Unallocated Reserve as of July 31, 2013, as compared to July 31, 2012, is the result of a decrease in the Trust's accrued income receivable. The decrease in the accrued income receivable portion of the Unallocated Reserve is the result of the reduction in shipments and lower sales prices per ton of iron ore pellets shipped for the month ended July 31, 2013, as compared to the month ended July 31, 2012. The decrease in the unallocated cash and U.S. Government securities for potential fixed or contingent future liabilities is due to the Trustee's decision to reduce the Trust's cash reserve in favor of distributions.

                                                          July 31,
                                                     2013          2012
Accrued Income Receivable                         $ 3,237,094   $ 5,116,862
Unallocated Cash and U.S. Government Securities       721,799     1,009,916
Prepaid Expenses and (Accrued Expenses) Net           (34,308 )    (101,699 )
Unallocated Reserve                               $ 3,924,585   $ 6,025,079

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 3 of the Trust's Annual Report on Form 10-K for the fiscal year ended January 31, 2013.

The Trust's Unallocated Reserve as of July 31, 2013 increased by $2,742,363 to $3,924,585, as compared to the fiscal year ended January 31, 2013. The increase in the Unallocated Reserve is due primarily to an increase in the Trust's accrued income receivable. As of July 31, 2013, the Trust's Unallocated Reserve consisted of $721,799 of unallocated cash and U.S. Government securities and $3,237,094 of accrued income receivable. At January 31, 2013, the Trust's Unallocated Reserve consisted of $942,526 in unallocated cash and U.S. Government securities and $218,053 of accrued


income receivable.

                                                        July 31, 2013      January 31, 2013
Accrued Income Receivable                              $     3,237,094    $          218,053
. . .
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