UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
| xQUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended October 31, 2015April 30, 2016
or
oTRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
|
For the transition period from to
Commission File Number: 1-4488
MESABI TRUST
(Exact name of registrant as specified in its charter)
New York | 13-6022277 | |
(State or other jurisdiction of |
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c/o Deutsche Bank Trust Company Americas | 10005 | |
(Address of principal executive offices) |
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(615)(904) 271-2520
(Registrant’s telephone number, including area code)
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. Yes x No o
Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files). Yes x No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act:
Large accelerated filero |
| Accelerated filerx | |
| |||
Non-accelerated filero |
| Smaller reporting company | o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x
As of December 7, 2015,June 1, 2016, there were 13,120,010 Units of Beneficial Interest in Mesabi Trust outstanding.
PART I - FINANCIAL INFORMATION
Item 1.Financial Statements. (Note 1)
Mesabi Trust
Condensed Statements of IncomeOperations
Three and Nine Months Ended October 31,April 30, 2016 and 2015 and 2014
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| Three Months Ended |
| Nine Months Ended |
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| October 31, |
| October 31, |
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| 2015 |
| 2014 |
| 2015 |
| 2014 |
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| (unaudited) |
| (unaudited) |
| (unaudited) |
| (unaudited) |
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A. | Condensed Statements of Income |
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| Revenues |
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| Royalty income |
| $ | 2,619,097 |
| $ | 11,780,502 |
| $ | 6,667,942 |
| $ | 20,139,905 |
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| Interest income |
| 2,468 |
| 2,256 |
| 6,993 |
| 6,647 |
| ||||
| Total revenues |
| 2,621,565 |
| 11,782,758 |
| 6,674,935 |
| 20,146,552 |
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| Expenses |
| 219,498 |
| 243,152 |
| 848,958 |
| 1,053,187 |
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| Net income |
| $ | 2,402,067 |
| $ | 11,539,606 |
| $ | 5,825,977 |
| $ | 19,093,365 |
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| Number of units outstanding |
| 13,120,010 |
| 13,120,010 |
| 13,120,010 |
| 13,120,010 |
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| Net income per unit (Note 2) |
| $ | 0.1831 |
| $ | 0.8795 |
| $ | 0.4441 |
| $ | 1.4553 |
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| Distributions declared per unit (Note 3) |
| $ | — |
| $ | 0.8800 |
| $ | 0.0400 |
| $ | 1.2000 |
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| Three Months Ended |
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| April 30, |
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| 2016 |
| 2015 |
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| (unaudited) |
| (unaudited) |
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A. Condensed Statements of Operations |
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Revenues |
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Royalty income |
| $ | — |
| $ | 1,315,953 |
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Interest income |
| 1,679 |
| 2,057 |
| ||
Total revenues |
| 1,679 |
| 1,318,010 |
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|
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Expenses |
| 431,931 |
| 377,744 |
| ||
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Net income (loss) |
| $ | (430,252 | ) | $ | 940,266 |
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Number of units outstanding |
| 13,120,010 |
| 13,120,010 |
| ||
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Net income (loss) per unit (Note 2) |
| $ | (0.0328 | ) | $ | 0.0717 |
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Distributions declared per unit (Note 3) |
| $ | 0.2000 |
| $ | — |
|
See Notes to Condensed Financial Statements.
Mesabi Trust
Condensed Balance Sheets
October 31, 2015April 30, 2016 and January 31, 20152016
|
| October 31, 2015 |
| January 31, 2015 |
| |||
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| (unaudited) |
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| |||
B. | Condensed Balance Sheets |
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| Assets |
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| Cash and cash equivalents |
| $ | 5,784,902 |
| $ | 8,717,943 |
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| U.S. Government securities, at amortized cost (which approximates market) |
| 633,700 |
| 510,573 |
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| Accrued income receivable |
| 355,567 |
| 558,385 |
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| Prepaid expenses |
| 92,712 |
| 54,957 |
| ||
| Current assets |
| 6,866,881 |
| 9,841,858 |
| ||
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| U.S. Government securities, at amortized cost (which approximates market) |
| 132,940 |
| 255,759 |
| ||
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| Fixed property, including intangibles, at nominal values |
|
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| Amended Assignment of Peters Lease |
| 1 |
| 1 |
| ||
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| Assignment of Cloquet Lease |
| 1 |
| 1 |
| ||
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| Certificate of beneficial interest for 13,120,010 units of land trust |
| 1 |
| 1 |
| ||
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| 3 |
| 3 |
| ||
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| Total Assets |
| $ | 6,999,824 |
| $ | 10,097,620 |
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| Liabilities, Unallocated Reserve and Trust Corpus |
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| Liabilities |
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| Distribution payable |
| $ | — |
| $ | 8,396,806 |
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| Accrued expenses |
| 87,520 |
| 89,687 |
| ||
| Total liabilities |
| 87,520 |
| 8,486,493 |
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| Unallocated Reserve (Note 4) |
| 6,912,301 |
| 1,611,124 |
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| Trust Corpus |
| 3 |
| 3 |
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| Total Liabilities, unallocated reserve and trust corpus |
| $ | 6,999,824 |
| $ | 10,097,620 |
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|
| April 30, 2016 |
| January 31, 2016 |
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| (unaudited) |
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B. Condensed Balance Sheets |
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Assets |
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Cash and cash equivalents |
| $ | 8,219,812 |
| $ | 2,587,165 |
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U.S. Government securities, at amortized cost (which approximates market) |
| 238,047 |
| 5,740,659 |
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Accrued income receivable |
| 1,295 |
| 978,146 |
| ||
Prepaid expenses |
| 60,423 |
| 54,930 |
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Current assets |
| 8,519,577 |
| 9,360,900 |
| ||
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U.S. Government securities, at amortized cost (which approximates market) |
| 373,430 |
| 456,058 |
| ||
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Fixed property, including intangibles, at nominal values |
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Amended Assignment of Peters Lease |
| 1 |
| 1 |
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Assignment of Cloquet Lease |
| 1 |
| 1 |
| ||
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Certificate of beneficial interest for 13,120,010 units of land trust |
| 1 |
| 1 |
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Total other assets |
| 3 |
| 3 |
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Total assets |
| $ | 8,893,010 |
| $ | 9,816,961 |
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Liabilities, Unallocated Reserve and Trust Corpus |
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Liabilities |
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Distribution payable |
| $ | 2,624,002 |
| $ | 656,001 |
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Accrued expenses |
| 77,031 |
| 171,793 |
| ||
Deferred royalty revenue (Note 4) |
| 257,064 |
| — |
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Total liabilities |
| 2,958,097 |
| 827,794 |
| ||
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Unallocated Reserve (Note 5) |
| 5,934,910 |
| 8,989,164 |
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Trust Corpus |
| 3 |
| 3 |
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Total liabilities, unallocated reserve and trust corpus |
| $ | 8,893,010 |
| $ | 9,816,961 |
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See Notes to Condensed Financial Statements.
Mesabi Trust
Condensed Statements of Cash Flows
NineThree Months Ended October 31,April 30, 2016 and 2015 and 2014
|
| Nine Months Ended |
| |||||
|
| October 31, |
| |||||
|
| 2015 |
| 2014 |
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|
| (unaudited) |
| (unaudited) |
| |||
C. | Condensed Statements of Cash Flows |
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| Cash flows from operating activities |
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| Royalties received |
| $ | 6,872,800 |
| $ | 16,895,966 |
|
| Interest received |
| 4,953 |
| 4,618 |
| ||
| Expenses paid |
| (888,880 | ) | (1,096,536 | ) | ||
|
|
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|
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| Net cash provided by operating activities |
| 5,988,873 |
| 15,804,048 |
| ||
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| Cash flows from investing activities |
|
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| Maturities of U.S. Government Securities |
| 82,320 |
| 105,000 |
| ||
| Sale of U.S. Government Securities |
| — |
| 100,056 |
| ||
| Purchases of U.S. Government Securities |
| (82,628 | ) | (205,447 | ) | ||
|
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| Net cash used for investing activities |
| (308 | ) | (391 | ) | ||
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| Cash flows used for financing activities |
|
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| Distributions to Unitholders |
| (8,921,606 | ) | (11,676,809 | ) | ||
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| Net change in cash and cash equivalents |
| (2,933,041 | ) | 4,126,848 |
| ||
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| Cash and cash equivalents, beginning of year |
| 8,717,943 |
| 7,719,963 |
| ||
|
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| Cash and cash equivalents, end of period |
| $ | 5,784,902 |
| $ | 11,846,811 |
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| Reconciliation of net income to net cash provided by operating activities |
|
|
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| ||
|
|
|
|
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| Net income |
| $ | 5,825,977 |
| $ | 19,093,365 |
|
| Decrease (increase) in accrued income receivable |
| 202,818 |
| (3,245,968 | ) | ||
| Increase in prepaid expenses |
| (37,755 | ) | (37,417 | ) | ||
| Decrease in accrued expenses |
| (2,167 | ) | (5,932 | ) | ||
|
|
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| Net cash provided by operating activities |
| $ | 5,988,873 |
| $ | 15,804,048 |
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| Non Cash Financing Activity |
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| Distributions payable |
| $ | — |
| $ | 11,545,608 |
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| Three Months Ended |
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|
| April 30, |
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|
| 2016 |
| 2015 |
| ||
|
| (unaudited) |
| (unaudited) |
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C. Condensed Statements of Cash Flows |
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Cash flows from operating activities |
|
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Royalties received |
| $ | 1,172,787 |
| $ | 853,153 |
|
Interest received |
| 1,574 |
| 19 |
| ||
Expenses paid |
| (470,953 | ) | (371,199 | ) | ||
|
|
|
|
|
| ||
Net cash provided by operating activities |
| 703,408 |
| 481,973 |
| ||
|
|
|
|
|
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Cash flows from investing activities |
|
|
|
|
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Maturities of U.S. Government Securities |
| 5,585,240 |
| 82,320 |
| ||
Purchases of U.S. Government Securities |
| — |
| (82,628 | ) | ||
|
|
|
|
|
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Net cash provided by (used for) investing activities |
| 5,585,240 |
| (308 | ) | ||
|
|
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|
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Cash flows used for financing activities |
|
|
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Distributions to Unitholders |
| (656,001 | ) | (8,396,806 | ) | ||
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|
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Net change in cash and cash equivalents |
| 5,632,647 |
| (7,915,141 | ) | ||
|
|
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Cash and cash equivalents, beginning of year |
| 2,587,165 |
| 8,717,943 |
| ||
|
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Cash and cash equivalents, end of period |
| $ | 8,219,812 |
| $ | 802,802 |
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Reconciliation of net income to net cash provided by operating activities |
|
|
|
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|
|
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|
|
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Net income (loss) |
| $ | (430,252 | ) | $ | 940,266 |
|
Decrease (increase) in accrued income receivable |
| 976,851 |
| (464,838 | ) | ||
Increase in prepaid expenses |
| (5,493 | ) | (917 | ) | ||
Increase (decrease) in accrued expenses |
| (94,762 | ) | 7,462 |
| ||
Increase in deferred royalty revenue |
| 257,064 |
| — |
| ||
|
|
|
|
|
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Net cash provided by operating activities |
| $ | 703,408 |
| $ | 481,973 |
|
See Notes to Condensed Financial Statements.
Mesabi Trust
Notes to Condensed Financial StatementsMESABI TRUST
October 31, 2015NOTES TO CONDENSED FINANCIAL STATEMENTS
April 30, 2016 (Unaudited)
Note 1. The financial statements included herein have been prepared without audit (except for the balance sheet at January 31, 2015)2016) in accordance with the instructions to Form 10-Q pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America 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, 2016 and nine months ended October 31, 2015, and 2014, (b) the financial position at October 31, 2015April 30, 2016, and (c) the cash flows for the ninethree months ended October 31,April 30, 2016 and 2015, and 2014, 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, 2015.2016.
Note 2. Net income (loss) per unit includes accrued income receivable. For the three months ended October 31, 2015,April 30, 2016, the Trust recorded $355,567$1,295 of accrued income receivable as reflected on the Condensed Balance Sheet as of October 31, 2015April 30, 2016 (unaudited). Accrued income, which is comprised entirely of interest receivable is accounted for and reported for the Trust’s third fiscal quarter based on shipments during the month of October, even though such accrued income receivable is not available for distribution to Unitholders until the applicable royalties are actually received by the Trust.U.S. Government securities. Accrued income receivable also includes accruals for anticipated pricing adjustments, which can be positive or negative. As of April 30, 2016, anticipated pricing adjustments were negative and have been classified under deferred royalty revenue. See Note 4. Net income (loss) per unit is based on 13,120,010 units outstanding during the period.
Note 3. The Trust declares distributions (if any) each year in April, July, October and January. Distributions are declared after receiving notification from Northshore Mining Company (“Northshore”) as to the amount of royalties expected to be paid to the Trust in cash based on shipments through the end of each calendar quarter. The Trust’s financial statements are prepared on an accrual basis and present the Trust’s results of operations based on each fiscal quarter which ends one month after the close of each calendar quarter. Because (i) distributions, if any, are declared by the Trustees based on, among other considerations, the royalty payment that is payable asamount of royalties actually paid to the Trust through the end of each calendar quarter prior to April, July, October and January of each year, the Trustees’ evaluation of known and projected Trust expenses in the current and future quarters, the then-current level of Unallocated Reserve and general economic conditions, and (ii) the Trust’s Net Income (Loss) is calculated as of the end of each fiscal quarter, the distributions declared by the Trust are not equivalent to the Trust’s Net Income (Loss) during the periods reported in this quarterly report on Form 10-Q.
Note 4. During recent periods, the Trustees had determined that Mesabi Trust’s unallocated reserve should usually be within the range of $500,000 to $1,000,000. In April 2015,2016, the Trustees determinedTrust received its quarterly royalty payment from Northshore Mining Company (“Northshore”) of approximately $1,173,000. In accordance with the Trust’s revenue recognition policy, the cash royalty payment received by the Trust exceeded the royalty revenue earned, and the Trust has recorded a liability for the excess cash received in the amount of $195,731 as of April 30, 2016. It is possible this deferred royalty revenue may offset future royalty payments to be received from NMC for any shipments that occur in future quarters of this fiscal year. In addition, the unallocated reserve will no longer necessarily be within such range. Rather, eachTrust has recorded a liability for the anticipated negative pricing adjustments on unconsumed iron ore pellets at January 31, 2016 in the amount of $61,333 for the quarter ending April 30, 2016. It is possible this deferred revenue may offset anticipated pricing adjustments in future quarters.
Note 5. Each quarter, as authorized by the Agreement of Trust, the Trustees will reevaluateevaluate all relevant factors including all costs, expenses, obligations, and present and future liabilities of the Trust (whether known or contingent) in determining athe prudent level of unallocated reserve in light
of the unpredictable nature of the iron ore industry and current economic conditions. Accordingly, 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 expected that future distributions will be highly dependent upon royalty payments, if any, received quarterlyin the prior quarter, and the level of Trust expenses that the Trustees anticipate occurringwill occur in subsequent quarters. Pursuant to the Agreement of Trust, the Trust makesTrustees 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.
Note 4. (continued)
As of October 31, 2015April 30, 2016 and January 31, 2015,2016, the unallocated cash and U.S. Government securities portion of the Trust’s Unallocated Reserve was comprised of the following components:
|
| October 31, 2015 |
| January 31, 2015 |
|
| April 30, 2016 |
| January 31, 2016 |
| ||||
Cash and U.S. Government securities |
| $ | 6,551,542 |
| $ | 9,484,275 |
|
| $ | 8,831,289 |
| $ | 8,783,882 |
|
Distribution payable |
| — |
| (8,396,806 | ) |
| (2,624,002 | ) | (656,001 | ) | ||||
|
|
|
|
|
|
|
|
|
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Unallocated cash and U.S. Government securities |
| $ | 6,551,542 |
| $ | 1,087,469 |
|
| $ | 6,207,287 |
| $ | 8,127,881 |
|
A reconciliation of the Trust’s Unallocated Reserve from January 31, 20152016 to October 31, 2015April 30, 2016 is as follows:
Unallocated Reserve, January 31, 2015 |
| $ | 1,611,124 |
|
|
|
|
| |
Net income, nine months ended October 31, 2015 |
| 5,825,977 |
| |
Distributions declared |
| (524,800 | ) | |
|
|
|
| |
Unallocated Reserve, October 31, 2015 |
| $ | 6,912,301 |
|
Unallocated Reserve, January 31, 2016 |
| $ | 8,989,164 |
|
|
|
|
| |
Net loss |
| (430,252 | ) | |
Distributions declared |
| (2,624,002 | ) | |
|
|
|
| |
Unallocated Reserve, April 30, 2016 |
| $ | 5,934,910 |
|
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 andor 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,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 119 of Mesabi Trust’s Annual Report on Form 10-K for the year endedyear-ended January 31, 2015, as updated by Part II, Item 1A of this Quarterly Report on Form 10-Q.2016. 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, 20152016 for a full understanding of Mesabi Trust’s financial position and results of operations for the ninethree month period ended October 31, 2015.April 30, 2016.
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 on July 18, 1961 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 Trustthe Trust’s assets are limited to collecting income, paying expenses and liabilities of the Trust, 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.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 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“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 Mesabi 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 (defined below) 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 isbonuses are calculated 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 $52.31 per ton for calendar year 2014 and is $53.01 per ton for calendar year 2015.2015 and is $53.80 per ton for calendar year 2016. 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.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 $872,156 for calendar year 2014 and is $883,875 for calendar year 2015.2015 and is $897,008 for calendar year 2016. Until base 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 by the 30th day 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 Mesabi Trust lands and/or such other lands, based on its current mining and engineering plan. The Trustees do not exert any influence over Northshore’s 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,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 itsthe Trust’s 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 Nine Months Ended October 31,April 30, 2016 and April 30, 2015 and October 31, 2014
As shown in the table below, production of iron ore pellets at Northshore from Mesabi Trust lands during the fiscal quarter ended October 31, 2015April 30, 2016 totaled 1,090,483zero tons, and actual shipments over the same period totaled 1,039,580zero tons. By comparison, actual pellet production and actual shipments for the comparable prior period in 2014 were 1,201,9491,195,260 tons and 1,929,060340,868 tons, respectively. The decreasesdecrease in production andat Northshore, as compared to the prior comparable period, is the result of a decrease in demand from Northshore’s customers. The decrease in shipments at Northshore is the result of a decrease in demand from Northshore’s customers during the current fiscal quarter, ended October 31, 2015, as compared to those during the prior comparable period in 2014, are the result of decreases in anticipated demand and actual orders from Cliff’s customers.period.
Fiscal Quarter Ended |
| Pellets Produced from |
| Pellets Shipped from |
|
October 31, 2015 |
| 1,090,483 |
| 1,039,580 |
|
October 31, 2014 |
| 1,201,949 |
| 1,929,060 |
|
As shown in the table below, during the nine months ended October 31, 2015, production of iron ore pellets at Northshore from Mesabi Trust lands totaled 3,143,019 tons, and shipments over the same period totaled 2,815,257 tons. By comparison, pellet production and shipments for the comparable period in 2014 were 3,474,155 tons and 3,723,506 tons, respectively. The decreases in production and shipments at Northshore for the nine months ended October 31, 2015 are the result of decreases in anticipated demand and actual orders from Cliff’s customers. For the nine months ended October 31, 2015, approximately 89% of shipments from Silver Bay, Minnesota originated from Mesabi Trust lands. Similarly, during the same period in 2014 approximately 89% of shipments originated from Mesabi Trust lands.
Nine Months Ended |
| Pellets Produced from |
| Pellets Shipped from |
|
October 31, 2015 |
| 3,143,019 |
| 2,815,257 |
|
October 31, 2014 |
| 3,474,155 |
| 3,723,506 |
|
Fiscal Quarter Ended |
| Pellets Produced from |
| Pellets Shipped from |
|
April 30, 2016 |
| — |
| — |
|
April 30, 2015 |
| 1,195,260 |
| 340,868 |
|
Comparison of Royalty Income for the Three and Nine Months Ended October 31,April 30, 2016 and April 30, 2015 and October 31, 2014
The Trust’s totalTotal royalty income for the fiscal quarter ended October 31, 2015April 30, 2016 decreased by $9,161,405$1,315,953 to $2,619,097,$0, as compared to the fiscal quarterthree months ended October 31, 2014.April 30, 2015. The decrease in total royalty income is due to the decreasesdecrease in the volume of iron ore shippedproduction and the lower average sales price per ton of iron ore products soldshipments during the three months ended October 31, 2015, eachApril 30, 2016, as compared to the three months ended October 31, 2014.April 30, 2015.
The table below shows that the base overriding royalties and the bonus royalties decreased by $4,763,679$503,142 and $4,361,961,$668,471, respectively, and the fee royalties decreased $144,340 for the three months ended October 31, 2015,April 30, 2016, as compared to the three months ended October 31, 2014. Fee royalties decreased by $35,765 over the same period.April 30, 2015. The decrease in the base overriding royalties isand the bonus royalties are both attributable to the decreases in the volume and the selling price of iron ore products shipped as discussed under “Base overriding royalties” on page 8 of this report. The decrease in bonus royalties is attributable toproduction and shipments during the decreases in the volume of iron ore products shipped and in the selling price of iron ore products shippedthree months ended April 30, 2016, as compared to the Adjusted Threshold Price as discussed under “Royalty bonuses” on page 8 of this report, including negative pricing adjustments relating to iron ore products shippedthree months ended April 30, 2015. The decrease in the first two quarters of this fiscal year.fee royalty amount is due to the decrease in production during the three months ended April 30, 2016, as compared to the three months ended April 30, 2015.
The table below summarizes the components of Mesabi Trust’s royalty income for the three months ended October 31,April 30, 2016 and April 30, 2015, and October 31, 2014, respectively:
|
| Three Months Ended October 31, |
|
| Three Months Ended April 30, |
| ||||||||
|
| 2015 |
| 2014 |
|
| 2016 |
| 2015 |
| ||||
Base overriding royalties |
| $ | 2,577,681 |
| $ | 7,341,360 |
|
| $ | — |
| $ | 503,142 |
|
Bonus royalties |
| (75,479 | ) | 4,286,482 |
|
| — |
| 668,471 |
| ||||
Minimum advance royalties paid (recouped) |
| — |
| — |
| |||||||||
Minimum advance royalty paid (recouped) |
| — |
| — |
| |||||||||
Fee royalties |
| 116,895 |
| 152,660 |
|
| — |
| 144,340 |
| ||||
Total royalty income |
| $ | 2,619,097 |
| $ | 11,780,502 |
|
| $ | — |
| $ | 1,315,953 |
|
Comparison of Income, Expenses and Distributions for the Three Months Ended April 30, 2016 and April 30, 2015
The Trust’s total royaltyNet loss for the three months ended April 30, 2016 was $430,252, a decrease of $1,370,518 compared to the net income for the ninethree months ended October 31, 2015 decreased by $13,471,963 to $6,667,942 as compared to the nine months ended October 31, 2014.April 30, 2015. The decrease in total royaltyfrom net income is the result of the decreases in the volume of iron ore tons shipped and the lower average sales price per ton of iron ore pellets sold during the nine months ended October 31, 2015, each as compared to the nine months ended October 31, 2014.
The table below shows that the base overriding royalties and the bonus royalties decreased by
$6,132,898 and $7,260,944 to $5,262,282 and $1,024,162, respectively, and the fee royalties decreased by $78,121 to $381,498 for the nine months ended October 31, 2015, from the comparable period in 2014. The decreases in the base overriding royalties and the bonus royalties are attributable to the decreases in the volume and selling price of iron ore products shipped, and also due decreases in the volume of iron ore products shipped and in the selling price of iron ore products shipped as compared to the Adjusted Threshold Price as discussed under “Royalty bonuses” on page 8 of this report, including negative pricing adjustments relating to iron ore products shipped in the first two quarters of this fiscal year.
The table below summarizes the components of Mesabi Trust’s royalty income for the nine months ended October 31, 2015 and October 31, 2014:
|
| Nine Months Ended October 31, |
| ||||
|
| 2015 |
| 2014 |
| ||
Base overriding royalties |
| $ | 5,262,282 |
| $ | 11,395,180 |
|
Bonus royalties |
| 1,024,162 |
| 8,285,106 |
| ||
Minimum advance royalties paid (recouped) |
| — |
| — |
| ||
Fee royalties |
| 381,498 |
| 459,619 |
| ||
Total royalty income |
| $ | 6,667,942 |
| $ | 20,139,905 |
|
Comparison of Net Income, Expenses and Distributions for the Three and Nine Months Ended October 31, 2015 and October 31, 2014
Net incomea net loss for the fiscal quarter ended October 31, 2015 was $2,402,067,April 30, 2016 is the result of a decrease in total shipments of $9,137,539iron ore pellets, as compared to the fiscal quarterthree months ended October 31, 2014.April 30, 2015. The decreaseTrust’s expenses for the three months ended April 30, 2016 were $431,931; an increase of $54,187 compared to the Trust’s expenses for the three-month period ended April 30, 2015. The increase in net incomeexpenses for the fiscal quarter ended October 31, 2015 wasApril 30, 2016 is the result of both the decrease in the volume ofanticipated negative pricing adjustments on unconsumed iron ore products shipped and the decrease in the selling price of iron ore products sold during the fiscal quarter ended Octoberpellets at January 31, 2015. The Trust’s expenses decreased by $23,654 to $219,498 for the fiscal quarter ended October 31, 2015, as compared to the fiscal quarter ended October 31, 2014, as a result of a minimal decrease in fees charged to the Trust.2016. The table below summarizes the Trust’s income and expenses for the fiscal quarterthree months ended October 31,April 30, 2016 and April 30, 2015, and October 31, 2014, respectively.
|
| Three Months Ended October 31, |
|
| Three Months Ended April 30, |
| ||||||||
|
| 2015 |
| 2014 |
|
| 2016 |
| 2015 |
| ||||
Total royalty income |
| $ | 2,619,097 |
| $ | 11,780,502 |
|
| $ | — |
| $ | 1,315,953 |
|
Interest income |
| 2,468 |
| 2,256 |
|
| 1,679 |
| 2,057 |
| ||||
Total revenues |
| 2,621,565 |
| 11,782,758 |
| |||||||||
Gross income |
| 1,679 |
| 1,318,010 |
| |||||||||
Expenses |
| 219,498 |
| 243,152 |
|
| 431,931 |
| 377,744 |
| ||||
Net income |
| $ | 2,402,067 |
| $ | 11,539,606 |
| |||||||
Net income (loss) |
| $ | (430,252 | ) | $ | 940,266 |
|
Net income for the nine months ended October 31, 2015 was $5,825,977, a decrease of $13,267,388 as compared to the nine months ended October 31, 2014. The decrease in net income for the nine months ended October 31, 2015 was the result of both the decrease in the volume of iron ore products shipped and the decrease in the selling price of iron ore products sold during the nine months ended October 31, 2015. The Trust’s expenses for the nine months ended October 31, 2015 decreased, compared with the Trust’s expenses for the nine month period ended October 31, 2014. In the period ended October 31, 2014, the Trust incurred additional expenses related to the election of a new Trustee, which only occurs when there is a vacancy on the board of trustees. The table below summarizes the Trust’s income and expenses for the nine months ended October 31, 2015 and October 31, 2014, respectively.
|
| Nine Months Ended October 31, |
| ||||
|
| 2015 |
| 2014 |
| ||
Total royalty income |
| $ | 6,667,942 |
| $ | 20,139,905 |
|
Interest income |
| 6,993 |
| 6,647 |
| ||
Total revenues |
| 6,674,935 |
| 20,146,552 |
| ||
Expenses |
| 848,958 |
| 1,053,187 |
| ||
Net income |
| $ | 5,825,977 |
| $ | 19,093,365 |
|
As presented on the Trust’s Condensed Statements of Income on page 2 of this quarterly report, the Trust’s net income (loss) per unit decreased by $0.6964 per unit$0.1045 to $0.1831 per unit$(0.0328) for the fiscal quarterthree months ended October 31, 2015,April 30, 2016, as compared to that during the comparable period in 2014. For the ninethree months ended October 31, 2015, the Trust’s net income per unit decreased by $1.0112 per unit to $0.4441 per unit, as compared to that during the comparable period in 2014. On October 19, 2015, the Trust announced that it was unable to consider the declaration of a distribution using anticipated royalty revenues earned during the quarter ended SeptemberApril 30, 2015. Comparatively, the TrustThe Trustees declared a distribution of $0.88twenty cents ($0.20) per unit to Unitholders in October 2014. DuringUnit of Beneficial Interest for the ninethree months ended October 31, 2015 and October 31, 2014,April 30, 2016, compared to no distribution for the three months ended April 30, 2015. The Trustees’ determination of this distribution amount reflects their continuing effort to maintain an appropriate level of unallocated reserve in order for the Trust had declared total distributions per unit of $0.040to be in a position to meet current and $1.200, respectively.future expenses, and present and future liabilities (whether fixed or contingent) that may arise in connection with the current and ongoing challenges in the iron ore and steel industries generally.
Distributions, if any, are declared after receiving notification from Northshore as toby the Trustees based on the Trustees’ evaluation of known and projected Trust expenses in the current and future quarters, the amount of royalty income that is expected to beroyalties actually paid to the Trust based on shipments through the end of each calendar quarter prior to April, July, October and suchJanuary of each year, the then-current level of Unallocated Reserve and general economic conditions. Quarterly royalty payments as reported by Northshore and Cliffs to the Trust 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 quartersquarter (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 Incomenet income (loss) during the periods reported in this quarterly report on Form 10-Q.
Comparison of Unallocated Reserve as of October 31,April 30, 2016, April 30, 2015 October 31, 2014 and January 31, 20152016
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, deferred royalty revenue, and prepaid expenses and accrued expenses, increased from $4,333,448$2,551,390 as of October 31, 2014April 30, 2015 to $6,912,301$5,934,910 as of October 31, 2015.April 30, 2016. The increase in the Unallocated Reserve as of October 31, 2015,April 30, 2016, as compared to October 31, 2014,April 30, 2015, is primarily the result of the increaseTrustees’ decision to add to the Trust’s reserve for unexpected obligations, which is primarily attributable to the idling of iron ore pellet production at Northshore Mining Company in Silver Bay, Minnesota, as announced on November 17, 2015 and the Trustees’ determination that it is prudent, at this time, to maintain an appropriate level of unallocated cashreserve for the Trust in order to make adequate provision for current and U.S government securities held byfuture expenses. The accrued income receivable portion of the Trust.Unallocated Reserve
decreased from $1,023,223 as of April 30, 2015 to $1,295 as of April 30, 2016. The decrease in the accrued income receivable portion of the Unallocated Reserve is the result of lower average sales prices per tonthe decrease in the amount of iron ore pellets sold and decreased shipments for the month ended October 31, 2015,shipped, as compared to the month ended October 31, 2014, which in turn drove lower royalties payable to Mesabi Trust.same period last year. The increase in the unallocated cash and U.S. Government securities is a result of the Trustees’ determinationsdecision to notadd to the Trust’s cash reserve for unexpected obligations, which is primarily attributable to the idling of iron ore pellet production at Northshore Mining Company in Silver Bay, Minnesota, as announced on November 17, 2015 and the Trustees’ determination that it is prudent, at this time, to maintain an appropriate level of unallocated reserve for the Trust in order to make adequate provision for current and future expenses. The increase in the deferred royalty revenue is a distribution in November 2015 (announced in October) due to a delay until the endresult of October 2015 in the receipt of advanced royalties received as of April 30, 2016 and the quarterly royalty report for shipmentsresult of anticipated negative pricing adjustments on unconsumed iron ore products from Silver Bay, Minnesota during Northshore’s quarter ended September 30, 2015. Because NYSE rules require 10 days advance notice of a record date for declarations of distributions, and the governing Agreement of Trust fixes a record date of October 30th, the Trustees were unable to consider the declaration of a distribution using anticipatedpellets at January 31, 2016.
royalty revenues during the calendar quarter ended September 30, 2015. Accordingly, no distribution was paid in November 2015.
|
| October 31, |
|
| Three Months Ended April 30, |
| ||||||||
|
| 2015 |
| 2014 |
|
| 2016 |
| 2015 |
| ||||
Accrued Income Receivable |
| $ | 355,567 |
| $ | 3,309,221 |
|
| $ | 1,295 |
| $ | 1,023,223 |
|
Unallocated Cash and U.S. Government Securities |
| 6,551,542 |
| 1,017,222 |
|
| 6,207,287 |
| 1,569,442 |
| ||||
Prepaid Expenses and (Accrued Expenses) Net |
| 5,192 |
| 7,005 |
| |||||||||
Prepaid Expenses and Accrued Expenses (net) |
| (16,608 | ) | (41,275 | ) | |||||||||
Deferred Royalty Revenue |
| (257,064 | ) | — |
| |||||||||
Unallocated Reserve |
| $ | 6,912,301 |
| $ | 4,333,448 |
|
| $ | 5,934,910 |
| $ | 2,551,390 |
|
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, 2015.2016.
The Trust’s Unallocated Reserve as of October 31, 2015 increased by $5,301,177 to $6,912,301,April 30, 2016 decreased $3,054,254, as compared to the fiscal year ended January 31, 2015.2016. The increasedecrease in the Unallocated Reserve is primarily due primarily to an increasethe Trustees’ decision to make a cash distribution of twenty cents ($0.20) per Unit of Beneficial Interest in April based on the Trustees’ evaluation of known and projected Trust expenses in the current and future quarters and in light of the Trust’s receipt of total royalty payments of $2,423,257 on January 29, 2016, which was payment for shipments of iron ore products by Northshore during the three months ended December 31, 2015, and also in recognition of Cliffs’ announcement in March 2016 that it plans to restart iron ore pellet production at Northshore by May 15, 2016. As of January 31, 2016, the Unallocated Reserve consisted of $8,127,881 in unallocated cash and U.S. Government securities held by the Trustand $978,146 of accrued income receivable, as a result of the Trustees’ determinationcompared to not make a distribution in November 2015 (announced in October) due to a delay until the end of October 2015 in the receipt of the quarterly royalty report for shipments of iron ore products from Silver Bay, Minnesota for Northshore’s quarter ended September 30, 2015. Because the NYSE rules require 10 days advance notice of a record date for declarations of distributions, and the Agreement of Trust fixes a record date of October 30th, the Trustees were unable to consider the declaration of a distribution using anticipated royalty revenues during the calendar quarter ended September 30, 2015. Accordingly, no distribution was paid in November 2015. As of October 31, 2015, the Trust’s Unallocated Reserve consisted of $6,551,542$6,207,287 of unallocated cash and U.S. Government securities and $355,567$1,295 of accrued income receivable. At January 31, 2015, the Trust’s Unallocated Reserve consistedreceivable as of $1,087,469 in unallocated cash and U.S. Government securities and $558,385 of accrued income receivable.April 30, 2016.
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| October 31, 2015 |
| January 31, 2015 |
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Accrued Income Receivable |
| $ | 355,567 |
| $ | 558,385 |
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Unallocated Cash and U.S. Government Securities |
| 6,551,542 |
| 1,087,469 |
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Prepaid Expenses and (Accrued Expenses) Net |
| 5,192 |
| (34,730 | ) | ||
Unallocated Reserve |
| $ | 6,912,301 |
| $ | 1,611,124 |
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During recent periods, the Trustees had determined that Mesabi Trust’s unallocated reserve should usually be within the range of $500,000 to $1,000,000. In April 2015, the Trustees determined that the unallocated reserve will no longer necessarily be within such range. Rather, eachEach quarter, as authorized by the Agreement of Trust, the Trustees will reevaluateevaluate all relevant factors including all costs, expenses, obligations, and present and future liabilities of the Trust (whether known or contingent) in determining athe prudent level of unallocated reserve in light of the unpredictable nature of the iron ore industry 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 intended that future distributions will be highly dependent upon royalty income as it is received, if any, 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. Economic conditions, particularly those affecting the steel industry, may adversely affect the amount and timing of such future shipments and sales. The Trustees will continue to monitor the economic 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 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
Delayed Delivery of Cliffs’ Quarterly Royalty Report
On October 16, 2015, Cliffs informed the Trustees that, unlike historical practice, the quarterly royalty report for shipments of iron ore products from Silver Bay, Minnesota during Northshore’s quarter ended September 30, 2015 would not be provided to Mesabi Trust until the end of October 2015. As previously reported, because NYSE rules require 10 days advance notice of a record date for declarations of distributions, and the Agreement of Trust fixes a record date of October 30th, the Trustees were unable to timely consider the declaration of a distribution in October 2015. Therefore, no distribution was paid in November 2015.
Neither Cliffs nor Northshore has provided Mesabi Trust with any projections about whether or not it will furnish future quarterly royalty reports on a timeline that will permit the Trustees to consider declarations of distributions from royalty revenues anticipated to be received by the 30th day of the month following each calendar quarter end.
Cliffs Disclosure regarding Risks associated with Obtaining and Maintaining Permits and Additional Financial Assurance
In its latest Form 10-Q filed on October 29, 2015, Cliffs disclosed as one of its risk factors that it may be unable to obtain and renew permits necessary for its operations or be required to provide additional financial assurance, which could reduce its production, cash flows, profitability and available liquidity.
Cliffs also added that it could also face significant permit and approval requirements that could delay its commencement or continuation of existing or new production operations which, in turn, could affect materially its cash flows, profitability and available liquidity.
Mining companies must obtain numerous permits that impose strict conditions on various environmental and safety matters in connection with iron ore mining. These include permits issued by various federal, state and provincial agencies and regulatory bodies. The permitting rules are complex and may change over time, making Cliffs’ ability to comply with the applicable requirements more difficult or impractical and costly, possibly precluding the continuance of ongoing operations or the development of future mining operations. Interpretations of rules may also change over time and may lead to requirements, such as additional financial assurance, making it more costly to comply. The public, including special interest groups and individuals, have certain rights under various statutes to comment upon, submit objections to, and otherwise engage in the permitting process, including bringing citizens’ lawsuits to challenge such permits or mining activities. Accordingly, required permits may not be issued or renewed in a timely fashion (or at all), or permits issued or renewed may be conditioned in a manner that may restrict Cliffs’ ability to efficiently conduct its mining activities. Such inefficiencies could reduce its production, cash flows, profitability and available liquidity, which could adversely affect the royalties payable to Mesabi Trust.
Temporary Idling of Northshore Iron OreRestarts Pellet Production
As previously reported,On March 14, 2016, Cliffs announced on November 17, 2015 that it is temporarily idlingwill be restarting iron ore pellet production at its Northshore mining operation in Minnesota by December 1, 2015.May 15, 2016. Cliffs disclosedannounced that untilit was taking such action based on its domestic customers’ blast furnace capacity utilization rates improve, existing customer demand will be satisfied fromfor iron ore pellets and consistent with its current pellet inventory. The Trustees have been informed that both crude orepreviously announced production plans for the year. On the same day, the President and pellet productionChief Executive Officer of Cliffs was quoted as saying: “In 2015, Cliffs developed at Northshore have been idled. In its news release,Mining a new product, the DR-grade pellets used as feedstock to DRI production. As we restart operations at Northshore in May, we will also resume the production of DR-grade pellets destined to EAF clients.” Cliffs anticipated that both Northshore and the previously idled United Taconite operations “will be temporarily idled through the
first quarter of 2016.” With respect to the remainder of calendar yearannounced in November 2015 neither Cliffs nor Northshore has advised Mesabi Trust of its expected 2015 shipments of iron ore products or what percentage of 2015 shipments will be from Mesabi Trust iron ore. Cliffs also announced that it would maintain minimal staffing during the temporary idle for basic maintenance duties and for on-going work to support the DR-grade pellet trials. The Trustees have been informed that pellet production at Northshore has been restarted in May 2016.
Mesabi TrustCliffs Announces Agreements with Minnesota Power
On May 24, 2016, Cliffs announced that through its subsidiaries, it has no additional information on exactly whenentered into multiple agreements with Minnesota Power, a utility division of ALLETE Inc. Cliffs will restarthas received $31 million dollars in cash as part of a long-term purchased power arrangement for its Northshore operation with Minnesota Power through 2031. The agreements, pending potential regulatory approval of the sale of utility assets, include certain non-core operations; transmission assets at United Taconite; certain land options at United Taconite and Northshore Mining Company; and transportation rights along the Cliffs Erie rail assets. Separately, Cliffs has extended its regulated power arrangements with Minnesota Power for 10 years at its United Taconite and Babbitt facilities.
Cliffs Announces New Long-Term Iron Ore Supply Agreement with ArcelorMittal
On May 31, 2016, Cliffs announced that it has entered into a new long-term commercial agreement with ArcelorMittal USA LLC to supply tailor-made iron ore pellets for the next ten years through 2026. The new agreement will replace two existing agreements expiring in December 2016 and January 2017 and fill the entirety of ArcelorMittal’s pellet production.purchase requirements from the previous contracts. The new commercial agreement includes ArcelorMittal’s total purchases of iron ore pellets from Cliffs up to 10 million long tons and preserves Cliffs’ current position as ArcelorMittal USA’s sole outside supplier of pellets.
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, and protecting and conserving the Trust’s assets.assets held.
Neither Mesabi Trust nor the Trustees have any control over the operations and activities of Northshore, except within the framework of the Amended Assignment Agreements. Cliffs alone controls (i) historical operating data, including iron ore production volumes, 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) decisions about whether and when to restart, or continue to idle, Northshore’s iron ore pellet production, (iii) plans for Northshore’s future operating and capital expenditures; (iv)(iii) geological data relating to ore reserves (v)reserves; (iv) projected production of iron ore products; (vi)(v) contracts between Cliffs and Northshore with their customers; and (vii)(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 material information from Cliffs and Northshore 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 this information provided by Cliffs and 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 3 through 119 of Mesabi Trust’s Annual Report on Form 10-K for the year-ended January 31, 2015, as updated by Part II, Item 1A of this Quarterly Report on Form 10-Q.2016.
Iron Ore Pricing and Contract Adjustments
During the course of its fiscal year some portion of the royalties paid to Mesabi Trust are based on estimated prices for iron ore products sold under term contracts between Cliffs and its subsidiaries and certain of their customers (the “Cliffs Pellet Agreements”). Mesabi Trust is not a party to any of the Cliffs Pellet Agreements. 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 the international benchmark pellet price, hot band steel prices and
various Producer Price Indexes.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, and 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,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 trust with Units of Beneficial Interest that are listed on the New York Stock Exchange (“NYSE”) and is therefore subject to extensive regulations under, among others, the Securities Act of 1933, the Securities Exchange Act of 1934, the Sarbanes-Oxley Act of 2002 (“Sarbanes-Oxley”) and the rules and regulations of the NYSE, each as amended. Issuers failing to comply with such regulations 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 publicly-traded trusts such as Mesabi Trust. In particular, Sarbanes-Oxley and the Dodd-Frank Wall Street Reform and Consumer Protection Act have mandated the adoption by the Securities and Exchange Commission (the “SEC”) and, in some instances, the NYSE of certain rules and regulations that are impossible for the Trust to satisfy because of its nature as a pass-through trust that has no officers or employees. Pursuant to NYSE rules currently in effect the Trust is exempt from many of the corporate governance requirements that apply to publicly traded corporations listed on the NYSE. The Trust does not have, nor does the Agreement of Trust provide for, a board of directors, an audit committee, a corporate governance committee or a compensation committee. The Trustees intend to
closely monitor the SEC’s and the NYSE’s rulemaking activity and will attempt to comply with such rules and regulations where 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. Critical accounting policies are those that have meaningful impact on the reporting of the Trust’s financial condition and results, and that require significant judgment and estimates. During the preparation of financial statements, the Trust makes estimates, assumptions and judgments that affect reported amounts. These estimates, assumptions and judgments include those related to revenue recognition and accrued expenses. The Trust bases its estimates on various assumptions and historical experience, which are believed to be reasonable; however, due to the inherent nature of estimates, actual results may differ significantly due to changed conditions or assumptions. On a regular basis, the Trust reviews the accounting policies, assumptions, estimates and judgments to ensure that the financial statements are fairly presented in accordance with accounting principles generally accepted in the United States. However, because future events and their effects cannot be determined with certainty, actual results could differ from assumptions and estimates, and such differences could be material.
The Trust did not have any changes in critical accounting policies or in significant accounting estimates during the three months ended October 31, 2015.April 30, 2016. 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, 2015.2016.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Not applicable.
Item 4. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures. The Trustees maintain disclosure controls and procedures designed to ensure that information required to be disclosed by the Trust in the reports that it files or submits 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 Securities and Exchange Commission. Disclosure controls and procedures include controls and procedures designed to ensure that information required to be disclosed by the Trust is accumulated and communicated by Northshore, and consultants to the Trustees as appropriate, to allow timely decisions regarding required disclosure.
As part of their evaluation of the Trust’s disclosure controls and procedures, the Trustees rely on quarterly shipment and royalty calculations provided by Northshore. Because Northshore has declined to support this information with 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 Northshore’s parent, Cliffs, certifying as to the accuracy of the royalty calculations, and (b) the related due diligence review performed by the Trust’s external accountants. In addition, the 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 the Eveleth Fee Office, Inc., an independent consultant to the Trust (“Eveleth Fee Office”). The Eveleth Fee Office
gathers production and shipping information from Northshore and prepares monthly production and shipment reports for the Trustees. Furthermore, as part of its engagement by the Trust, the 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 the Trust’s disclosure controls and procedures. 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 has been no change in the Trust’s internal control over financial reporting that occurred during the Trust’s last fiscal quarter that has materially affected, or is 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 control over financial reporting of Northshore or Cliffs.
PART II - OTHER INFORMATION
Item 1A. | Risk Factors |
There have been no material changes in the Trust’s risk factors as described in “Risk Factors” set forth on pages 3 through 119 of Mesabi Trust’s Annual Report on Form 10-K for the year-endedfiscal year ended January 31, 2015.2016.
Item 5. |
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Mine Safety and Health Administration Safety Data.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’ Form 10-Q filed October 29, 2015.April 28, 2016.
Item 6. | Exhibits |
31 |
| Certification of Corporate Trustee of Mesabi Trust pursuant to Rule |
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32 |
| Certification of Corporate Trustee of Mesabi Trust pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
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99.1 |
| Report of Baker Tilly Virchow Krause, LLP, dated |
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101.INS |
| XBRL Instance |
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101.SCH |
| XBRL Taxonomy Extension |
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101.CAL |
| XBRL Taxonomy Extension Calculation |
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101.DEF |
| XBRL Taxonomy Extension Definition |
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101.LAB |
| XBRL Taxonomy Extension Label |
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) | ||
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| By: | DEUTSCHE BANK TRUST COMPANY | |
AMERICAS | |||
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| Corporate Trustee | |
| Principal Administrative Officer and duly authorized | ||
signatory:* | |||
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| By: |
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| By: | /s/ Jeffrey Schoenfeld |
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| Name: | Jeffrey |
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| Title: | Vice President |
* There are no principal executive officers or principal financial officers of the registrant.
EXHIBIT INDEX
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