MESABI TRUST This discussion should be read in conjunction with the condensed financial statements and notes presented in this Quarterly Report on Form 10-Q and the financial statements and notes in the last filed Annual Report on Form 10-K for the year endedJanuary 31, 2022 for a full understanding ofMesabi Trust's financial position and results of operations for the three and nine months endedOctober 31, 2022 . All references in this discussion and in this Quarterly Report on Form 10-Q to iron ore products "shipped" shall include iron ore products that Cliffs actually ships fromSilver Bay, Minnesota and/or iron ore products Cliffs deems shipped upon production. Similarly, all references in this discussion and in this Quarterly Report on Form 10-Q to "shipments" shall include Cliffs' actual shipments of iron ore products and/Cliffs' production of iron ore products it deems shipped. After the outcome of the 2021 arbitration, Cliffs changed its payment and pricing practices to deem the Trust entitled to payment upon production of all pellet grades to be sold for internal use by facilities owned by Cliffs or its subsidiaries. Due to this change in practice, for revenue recognition purposes, the Trust now recognizes revenue for internal use pellets upon production of those pellets, which is when Cliffs deems these pellets to be shipped under the royalty agreement. Pellets that are not designated for internal use by Cliffs, or its subsidiaries, continues to be recognized as revenue upon shipment fromSilver Bay, Minnesota .
Background
Mesabi Trust , formed pursuant to the Agreement of Trust, is a trust organized under the laws of theState of New York .Mesabi Trust holds all of the interests formerly owned byMesabi Iron Company ("MIC"), including all right, title and interest in the Amendment of Assignment, Assumption and Further Assignment ofPeters Lease (the "Amended Assignment ofPeters Lease "), the Amendment of Assignment, Assumption and Further Assignment of Cloquet Lease (the "Amended Assignment of Cloquet Lease" and together with the Amended Assignment ofPeters Lease , the "Amended Assignment Agreements"), the beneficial interest in a trust organized under the laws of theState of Minnesota to administer the Mesabi Fee Lands (as defined below) as the trust corpus in compliance with the laws of theState of Minnesota onJuly 18, 1961 (the "Mesabi Land Trust ") and all other assets and property identified in the Agreement of Trust. The Amended Assignment ofPeters Lease relates to an Indenture made as ofApril 30, 1915 amongEast Mesaba Iron Company ("East Mesaba"),Dunka River Iron Company ("Dunka River") andClaude W. Peters (the "Peters Lease") and the Amended Assignment of Cloquet Lease relates to an Indenture madeMay 1, 1916 betweenCloquet Lumber Company andClaude 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 theTrust 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 inMesabi Trust ("Unitholders") after the payment of, or provision for, such expenses and liabilities, and protecting and conserving the assets held by the Trust. The Trustees do not intend to expand their responsibilities beyond those permitted or required by the Agreement of Trust, the Amendment to the Agreement of Trust datedOctober 25, 1982 (the "Amendment"), and those required under applicable law.Mesabi Trust has no employees, but it engages independent consultants to assist the Trustees in, among other things, monitoring the volume and sales prices of iron ore products shipped, based on information supplied to the Trustees by Northshore, the lessee/operator of the lands leased under the Peters Lease and Cloquet Lease (the "Peters Lease Lands" and "Cloquet Lease Lands," respectively) and the 20% fee interest of certain lands that are particularly described in, and subject to a mining lease under, the Peters Lease (the "Mesabi Fee Lands," and together with the Peters Lease Lands and Cloquet Lease Lands, the "Mesabi Trust Lands"), and its parent company, Cliffs. References to Northshore in this quarterly report, unless the context requires otherwise, are applicable to Cliffs as well. Leasehold royalty income constitutes the principal source of the Trust's revenue. The income of the Trust is highly dependent upon the activities and operations of Northshore. Royalty rates and the resulting royalty payments received by the Trust are determined in accordance with the terms of the Trust's leases and assignments of leases.
Three types of royalties, as well as royalty bonuses, comprise the Trust's leasehold royalty income:
Base overriding royalties. Base overriding royalties have historically
constituted the majority of the Trust's royalty income. Base overriding
royalties are determined by both the volume and selling price of iron ore
products shipped. Northshore is obligated to pay the Trust base overriding
royalties in varying amounts, based on the volume of iron ore products shipped.
Base overriding royalties are calculated as a percentage of the gross proceeds
of iron ore products produced at Mesabi Trust Lands (and to a limited extent ? other lands) and shipped. The percentage ranges from 2-1/2% of the gross
proceeds for the first one million tons of iron ore products shipped annually
to 6% of the gross proceeds for all iron ore products in excess of four million
tons shipped annually. Base overriding royalties are subject to interim and
final price adjustments under some of the contracts among Northshore, Cliffs
and certain of their customers (the "Cliffs' Customer Contracts") and, as
described elsewhere in this report, such adjustments may be positive or
negative.
10
Table of Contents
Royalty bonuses. The Trust earns royalty bonuses when iron ore products shipped
are sold at prices above a threshold price per ton. The royalty bonus is based
on a percentage of the gross proceeds of product shipped. The threshold price
is adjusted (but not below
deflation (the "Adjusted Threshold Price"). The Adjusted Threshold Price was
(on all tonnage shipped for sale at prices between the Adjusted Threshold Price
and
all tonnage shipped for sale at prices
Threshold Price). Royalty bonuses are subject to price adjustments under
Cliffs' Customer Contracts and, as described elsewhere in this report, such
adjustments may be positive or negative.
Fee royalties. Fee royalties have historically constituted a smaller component
of the Trust's total royalty income. Fee royalties are payable to the Mesabi
the Amended Assignment of
beneficial interest in the
Trust, which is generated from royalties on the amount of crude ore mined after
the payment of expenses to
trustee. Crude ore is the source of iron oxides used to make iron ore pellets
and other products. The fee royalty on crude ore is based on an agreed price
per ton, subject to certain indexing. Minimum advance royalties. Northshore's obligation to pay base overriding
royalties and royalty bonuses with respect to the sale of iron ore products
generally accrues upon the shipment of those products. However, regardless of
whether any shipment has occurred, Northshore is obligated to pay to Mesabi
Trust a minimum advance royalty. Each year, the amount of the minimum advance
royalty is adjusted (but not below
deflation. The minimum advance royalty was
bonuses, if any) for a particular year equal or exceed the minimum advance
royalty for the year, Northshore must make quarterly payments of up to 25% of
the minimum advance royalty for the year. Because minimum advance royalties are
essentially prepayments of base overriding royalties and royalty bonuses earned
each year, any minimum advance royalties paid in a fiscal quarter are recouped
by credits against base overriding royalties and royalty bonuses earned in
later fiscal quarters during the year.
The current royalty rate schedule became effective onAugust 17, 1989 pursuant to the Amended Assignment Agreements, which the Trust entered into withCyprus Northshore Mining Corporation ("Cyprus NMC"). Pursuant to the Amended Assignment Agreements, overriding royalties are determined by both the volume and selling price of iron ore products shipped. In 1994, Cyprus NMC was sold by its parent corporation to Cliffs and renamedNorthshore Mining Company . Cliffs now operates Northshore as a wholly owned subsidiary. Under the relevant agreements, Northshore has the right to mine and ship iron ore products from lands other than Mesabi Trust Lands. Northshore alone determines whether to conduct mining operations on Mesabi Trust Lands and/or such other lands based on its current mining and engineering plan. The Trustees do not exert any influence over mining operational decisions. To encourage the use of iron ore products from Mesabi Trust Lands,Mesabi Trust receives royalties on stated percentages of iron ore shipped, whether or not the iron ore products are from Mesabi Trust Lands.Mesabi Trust receives royalties at the greater of (i) the aggregate quantity of iron ore products shipped that were mined from Mesabi Trust Lands, and (ii) a portion of the aggregate quantity of all iron ore products shipped that were mined from any lands, such portion being 90% of the first four million tons shipped during such year, 85% of the next two million tons shipped during such year, and 25% of all tonnage shipped during such year in excess of six million tons. The royalty percentage paid to the Trust increases as the aggregate tonnage of iron ore products shipped, attributable to the Trust, in any calendar year increases past each of the first four one-million ton volume thresholds. Assuming a consistent sales price per ton throughout a calendar year, shipments of iron ore product attributable to the Trust later in the year generate a higher royalty to the Trust, as total shipments for the year exceed increasing levels of royalty percentages and pass each of the first four one-million ton volume thresholds. During the course of its typical fiscal year, some portion of royalties expected to be paid toMesabi Trust is based in part on estimated prices for certain iron ore products sold under some of the Cliffs' Customer Contracts. Some of the Cliffs' Customer Contracts use estimated prices which are subject to interim and final pricing adjustments, which can be positive or negative, and which adjustments are dependent in part on multiple price and inflation index factors that are not known until after the end of a contract year. Even thoughMesabi Trust is not a party to the Cliffs' Customer Contracts, these adjustments can result in significant variations in royalties payable toMesabi Trust (and, in turn, the resulting amount available for distribution to Unitholders by the Trust) from quarter to quarter and on a comparative historical basis, and these variations, which can be positive or negative, cannot be predicted by the Trust. In either case, these price adjustments will impact future royalties payable to the Trust and, in turn, will impact cash reserves that may become available for distribution to Unitholders. According to Cliffs'SEC filings, historically, certain of Cliffs' third party customer supply agreements specify provisional price calculations, where the pricing mechanisms generally are based on market pricing, with the final revenue rate based on certain market inputs at a specified period in time in the future, per the terms of the supply agreements. Market inputs are tied to indexed price adjustment factors that are integral to the iron ore supply contracts and vary based on the agreement. The pricing adjustments generally operate in the same manner, with each factor typically comprising a portion of the price adjustment, although the weighting 11 Table of Contents
of each factor varies based upon the specific terms of each agreement. The price adjustment factors have been evaluated to determine if they qualify as embedded derivatives. The price adjustment factors share the same economic characteristics and risks as the host sales contract and are integral to the host sales contract as inflation adjustments; accordingly, they have not been separately valued as derivative instruments.
A portion of royalties expected to be paid to the Trust each year is also based on "spot" sales of iron ore products sold by Northshore and Cliffs, where pricing is basically set at a fixed rate.
As also described elsewhere in this report, the Trust receives a bonus royalty equal to a percentage of the gross proceeds of iron ore products (mined from Mesabi Trust Lands) shipped and sold at prices above the Adjusted Threshold Price. Although 99.5% of all the iron ore products shipped during calendar 2021 was sold at prices higher than the Adjusted Threshold Price, the Trustees are unable to project whether Cliffs will continue to be able to sell iron ore products at prices above the applicable Adjusted Threshold Price, entitling the Trust to any future bonus royalty payments. As previously disclosed, onMay 1, 2022 , Cliffs idled Northshore. OnJuly 22, 2022 , Cliffs announced that it extended the idling of Northshore to at leastApril 2023 and would perhaps continue idling Northshore beyond that date.Deutsche Bank Trust Company Americas , the Corporate Trustee ofMesabi Trust , performs certain administrative functions forMesabi 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 theSEC through its website as soon as reasonably practicable after electronically filing or furnishing such material with or to theSEC .
Results of Operations
Comparison of Iron Ore Pellet Production and Shipments for the Three and Nine
Months Ended
As shown in the table below, during the three months endedOctober 31, 2022 , production of iron ore pellets at Northshore from Mesabi Trust Lands totaled - zero tons, and shipments over the same period totaled - zero tons. By comparison, pellet production and shipments for the comparable period in 2021 were 1,117,253 tons and 1,179,530 tons, respectively. The decrease in production and shipments is attributable to the ongoing idling of Northshore's facilities during the current period as compared to the prior period. Pellets Produced from Pellets Shipped from Trust Lands Trust Lands Three Months Ended (Tons) (Tons) October 31, 2022 - - October 31, 2021 1,117,253 1,179,530
As shown in the table below, during the nine months endedOctober 31, 2022 , production of iron ore pellets at Northshore from Mesabi Trust Lands totaled 906,952 tons, and shipments over the same period totaled 906,952 tons. By comparison, pellet production and shipments for the comparable period in 2021 were 3,404,224 tons and 3,174,110 tons, respectively. The decrease in production and shipments is attributable to the idling of Northshore's facilities during the current period as compared to the prior period. For the nine months endedOctober 31, 2022 , approximately 99.7% of shipments originated from Trust lands. Pellets Produced from Pellets Shipped from Trust Lands Trust Lands Nine Months Ended (Tons) (Tons) October 31, 2022 906,952 906,952 October 31, 2021 3,404,224 3,174,110
Comparison of Royalty Income for the Three and Nine Months Ended
As reflected in the table below, the Trust's total royalty income for the three months endedOctober 31, 2022 decreased by$15,836,180 to$0 as compared to the three months endedOctober 31, 2021 . The decrease in total royalty income is due to the idling of Northshore's facilities during the three months endedOctober 31, 2022 , as compared to the three months endedOctober 31, 2021 . The table below shows that the base overriding royalties decreased$9,644,501 and the bonus royalties decreased by$5,981,907 for the three months endedOctober 31, 2022 , as compared to the three months endedOctober 31, 2021 . Fee royalties decreased by$209,772 over the same period. The decrease in the base overriding royalties, bonus royalties and fee royalties is attributable to the idling of Northshore's facilities in the current period as compared to the
prior
comparable period.
12
Table of Contents
The table below summarizes the components of
Three Months Ended October 31,
2022 2021
Base overriding royalties $ - $ 9,644,501
Bonus royalties - 5,981,907
Fee royalties - 209,772
Total royalty income $ - $ 15,836,180
As reflected in the table below, the Trust's total royalty income for the nine
months ended October 31, 2022 decreased by $43,187,943 to $9,794,440 as compared
to the nine months ended October 31, 2021 . The decrease in total royalty income
is attributable to the idling of Northshore's facilities during the nine months
ended October 31, 2022 , as compared to the nine months ended October 31, 2021 .
The table below shows that the base overriding royalties decreased $28,099,399
and the bonus royalties decreased by $14,742,753 for the nine months ended
October 31, 2022 , as compared to the nine months ended October 31, 2021 . Fee
royalties decreased by $345,791 over the same period. The decrease in the base
overriding royalties, bonus royalties and fee royalties is attributable to the
idling of Northshore's facilities in the current period as compared to the prior
comparable period.
The table below summarizes the components of Mesabi Trust's total royalty income
for the nine months ended October 31, 2022 and October 31, 2021 , respectively:
Nine Months Ended October 31,
2022 2021
Base overriding royalties $ 3,829,720 $ 31,929,119
Bonus royalties 5,722,317 20,465,070
Fee royalties 242,403 588,194
Total royalty income $ 9,794,440 $ 52,982,383 Comparison of Net Income, Expenses and Distributions for the Three and Nine
Months Ended
Net loss for the three months endedOctober 31, 2022 was ($413,692 ), a decrease of$16,406,598 as compared to the three months endedOctober 31, 2021 . The decrease in net income (loss) for the three months endedOctober 31, 2022 was due to the idling of Northshore's facilities during the current period as compared to the three months endedOctober 31, 2021 . The Trust's expenses for the three months endedOctober 31, 2022 were$498,373 , an increase of$133,072 compared to the expenses for the three months endedOctober 31, 2021 . The increase in expenses was primarily attributable to an increase in legal fees and expenses incurred for the three months endedOctober 31, 2022 , as compared to the prior comparable period. The table below summarizes the Trust's income and expenses for the three months endedOctober 31, 2022 andOctober 31, 2021 ,
respectively.
Three Months Ended October 31,
2022 2021
Total royalty income $ - $ 15,836,180
Interest income 84,681 522,027
Total revenues 84,681 16,358,207
Expenses 498,373 365,301
Net income (loss) $ (413,692) $ 15,992,906
Net income for the nine months ended October 31, 2022 was $8,324,122 , a decrease
of $42,998,684 as compared to the nine months ended October 31, 2021 . The
decrease in net income for the nine months ended October 31, 2022 was due to the
idling of Northshore's facilities during the current period as compared to the
nine months ended October 31, 2021 . The Trust's expenses for the nine months
ended October 31, 2022 were $1,589,996 a decrease of $592,271 compared to the
expenses for the nine months ended October 31, 2021 . The decrease in expenses
was primarily attributable to a decrease in legal fees and expenses related
to
the
13
Table of Contents
arbitration that was completed during the fiscal year ended January 31, 2022 .
The table below summarizes the Trust's income and expenses for the nine months
ended October 31, 2022 and October 31, 2021 , respectively.
Nine Months Ended October 31,
2022 2021
Total royalty income $ 9,794,440 $ 52,982,383
Interest income 119,678 522,690
Total revenues 9,914,118 53,505,073
Expenses 1,589,996 2,182,267
Net income $ 8,324,122 $ 51,322,806 As presented on the "Trust's Condensed Statements of Operations" on page 3 of this quarterly report, the Trust's net income (loss) per unit decreased$1.2505 per unit to ($0.0315 ) per unit for the fiscal quarter endedOctober 31, 2022 as compared to the fiscal quarter endedOctober 31, 2021 . OnOctober 14, 2022 , the Trust declared no distribution to Unitholders of record. Comparatively, the Trust declared a distribution of$1.42 per unit to Unitholders inOctober 2021 . During the nine months endedOctober 31, 2022 andOctober 31, 2021 the Trust had declared distributions of$1.88 and$2.40 per unit, respectively. On a quarterly basis, the Trustees review a variety of financial and economic data and information impacting the Trust, and upon the Trustees' determination, distributions may be declared approximately ten weeks after the Trustees receive a quarterly royalty report from Northshore and Cliffs and the Trust receives the actual royalty payment with respect to royalty income that is payable for iron ore shipments through the end of each prior calendar quarter. Royalty payments may include pricing adjustments with respect to shipments made during prior periods. The Trust accounts for and reports accrued income receivable based on shipments during the last month of each of the Trust's fiscal quarters (April, July, October and January) and price adjustments under Cliffs' Customer Contracts (which can be positive or negative and can result in significant variations in royalties received byMesabi 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 (loss) during the periods reported in this quarterly report on Form 10-Q.
Comparison of Unallocated Reserve as of
As set forth in the table below, Unallocated Reserve decreased from$36,311,828 as ofOctober 31, 2021 to$14,453,251 as ofOctober 31, 2022 . The decrease in Unallocated Reserve as ofOctober 31, 2022 , as compared toOctober 31, 2021 , is primarily the result of a decrease in the unallocated cash andU.S. Government securities and accrued income receivable. The decrease in the unallocated cash andU.S. Government securities is attributable to a decrease in royalties received in the third quarter of 2022 as compared to the third quarter of 2021. The decrease in the accrued income receivable portion of the Unallocated Reserve is attributable to a decrease in shipments for the month endedOctober 31, 2022 as compared to the month endedOctober 31, 2021 . October 31, % increase 2022 2021 (decrease) Accrued Income Receivable$ 34,460 $ 8,491,074 (99.6)% Contract Asset - 551,370 100.0% Unallocated Cash and U.S. Government Securities 14,504,539 27,229,547 (46.7)% Prepaid Expenses and (Accrued Expenses), net (85,748) 39,837 (315.2)% Unallocated Reserve$ 14,453,251 $ 36,311,828 (60.2)%
It is possible that future negative price adjustments could offset, or even eliminate, future royalties or royalty income that would otherwise be payable to the Trust in any particular quarter, or at year end, thereby potentially reducing cash available for distribution to the Trust's Unitholders in future quarters. See the discussion under the heading "Risk Factors" beginning on page 4 of the Trust's Annual Report on Form 10-K for the fiscal year endedJanuary 31, 2022 (filedApril 27, 2022 ), as updated by Part II, Item 1A of this Quarterly Report on Form 10-Q. The Trust's Unallocated Reserve as ofOctober 31, 2022 decreased by$16,341,498 to$14,453,251 , as compared to the fiscal year endedJanuary 31, 2022 . The decrease in the Unallocated Reserve as ofOctober 31, 2022 , as compared toJanuary 31, 2022 , is primarily the result of a decrease in the unallocated cash andU.S. Government securities and accrued income receivable. The decrease in the unallocated cash andU.S. Government securities is attributable to a decrease in royalties received in the third quarter 14
Table of Contents
of 2022 as compared to the fourth quarter of 2021. The decrease in the accrued income receivable portion of the Unallocated Reserve is attributable to a decrease in shipments for the month endedOctober 31, 2022 as compared to the month endedJanuary 31, 2022 . % increase October 31, 2022 January 31, 2022 (decrease) Accrued Income Receivable $ 34,460$ 4,631,510 (99.3)% Contract Asset - 1,431,633 (100.0)% Unallocated Cash and U.S. Government Securities 14,504,539 24,767,504 (41.4)% Prepaid Expenses and (Accrued Expenses), net (85,748) (35,898) 138.9% Unallocated Reserve$ 14,453,251 $
30,794,749 (53.1)%
Each quarter, as authorized by the Agreement of Trust, the Trustees will reevaluate all relevant factors including all costs, expenses, obligations, and present and future liabilities of the Trust (whether fixed or contingent) in determining a prudent level of unallocated reserve in light of the unpredictable nature of the iron ore industry, current and projected future mining operations and current economic conditions. Although the actual amount of the Unallocated Reserve will fluctuate from time to time and may increase or decrease from its current level, it is currently anticipated that future distributions will be highly dependent upon royalty income as it is received and the level of Trust expenses. The amount of future royalty income available for distribution will be subject to the volume of iron ore product shipments and the dollar level of sales by Northshore. Shipping activity is greatly reduced during the winter months. The current idling of Northshore operations, which commencedMay 1, 2022 and will continue until at leastApril 2023 and maybe beyond according to Cliffs, will reduce the Trust's royalty income, which in turn will reduce, or potentially eliminate, funds available for distribution to Unitholders. Economic conditions, particularly those affecting the iron ore and steel industry arising from the COVID-19 pandemic, may adversely affect the amount and timing of such future shipments and sales. The Trustees will continue to monitor the economic and other circumstances of the Trust to strike a responsible balance between distributions to Unitholders and the need to maintain adequate reserves at a prudent level, given the unpredictable nature of the iron ore and steel industry, the Trust's dependence on the actions of the lessee/operator, and the fact that the Trust essentially has no other liquid assets.
Recent Developments
Receipt of Quarterly Royalty Report and Royalty Payment
OnOctober 28, 2022 ,Mesabi Trust received the quarterly royalty report of iron ore shipments out ofSilver Bay, Minnesota during the quarter endedSeptember 30, 2022 (the "Royalty Report") from Cliffs, the parent company of Northshore. The Royalty Report indicated that, because of the current and ongoing idling of Northshore, the Trust received no royalty payments for the quarter. As reported toMesabi Trust by Cliffs in the Royalty Report, based on shipments of iron ore products by Northshore during the three months endedSeptember 30, 2022 ,Mesabi Trust was credited with a base royalty of zero dollars ($0.00 ). For the three months endedSeptember 30, 2022 ,Mesabi Trust was also credited with a bonus royalty in the amount of zero dollars ($0.00 ). No adjustments were taken by Cliffs for the quarter. In addition, because of the current idling of Northshore, a royalty payment of zero dollars ($0.00 ) was paid to theMesabi Land Trust . Accordingly, the total royalty payments received byMesabi Trust onOctober 28, 2022 from Cliffs were zero dollars ($0.00 ). The royalties paid toMesabi Trust are based on the volume of iron ore pellets produced or shipped during the quarter and the year to date, the pricing of iron ore product sales, and the percentage of iron ore pellet shipments from Mesabi Trust Lands rather than from non-Mesabi Trust Lands. In the third calendar quarter of 2022, Cliffs creditedMesabi Trust with zero (0) tons of iron ore shipped, as compared to 1,169,461 tons shipped during the third calendar quarter of 2021. The volume of iron ore pellets (and other iron ore products) produced and shipped by Northshore varies from quarter to quarter and year to year based on a number of factors, including, among others, Cliffs' decisions to idle Northshore operations, the requested delivery schedules of customers, general economic conditions in the iron ore industry, production schedules and weather conditions on theGreat Lakes . These multiple factors can result in significant variations in royalties received byMesabi Trust (and in turn, the resulting funds available for distribution to Unitholders byMesabi Trust ) from quarter to quarter and from year to year. These variations, which can be positive or negative, cannot be predicted by the Trustees ofMesabi Trust . Based on the above factors, and as indicated byMesabi Trust's historical distribution payments, the royalties received byMesabi Trust , and the distributions paid to Unitholders, if any, in any particular quarter are not necessarily indicative of royalties that will be received, or distributions that will be paid, if any, in any subsequent quarter or full year.
As previously announced by Cliffs on
Cliffs' Royalty Report stated that the reported royalty amounts were based on
estimated iron ore pellet prices that are subject to change. It is possible that
future negative price adjustments could offset, or even eliminate, royalties or
royalty income that would
15
Table of Contents
otherwise be payable toMesabi Trust in any particular quarter, or at year end, thereby potentially reducing cash available for distribution toMesabi Trust's Unitholders in future quarters.
Announcement of No Distribution
OnOctober 14, 2022 ,Mesabi Trust issued a press release announcing that the Trustees ofMesabi Trust determined that no distribution was declared inOctober 2022 with respect to Units of Beneficial Interest. The Trustees' announcement of declaring no distribution this quarter primarily reflected the Trustees' caution about uncertainties arising from theJuly 22, 2022 announcement by Cleveland-Cliffs Inc. ("Cliffs"), the parent company ofNorthshore Mining Company ("Northshore"), to extend the current idling of Northshore operations until at leastApril 2023 and maybe beyond. With Northshore's operations currently in idle mode, and no additional information being made available to the Trustees regarding the length of the idling, the Trustees' decision reflects their determination to maintain an appropriate level of reserves in order to make adequate provision to meet current and future expenses and present and future liabilities (whether fixed or contingent) that may arise in the future. The Trustees have received no specific updates on Cliffs' plans concerning Northshore operations. The Trustees' determination of no distribution during the quarter also took into account numerous other factors, including uncertainties resulting from Cliffs' prior announcements to make Northshore a swing operation as Cliffs' Minorca operation becomes increasingly utilized, Cliffs' increased use of scrap iron in its vertical supply chain planning, potential volatility in the iron ore and steel industries generally, national and global economic uncertainties, the costs and expenses related to the Trust's initiation of arbitration against Northshore and its parent, Cliffs, possible further disturbances from global unrest and the potential impacts from further outbreaks of the coronavirus (COVID-19) pandemic.
Commencement of Arbitration
OnOctober 14, 2022 ,Mesabi Trust initiated arbitration against Northshore and its parent, Cliffs (jointly, the "Operator"), the lessee/operator of the leased lands. The arbitration proceeding has been commenced with theAmerican Arbitration Association . The Trust seeks an award of damages relating to the Operator's underpayment of royalties in 2020, 2021, and 2022 by virtue of the Operator's failure to use the highest price arm's length iron ore pellet sale from the preceding four quarters in pricing internal production during the fourth quarter of 2020 through 2022. The Trust also seeks declaratory relief related to the Trust's entitlement to certain documentation and to the time the Operator's royalty obligation accrues on internal production.
Forward-looking Statements
This report contains certain forward-looking statements based on Cliffs' publicly announced plans with respect to DR-grade pellet production, third party sales, and use of Northshore in the future, which statements are intended to be made under the safe harbor protections of the Private Securities Litigation Reform Act of 1995, as amended. Cliffs' implementation of, or changes to, these plans are beyondMesabi Trust's control. As such, such statements are subject to risks and uncertainties, which could cause actual results to differ materially. Additional information concerning these and other risks and uncertainties is contained inMesabi Trust's filings with theSecurities and Exchange Commission , including its Annual Report on Form 10-K for the fiscal year endedJanuary 31, 2022 (filedApril 27, 2022 ) and Quarterly Reports on Form 10-Q for the quarter endedApril 30, 2022 (filedJune 13, 2022 ) and for the quarter endedJuly 31, 2022 (filedSeptember 13, 2022 ).Mesabi Trust undertakes no obligation to publicly update or revise any of the forward-looking statements made herein to reflect events or circumstances after the date hereof. In accordance with general instruction B.2 to Form 8-K, the information in this Form 8-K shall not be deemed to be "filed" for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to the liabilities of that section.
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 toMesabi Trust's Unitholders after the payment of, or provision for, such expenses and liabilities, monitoring royalties and protecting and conserving the held assets. NeitherMesabi Trust nor the Trustees have any control over the operations and activities of Northshore, except within the framework of the Amended Assignment ofPeters Lease . Cliffs alone controls (i) historical operating data, including iron ore production volumes, decisions to reduce or idle the Northshore plant and mining operations, marketing of iron ore products, operating and capital expenditures as they relate to Northshore, environmental and other liabilities and the effects of regulatory changes; (ii) plans for Northshore's future operating and capital expenditures; (iii) geological data relating to ore reserves; (iv) projected production of iron ore products; (v) contracts between Cliffs and Northshore with their customers; and (vi) the decision to mine off 16 Table of ContentsMesabi Trust and/or state lands, based on Cliffs' current mining and engineering plan. The Trustees do not exert any influence over mining operational decisions at Northshore, nor do the Trustees provide any input regarding the ore reserve estimated at Northshore as reported by Cliffs. While the Trustees request relevant information from Cliffs and Northshore in accordance with the royalty agreement for use in periodic reports as part of their evaluation ofMesabi Trust's disclosure controls and procedures, the Trustees do not control this information and they rely on the information in Cliffs' periodic and current filings with theSEC to provide accurate and timely information inMesabi Trust's reports filed with theSEC . 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 ofMesabi 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 toMesabi Trust . For a discussion of additional factors, including but not limited to those that could adversely affectMesabi Trust's actual results and performance, see "Risk Factors" set forth on pages 4 through 16 ofMesabi Trust's Annual Report on Form 10-K for the fiscal year-endedJanuary 31, 2022 (filedApril 27, 2022 ).
Iron Ore Pricing and Contract Adjustments
During the course of its typical fiscal year, some portion of the royalties paid toMesabi Trust is based in part on estimated prices for certain iron ore products sold under some of the Cliffs' Customer Contracts.Mesabi Trust is not a party to any of the Cliffs' Customer Contracts. These prices are subject to interim and final pricing adjustments, which can be positive or negative, and which adjustments are dependent in part on a variety of price and inflation index factors, including but not limited to various benchmark pellet prices, hot band steel prices and various Producer Price Indexes. Although Northshore makes interim adjustments to the royalty payments on a quarterly basis, these price adjustments cannot be finalized until after the end of a contract year. This may result in significant and frequent variations in royalties received byMesabi Trust (and in turn the resulting amount of funds available for distribution to Unitholders by the Trust) from quarter to quarter and on a comparative historical basis. These variations, which can be positive or negative, cannot be predicted byMesabi Trust . It is possible that future negative price adjustments could partially or even completely offset royalties or royalty income that would otherwise be payable to the Trust in any particular quarter, or at year-end, thereby potentially reducing cash available for distribution to the Trust's Unitholders in future quarters.
Effects of Securities Regulation
The Trust is a publicly traded, pass-through royalty trust with its Trust Certificates listed on theNew York Stock Exchange ("NYSE") and is therefore subject to extensive regulation under, among others, the Securities Act of 1933, the Securities Exchange Act of 1934, the Sarbanes-Oxley Act of 2002 ("Sarbanes-Oxley"), each as amended, and the rules and regulations of the NYSE. Issuers failing to comply with such authorities risk serious consequences, including criminal as well as civil and administrative penalties. In most instances, these laws, rules and regulations do not specifically address their applicability to a publicly-traded pass-through royalty trust such asMesabi Trust . In particular, Sarbanes-Oxley mandated the adoption by theSEC and NYSE of certain rules and regulations that are impossible for the Trust to literally satisfy because of its nature as a pass-through royalty trust. Pursuant to NYSE rules, as a pass-through royalty trust, the Trust is exempt from many of the corporate governance requirements that apply to other publicly traded corporations. The Trust does not have, nor does the Agreement of Trust provide for, a board of directors, an audit committee, a corporate governance committee, a compensation committee or executive officers. The Trust has no employees. The Trustees closely monitor theSEC's and NYSE's rulemaking activities and will comply with their rules and regulations to the extent applicable.
The Trust's website is located at www.mesabi-trust.com.
Critical Accounting Policies and Estimates
This "Trustees' Discussion and Analysis of Financial Condition and Results of Operations" is based upon the Trust's financial statements, which have been prepared in accordance with accounting principles generally accepted inthe United States . The preparation of these financial statements requires the Trustees to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. These estimates form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. The Trustees base their estimates and judgments on historical experience and on various other assumptions that the Trustees believe are reasonable under the circumstances. However, because future events and their effects cannot be determined with certainty, actual results could differ from our assumptions and estimates, and such differences could be material. Critical accounting policies are those that have meaningful impact on the reporting of the Trust's financial condition and results of operations, and that require significant judgment and estimates. 17
Table of Contents
There have been no material changes in the Trust's critical accounting policies or significant accounting estimates during the three months endedOctober 31, 2022 . For a complete description of the Trust's significant accounting policies, please see Note 2 to the financial statements included in the Trust's Annual Report on Form 10-K for the year endedJanuary 31, 2022 (filedApril 27, 2022 ).
Certain Tax Information
The Trust is not taxable as a corporation for federal or state income tax purposes and is instead qualified as a nontaxable grantor trust. Since the Trust's inception, all net taxable income is annually attributable directly to Unitholders for tax purposes regardless of whether the income is distributed or retained by the Trust in its reserve account. As such, in lieu of the Trust paying income taxes, Unitholders report their pro rata share of the various items of Trust income and deductions on their income tax returns. This reporting is required whether or not the earnings of the Trust are distributed as to Unitholders. During calendar year 2021, any funds retained to increase the Trust's unallocated reserve, which were derived from reportable royalty income, will nonetheless become taxable as reportable income to Unitholders, depending on each individual's personal tax situation. Information regarding the background on the changes in the Trust's unallocated reserve is described above under "Results of Operations - Comparison of Unallocated Reserve as ofOctober 31, 2022 ,October 31, 2021 andJanuary 31, 2022 " beginning on page 12. Unitholders are encouraged to consult with their own tax advisors to plan for any financial impact related to this and to review their personal tax situations related to investing in, holding or selling units of beneficial interest inMesabi Trust .
© Edgar Online, source
