Mesabi Trust Declares No Distribution
07/20/2009 - Trustees of the Mesabi Trust have decided to not distribute any royalty income for the quarter ended July 31, 2009, due in part to a significant decrease in iron ore shipments combined with the extended shutdown of mining operations at Northshore Mining Co.
Trustees of the Mesabi Trust have decided to not distribute any royalty income for the three months ended July 31, 2009. The decision is due in part to a significant decrease in shipments of iron ore combined with the extended shutdown of mining operations at Northshore Mining Co. The Trust will retain the second quarter royalty payment (after the payment of the Trust’s expenses) and add it to the Trust’s unallocated reserve, which was ($392,377) as of April 30, 2009.
In making their decision, Trustees considered the per-unit royalty income that would have been available for distribution to the Trust’s Unitholders, as well as the need for the Trust to maintain adequate reserves to cover present and future liabilities. The Trust is currently carrying a $2.37 million deferred royalty revenue liability.
Shipments credited to the Trust by Northshore during second quarter reached 309,895 tons an approximately 88% decrease as compared to 2,494,369 tons during the year-ago second calendar quarter (when the Trust paid a distribution of $1.00 per Unit). The total royalty payment that Mesabi Trust expects to receive from Northshore is $853,016, before payment of the Trust’s expenses and allocation for reserves. The Trust’s total second quarter royalty payment consists of a base royalty payment of $281,766 (which reflects the base royalty payment received after deducting the minimum base royalty payment of $202,044 which the Trust earned during the first calendar quarter of 2009). Mesabi Trust is also expecting to receive a bonus royalty in the amount of $545,224, based on the average sales price per ton of iron ore pellets and the volume of shipments during the quarter. Adjustments to first-quarter base and bonus royalties ($26,026) have been added to the second quarter royalty payment. The net royalty income earned by the Trust, to be received on July 31, 2009, will be added to the Trust’s Unallocated Reserve upon receipt, leaving no funds available for distribution to Unitholders.
With respect to the remainder of 2009, Northshore has not advised Mesabi Trust as to expected shipments of iron ore products or what percentage of such shipments will be from Mesabi Trust iron ore. Cleveland-Cliffs Inc, Northshore’s parent, had previously reported that it estimates scheduled 2009 pellet production at Northshore (using iron ore mined from both Mesabi Trust lands and from other than Mesabi Trust lands) will be approximately 3.2 million tons. Cliffs has not provided Mesabi Trust with any projections about possible pricing (and resulting royalty) adjustments that might impact future distributions, although it did indicate that the current royalty payments are based on estimated iron ore pellet prices under the Cliffs Pellet Agreements, which are subject to adjustment.
Although production at Northshore has resumed as planned, the Trustees believe that decision to not distribute any second quarter royalty income is necessary and prudent given the unpredictable nature of the current economic conditions, a possible prolonged economic recession, the possibility of future negative price adjustments under the long-term customer contracts, and other unforeseeable events that could cause major changes in demand patterns. These factors could continue to have a material adverse effect on the volume of shipments and sales prices of iron ore products shipped by Northshore, and thus have potential to significantly reduce future royalties received by the Trust.
Royalties paid to Mesabi Trust are based on the volume of pellet shipments, pricing of the iron ore product sales, and the percentage of iron ore pellet shipments from Mesabi Trust lands (rather than from other lands). The volume of shipments of iron ore pellets by Northshore varies based on a number of factors, including the requested delivery schedules, general economic conditions in the industry, and weather conditions on the Great Lakes. Prices under the Cliffs Pellet Agreements are subject to interim and final pricing adjustments, dependent in part on multiple price and inflation index factors that are not known until after the end of a contract year. 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 Mesabi Trust). These variations cannot be predicted by the Trustees of Mesabi Trust. It is possible that future negative price adjustments could offset, or even eliminate, royalties or royalty income that would otherwise be payable to the Trust, thereby potentially reducing cash available for distribution to the Trust’s Unitholders in future quarters.
