UNITED STATES

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)


☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended July 31, 2023


☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File Number: 1-4488

MESABI TRUST

(Exact name of registrant as specified in its charter)

New York

13-6022277

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer Identification No.)

c/o Deutsche Bank Trust Company Americas

Trust & Agency Services

1 Columbus Circle, 17th Floor

Mail Stop: NYC01-1710

New York, New York

10019

(Address of principal executive offices)

(Zip Code)

(904) 271-2520

(Registrant’s telephone number, including area code)

Not applicable

(Former name, former address and former fiscal year, if changed since last report)

Securities registered pursuant to Section 12(b) of the Act:


Title of each class	Trading Symbol	Name of each exchange on which registered
Units of Beneficial Interest, no par value	MSB	New York Stock Exchange

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 ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer ☐		Accelerated filer ☐
Non-accelerated filer ☒		Smaller reporting company ☒
		Emerging growth company ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

As of September 10, 2023, there were 13,120,010 Units of Beneficial Interest in Mesabi Trust outstanding.

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TABLE OF CONTENTS

	Page

PART I – FINANCIAL INFORMATION	3
Item 1. Financial Statements. (Note 1)	3
Condensed Statements of Operations Three and Six Months Ended July 31, 2023 and 2022	3
Condensed Balance Sheets July 31, 2023 and January 31, 2023	4
Condensed Statements of Cash Flows Six Months Ended July 31, 2023 and 2022	5
Notes to Condensed Financial Statements	6
Item 2. Trustees’ Discussion and Analysis of Financial Condition and Results of Operations.	10
Item 3. Quantitative and Qualitative Disclosures About Market Risk.	18
Item 4. Controls and Procedures.	18

PART II - OTHER INFORMATION	19
Item 1. Legal Proceedings	19
Item 1A. Risk Factors	19
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	19
Item 3. Defaults upon Senior Securities	19
Item 4. Mine Safety Disclosures	19
Item 5. Other Information	19
Item 6. Exhibits.	19

SIGNATURES	20

Forward-Looking Statements

Certain information included in this Quarterly Report on Form 10-Q contains, or incorporates by reference, not only historical information, but also “forward-looking statements” within the meaning of Section 21E of the Securities Exchange Act of 1934. All such forward-looking statements, including those statements regarding estimation of iron ore pellet production, shipments, pricing, royalties and other matters, are based on information from the lessee/operator (and its parent corporation) of the mine located on the lands owned and held in trust for the benefit of the holders of units of beneficial interest of Mesabi Trust (“Mesabi Trust” or the “Trust”). These statements may be identified by the use of forward-looking words, such as “may,” “will,” “could,” “project,” “predict,” “intend,” “believe,” “anticipate,” “expect,” “estimate,” “continue,” “potential,” “plan,” “should,” “assume,” “forecast” and other similar words. Such forward-looking statements are inherently subject to known and unknown risks and uncertainties. Actual results and future developments could differ materially from the results or developments expressed in or implied by these forward-looking statements. These risks and uncertainties include, but are not limited to, volatility of iron ore and steel prices, market supply and demand, competition, environmental hazards, health and safety conditions, regulation or government action, litigation, uncertainties about estimates of reserves, general adverse business and industry economic trends, uncertainties arising from war, terrorist events and other global events, higher or lower customer demand for steel and iron ore, decisions by mine operators regarding curtailments or idling production lines or entire plants, environmental compliance uncertainties, difficulties in obtaining and renewing necessary operating permits, higher imports of steel and iron ore substitutes, processing difficulties, consolidation and restructuring in the domestic steel market, market inputs tied to indexed price adjustment factors found in Cliffs’ Customer Contracts (as defined below) resulting in future adjustments to royalties payable to Mesabi Trust, and other factors. Further, substantial portions of royalties earned by Mesabi Trust are based on estimated prices that are subject to interim and final adjustments, which can be positive or negative, and are dependent in part on multiple price and inflation index factors under agreements to which Mesabi Trust is not a party and that are not known until after the end of a contract year. It is possible that future negative price adjustments could partially or even completely offset royalties or royalty income that would otherwise be payable to the Trust in any particular quarter, or at year-end, thereby potentially reducing cash available for distribution to the Trust’s Unitholders (as defined below) in future quarters.

For a discussion of the factors, including without limitation, those that could materially and adversely affect Mesabi Trust’s actual results and performance, see “Risk Factors” set forth on pages 4 through 17 of Mesabi Trust’s Annual Report for the year ended January 31, 2023, as updated by Part II, Item 1A of the Report on Form 10-Q for the quarter ended April 30, 2023. These risks and uncertainties are not exclusive and further information concerning the Trust, including factors that potentially could materially affect our operating results, financial condition or the market price of the Units, may emerge from time to time. Mesabi Trust undertakes no obligation, other than that imposed by law, to make any revisions to the forward-looking statements contained in this filing or to update them to reflect circumstances occurring after the date of this filing. We advise you, however, to consult any further disclosures we make on related subjects in our future Quarterly Reports on Form 10-Q, Annual Reports on Form 10-K and Current Reports on Form 8-K that we file with or furnish to the Securities and Exchange Commission.

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PART I – FINANCIAL INFORMATION

Item 1. Financial Statements. (Note 1)

Mesabi Trust

Condensed Statements of Operations

Three and Six Months Ended July 31, 2023 and 2022


	Three Months Ended				Six Months Ended
	July 31,				July 31,
	2023		2022		2023		2022
	(unaudited)		(unaudited)		(unaudited)		(unaudited)
A. Condensed Statements of Operations

Revenues
Royalty income (loss)	$	9,730,596	$	(4,401,049)	$	11,441,912	$	9,794,440
Interest		158,645		34,238		296,178		34,997

Total revenues (loss)		9,889,241		(4,366,811)		11,738,090		9,829,437

Expenses		705,901		490,560		1,531,611		1,091,623

Net income (loss)	$	9,183,340	$	(4,857,371)	$	10,206,479	$	8,737,814

WEIGHTED AVERAGE NUMBER OF UNITS OUTSTANDING
Number of units outstanding		13,120,010		13,120,010		13,120,010		13,120,010

Net income (loss) per unit (Note 2)	$	0.6999	$	(0.3702)	$	0.7779	$	0.6660

Distributions declared per unit (Note 3)	$	-	$	0.8400	$	-	$	1.8800

See Notes to Condensed Financial Statements.

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Mesabi Trust

Condensed Balance Sheets

July 31, 2023 and January 31, 2023


	July 31, 2023		January 31, 2023
	(unaudited)
B. Condensed Balance Sheets

Assets

Cash and cash equivalents	$	17,750,909	$	13,966,500
Accrued income receivable		1,812,600		23,562
Contract asset		2,033,676		—
Prepaid expenses		303,942		127,233
Current assets		21,901,127		14,117,295

Fixed property, including intangibles, at nominal values
Assignments of leased property

Amended assignment of Peters Lease		1		1

Assignment of Cloquet Leases		1		1

Certificate of beneficial interest for 13,120,010 units of Land Trust		1		1
		3		3

Total assets	$	21,901,130	$	14,117,298

Liabilities, Unallocated Reserve And Trust Corpus

Liabilities
Accrued expenses	$	256,434	$	380,960
Contract liability		—		2,298,121
Total liabilities		256,434		2,679,081

Unallocated reserve		21,644,693		11,438,214

Trust corpus		3		3

Total liabilities, unallocated reserve and trust corpus	$	21,901,130	$	14,117,298

See Notes to Condensed Financial Statements.

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Mesabi Trust

Condensed Statements of Cash Flows

Six Months Ended July 31, 2023 and 2022


	Six Months Ended
	July 31,
	2023		2022
		(unaudited)		(unaudited)
C. Condensed Statements of Cash Flows

Operating activities
Royalties received	$	5,321,510	$	15,857,438
Interest received		295,745		25,666
Expenses paid		(1,832,846)		(1,216,251)

Net cash from operating activities		3,784,409		14,666,853

Investing activities
Maturities of U.S. Government securities		53,995,684		49,166,956
Purchases of U.S. Government securities		(53,995,684)		(72,503,643)

Net cash from (used for) investing activities		—		(23,336,687)

Financing activity
Distributions to unitholders		—		(36,604,828)

Net change in cash and cash equivalents		3,784,409		(45,274,662)

Cash and cash equivalents, beginning of period		13,966,500		47,727,522

Cash and cash equivalents, end of period	$	17,750,909	$	2,452,860

Reconciliation of net income to net cash from operating activities

Net income	$	10,206,479	$	8,737,814
(Increase) decrease in accrued income receivable		(1,789,038)		4,622,034
(Increase) decrease in contract asset		(2,033,676)		1,431,633
Increase in prepaid expense		(176,709)		(176,940)
(Decrease) increase in accrued expenses		(124,526)		52,312
Decrease in contract liability		(2,298,121)		—

Net cash from operating activities	$	3,784,409	$	14,666,853

Non cash financing activity

Distributions declared and payable	$	—	$	11,020,810

See Notes to Condensed Financial Statements.

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Mesabi Trust

Notes to Condensed Financial Statements

July 31, 2023 (Unaudited)

Note 1. The condensed financial statements and notes to the condensed financial statements included herein have been prepared in accordance with the instructions to Form 10-Q pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted pursuant to such rules and regulations. In the opinion of the Trustees of Mesabi Trust (the “Trustees”), all adjustments, consisting only of normal recurring adjustments, necessary for a fair statement of (a) the results of operations for the three and six months ended July 31, 2023 and 2022, (b) the financial position as of July 31, 2023 and (c) the cash flows for the six months ended July 31, 2023 and 2022, 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, 2023.

Note 2. Net income per unit is based on 13,120,010 units outstanding during all periods presented.

The Trust accounts for revenue in accordance with ASC 606, Revenue from Contracts with Customers. All revenue is recognized as the performance obligations are satisfied. In accordance with the royalty agreement, the Trust recognizes revenue upon providing access to the lands and minerals only after the consideration that is entitled to be received is determinable. The Trust is entitled to payment upon production of all pellet grades to be sold for internal use by facilities owned by Cliffs or its subsidiaries. For revenue recognition purposes, the Trust 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, are recognized as revenue upon shipment from Silver Bay, Minnesota.

Disaggregation of Revenues

The following table represents a disaggregation of revenue for the three and six months ended July 31, 2023 and July 31, 2022.


	Three Months Ended July 31,
	2023		2022
Base overriding royalties	$	5,373,668	$	(4,402,501)
Bonus royalties		4,090,094		(10)
Fee royalties		266,834		1,462
Total royalty income (loss)	$	9,730,596	$	(4,401,049)


	Six Months Ended July 31,
	2023		2022
Base overriding royalties	$	6,335,466	$	3,829,720
Bonus royalties		4,797,934		5,722,317
Fee royalties		308,512		242,403
Total royalty income	$	11,441,912	$	9,794,440

Base overriding royalties

The performance obligation for the base overriding royalty consists of providing Northshore access to the Peters Lands, Cloquet Lands, and Mesabi Lands and the right to mine on these lands. The consideration to be received from this access relates to the volume of iron ore actually shipped to third parties, or deemed shipped upon production for internal use, by Northshore. Cliffs considers pellets designated for internal use by Cliffs to be “deemed shipped” upon production, entitling the Trust to payment under the provisions of the royalty agreement at this time. Mesabi Trust receives royalties at the greater of (i) the aggregate quantity of iron ore products shipped, or deemed shipped, that were mined from Mesabi Trust Lands, and (ii) a portion of the aggregate quantity of all iron ore products shipped, or deemed shipped, that were mined from any lands, such portion being 90% of the first four million tons shipped, or deemed shipped, during such year, 85% of the next two million tons shipped, or deemed shipped, during such year, and 25% of all tonnage shipped, or deemed 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, or deemed shipped, attributable to the Trust, in any calendar year increases. The Trust earns a 2.5% royalty on the first million tons shipped or deemed shipped, 3.5% on the second million tons, 5.0% on the third million tons, 5.5% on the fourth million tons and 6.0%

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beyond four million tons. The base overriding royalties contain variable consideration, as the transaction price is based on a percentage that varies based on the total cumulative tons of iron ore shipped, or deemed shipped, for the calendar year. The Trust estimates the variable consideration it expects to be entitled to receive over the contractual period associated with the royalty agreement. Under the royalty agreement, measurement of the total cumulative volumes of iron ore shipped, or deemed shipped, and the applicable royalty percentages, is reset at the beginning of each calendar year. The Trust evaluates the estimate of the variable consideration to determine whether the estimate needs to be constrained; therefore, the Trust includes the variable consideration in the transaction price only to the extent that it is probable that a significant reversal of the amount of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is subsequently resolved. For the base overriding royalties, the Trust estimates the base overriding royalty percentage using the expected value method, which calculates the estimate based off the historical, current, and forecasted shipments. The Trust recognizes base overriding royalties on a quarterly basis based on the actual third party shipments and deemed shipments for internal use, for the fiscal quarter at the estimated royalty percentage as described above and based on the estimated prices for iron ore products sold under Cliffs’ Customer Contracts.

On May 1, 2022, Cliffs idled Northshore. On July 22, 2022, Cliffs announced that it was extending the ongoing idle at Northshore through at least April of 2023. Based on the change in the anticipated timing of the idling of Northshore operations, the Trust’s estimate of the variable consideration relating to the base overriding royalties to be received was determined to be constrained during the second quarter ended July 31, 2022, and all variable consideration expected to be received through the end of the fiscal year ended January 31, 2023 was reversed in the second fiscal quarter ended July 31, 2022, resulting in negative base overriding royalties during that quarter. On April 25, 2023, Cliff's announced a partial restart of some operations at Northshore and that Cliffs will continue to treat Northshore as a swing operation. The Trust has recommenced recording a contract asset for variable consideration in the current fiscal year for base overriding royalties, based on estimated cumulative tons shipped for the current fiscal year at estimated prices for iron ore products sold under Cliffs’ Customer Contracts that will be collected in subsequent quarters as the uncertainty associated with the variable consideration is resolved.

Bonus royalties

The performance obligation for the bonus royalties consists of providing Northshore access to the Peters Lands, Cloquet Lands, and Mesabi Lands and the right to mine on these lands and the consideration to be received from this access relates to the volume of iron ore shipped, or deemed shipped, by Northshore. The Trust recognizes bonus royalties on a quarterly basis based on the actual third party shipments and deemed shipments for internal use, of the fiscal quarter at the actual royalty percentage for those shipments and based on the anticipated prices for iron ore products sold under Cliffs’ Customer Contracts. The Trust is paid royalty bonuses when iron ore products shipped are sold at anticipated prices above a threshold price per ton. The royalty bonus is based on a percentage of the gross proceeds of product shipped. The royalty bonus percentage ranges from 1/2 of 1% of the gross proceeds (on all tonnage shipped for sale at prices between the threshold price and $2.00 above the threshold price) to 3% of the gross proceeds (on all tonnage shipped for sale at prices $10.00 or more above the threshold price). The threshold price is adjusted annually for inflation and is $66.00 per ton for calendar year 2023.

Fee royalties

The fee royalties consists of the volume of crude ore mined on a quarterly basis. The Trust recognizes fee royalties on a quarterly basis based on the actual crude ore mined during the fiscal quarter. Fee royalties are payable to the Mesabi Land Trust, a Minnesota land trust, which holds a 20% interest as fee owner in the Amended Assignment of Peters Lease. Mesabi Trust holds the entire beneficial interest in the Mesabi Land Trust for which U.S. Bank N.A. acts as the corporate trustee. Mesabi Trust receives the net income of the Mesabi Land Trust, which is generated from royalties on the amount of crude ore mined after the payment of expenses to U.S. Bank N.A. for its services as the corporate trustee. The fee royalty on crude ore is based on an agreed price per ton, subject to certain indexing.

Accrued income receivable

The accrued income receivable is included in net income per unit. The Trust recorded $1,812,600 of accrued income receivable as reflected on the Condensed Balance Sheet as of July 31, 2023 (unaudited). As of January 31, 2023, the Trust recorded accrued income receivable of $23,562. Accrued income receivable represents royalty income earned but not yet received by the Trust. Accrued income receivable is calculated using estimated prices and includes (i) shipments during the last month of Mesabi Trust’s fiscal quarter, if any, and (ii) net positive adjustments (which may include the sum of positive and negative price adjustments) calculated using the pricing adjustment mechanisms in the iron ore pellet sales agreements between Cliffs and its customers that determine the final sales price of the shipments from Silver Bay, Minnesota.

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Contract asset and contract liability

The contract asset and contract liability are presented net in the accompanying condensed balance sheets as both the contract asset and contract liability are derived from one customer contract. A net contract asset in the amount of $2,033,676 is reflected on the Condensed Balance Sheet as of July 31, 2023 (unaudited). The net contract asset is made up of a contract asset in the amount of $2,185,978 and a contract liability in the amount of $152,302. As of January 31, 2023 the Trust recorded a net contract liability of $2,298,121. The net contract liability is made up of a contract asset in the amount of $0 and a contract liability in the amount of $2,298,121. The contract asset is based on the revenue recognized on the base overriding royalties, at the estimated prices for iron ore products sold under Cliffs’ Customer Contracts that will be collected in subsequent quarters as the uncertainty associated with the variable consideration is resolved. The contract asset is not available for distribution to the Unitholders until the applicable royalties are actually received by the Trust. The Trust includes estimated future royalty rates on current contracted volumes within contract asset. The contract liability represents an estimate of decreases in royalty revenue related to tons of iron ore that were shipped, or deemed shipped, by Northshore, but for which Northshore has indicated that final pricing is not yet known and is adjusted in accordance with the Trust’s revenue recognition policy each quarter as updated pricing information is received, as well as payment for tons credited to the Trust at a minimum of 90% of total shipments when the actual tons shipped from Trust lands are less than 90% in the calendar quarter. The contract liability as of January 31, 2023 was offset against royalty payments owed to the Trust during the second fiscal quarter ended July 31, 2023. The Trust is entitled to payment upon production of pellets to be sold for internal use by facilities owned by Cliffs or its subsidiaries. Revenue is recognized in accordance with the Trust’s revenue recognition policy at the estimated prices for iron ore products sold under Cliffs’ Customer Contracts as actual third party shipments and deemed shipments for internal use, of these products are made.

Note 3. The Trustees determine whether to declare a distribution each year in April, July, October and January. The Trust’s financial statements are prepared on an accrual basis and present the Trust’s results of operations based on each of the Trust’s fiscal quarters, which end 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 amount 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 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 during the periods reported in this quarterly report on Form 10-Q.

Note 4. On July 14, 2023, the Trustees declared no distribution per Unit of Beneficial Interest for the quarter ended July 31, 2023 as compared to a distribution of $0.84 per Unit of Beneficial Interest for the quarter ended July 31, 2022.

On July 28, 2023, the Trustees received the quarterly royalty report of iron ore production and shipment during the calendar quarter ended June 30, 2023 from Cliffs, the parent company of Northshore.

Each quarter, as authorized by the Agreement of Trust dated July 18, 1961, as amended (the “Agreement of Trust”), the Trustees evaluate all relevant factors, including all costs, expenses, obligations, and present and future liabilities of the Trust (whether fixed or contingent) in determining the prudent level of unallocated reserve in light of the unpredictable nature of the iron ore industry and current economic conditions.

Pursuant to the Agreement of Trust, the Trustees make decisions about cash distributions to Unitholders based on the royalty payments it receives from Northshore when received, rather than as royalty income is recorded in accordance with the Trust’s revenue recognition policy. Refer to Note 3 for further information.

As of July 31, 2023 and January 31, 2023, the unallocated cash and cash equivalents portion of the Trust’s Unallocated Reserve was comprised of the following components. Cash equivalents consists of U.S. government securities with original maturities of 3 months or less.


	July 31, 2023		January 31, 2023
Cash and cash equivalents	$	17,750,909	$	13,966,500
Distribution payable		—		—

Unallocated cash and cash equivalents	$	17,750,909	$	13,966,500

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A reconciliation of the Trust’s Unallocated Reserve and Trust Corpus for the three and six months ended July 31, 2023 and 2022 is as follows:


		Unallocated		Trust
		Reserve		Corpus		Total
Balances as of January 31, 2023	$	11,438,214	$	3	$	11,438,217

Net income		10,206,479		—		10,206,479
Distributions declared - $0.0000 per unit		—		—		—

Balances as of July 31, 2023	$	21,644,693	$	3	$	21,644,696


		Unallocated		Trust
		Reserve		Corpus		Total
Balances as of April 30, 2023	$	12,461,353	$	3	$	12,461,356

Net income		9,183,340		—		9,183,340
Distributions declared - $0.0000 per unit		—		—		—

Balances as of July 31, 2023	$	21,644,693	$	3	$	21,644,696


		Unallocated		Trust
		Reserve		Corpus		Total
Balances as of January 31, 2022	$	30,794,749	$	3	$	30,794,752

Net income		8,737,814		—		8,737,814
Distributions declared - $1.8800 per unit		(24,665,620)		—		(24,665,620)

Balances as of July 31, 2022	$	14,866,943	$	3	$	14,866,946


		Unallocated		Trust
		Reserve		Corpus		Total
Balances as of April 30, 2022	$	30,745,124	$	3	$	30,745,127

Net loss		(4,857,371)		—		(4,857,371)
Distributions declared - $.8400 per unit		(11,020,810)		—		(11,020,810)

Balances as of July 31, 2022	$	14,866,943	$	3	$	14,866,946

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

This discussion should be read in conjunction with the condensed financial statements and notes presented in this Quarterly Report on Form 10-Q and the financial statements and notes in the last filed Annual Report on Form 10-K for the year ended January 31, 2023 for a full understanding of Mesabi Trust’s financial position and results of operations for the three and six months ended July 31, 2023.

All references in this discussion and in this Quarterly Report on Form 10-Q to iron ore products “shipped” shall include iron ore products that Cliffs actually ships from Silver Bay, Minnesota and/or iron ore products Cliffs deems shipped upon production. Similarly, all references in this discussion and in this Quarterly Report on Form 10-Q to “shipments” shall include Cliffs’ actual shipments of iron ore products and/Cliffs’ production of iron ore products it deems shipped. The Trust is entitled to payment upon production of all pellet grades to be sold for internal use by facilities owned by Cliffs or its subsidiaries. For revenue recognition purposes, the Trust 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, are recognized as revenue upon shipment from Silver Bay, Minnesota.

Background

Mesabi Trust, formed pursuant to the Agreement of Trust, is a trust organized under the laws of the State of New York. Mesabi Trust holds all of the interests formerly owned by Mesabi Iron Company (“MIC”), including all right, title and interest in the Amendment of Assignment, Assumption and Further Assignment of Peters Lease (the “Amended Assignment of Peters Lease”), the Amendment of Assignment, Assumption and Further Assignment of Cloquet Lease (the “Amended Assignment of Cloquet Lease” and together with the Amended Assignment of Peters Lease, the “Amended Assignment Agreements”), the beneficial interest in a trust organized under the laws of the State of Minnesota to administer the Mesabi Fee Lands (as defined below) as the trust corpus in compliance with the laws of the State of Minnesota on July 18, 1961 (the “Mesabi Land Trust”) and all other assets and property identified in the Agreement of Trust. The Amended Assignment of Peters Lease relates to an Indenture made as of April 30, 1915 among East Mesaba Iron Company (“East Mesaba”), Dunka River Iron Company (“Dunka River”) and Claude W. Peters (the “Peters Lease”) and the Amended Assignment of Cloquet Lease relates to an Indenture made May 1, 1916 between Cloquet Lumber Company and Claude W. Peters (the “Cloquet Lease”).

The Agreement of Trust specifically prohibits the Trustees from entering into or engaging in any business. This prohibition applies even to business activities the Trustees may deem necessary or proper for the preservation and protection of the Trust Estate. Accordingly, the Trustees’ activities in connection with the administration of Trust assets are limited to collecting income, paying expenses and liabilities, distributing net income to the holders of Certificates of Beneficial Interest in Mesabi Trust (“Unitholders”) after the payment of, or provision for, such expenses and liabilities, and protecting and conserving the assets held by the Trust.

The Trustees do not intend to expand their responsibilities beyond those permitted or required by the Agreement of Trust, the Amendment to the Agreement of Trust dated October 25, 1982 (the “Amendment”), and those required under applicable law. Mesabi Trust has no employees, but it engages independent consultants to assist the Trustees in, among other things, monitoring the volume and sales prices of iron ore products shipped, based on information supplied to the Trustees by Northshore, the lessee/operator of the lands leased under the Peters Lease and Cloquet Lease (the “Peters Lease Lands” and “Cloquet Lease Lands,” respectively) and the 20% fee interest of certain lands that are particularly described in, and subject to a mining lease under, the Peters Lease (the “Mesabi Fee Lands,” and together with the Peters Lease Lands and Cloquet Lease Lands, the “Mesabi Trust Lands”), and its parent company, Cliffs. References to Northshore in this quarterly report, unless the context requires otherwise, are applicable to Cliffs as well.

Leasehold royalty income constitutes the principal source of the Trust’s revenue. The income of the Trust is highly dependent upon the activities and operations of Northshore. Royalty rates and the resulting royalty payments received by the Trust are determined in accordance with the terms of the Trust’s leases and assignments of leases.

Three types of royalties, as well as royalty bonuses, comprise the Trust’s leasehold royalty income:

●

Base overriding royalties. Base overriding royalties have historically constituted the majority of the Trust’s royalty income. Base overriding royalties are determined by both the volume and selling price of iron ore products shipped. Northshore is obligated to pay the Trust base overriding royalties in varying amounts, based on the volume of iron ore products shipped. Base overriding royalties are calculated as a percentage of the gross proceeds of iron ore products produced at Mesabi Trust Lands (and to a limited extent other lands) and shipped or deemed 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.

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●

Royalty bonuses. The Trust earns royalty bonuses when iron ore products shipped are sold at prices above a threshold price per ton. The royalty bonus is based on a percentage of the gross proceeds of product shipped. The threshold price is adjusted (but not below $30.00 per ton) on an annual basis for inflation and deflation (the “Adjusted Threshold Price”). The Adjusted Threshold Price was $62.03 per ton for calendar year 2022 and is $66.00 per ton for calendar year 2023. The royalty bonus percentage ranges from 1/2 of 1% of the gross proceeds (on all tonnage shipped for sale at prices between the Adjusted Threshold Price and $2.00 above the Adjusted Threshold Price) to 3% of the gross proceeds (on all tonnage shipped for sale at prices $10.00 or more above the Adjusted Threshold Price). Royalty bonuses are subject to price adjustments under Cliffs’ Customer Contracts and, as described elsewhere in this report, such adjustments may be positive or negative.

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Fee royalties. Fee royalties have historically constituted a smaller component of the Trust’s total royalty income. Fee royalties are payable to the Mesabi Land Trust, a Minnesota land trust, which holds a 20% interest as fee owner in the Amended Assignment of Peters Lease. Mesabi Trust holds the entire beneficial interest in the Mesabi Land Trust for which U.S. Bank N.A. acts as the corporate trustee. Mesabi Trust receives the net income of the Mesabi Land Trust, which is generated from royalties on the amount of crude ore mined after the payment of expenses to U.S. Bank N.A. for its services as the corporate trustee. Crude ore is the source of iron oxides used to make iron ore pellets and other products. The fee royalty on crude ore is based on an agreed price per ton, subject to certain indexing.

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Minimum advance royalties. Northshore’s obligation to pay base overriding royalties and royalty bonuses with respect to the sale of iron ore products generally accrues upon the shipment of those products. However, regardless of whether any shipment has occurred, Northshore is obligated to pay to Mesabi Trust a minimum advance royalty. Each year, the amount of the minimum advance royalty is adjusted (but not below $500,000 per annum) for inflation and deflation. The minimum advance royalty was $1,034,237 for calendar year 2022 and is $1,100,498 for calendar year 2023. Until overriding royalties (and royalty bonuses, if any) for a particular year equal or exceed the minimum advance royalty for the year, Northshore must make quarterly payments of up to 25% of the minimum advance royalty for the year. Because minimum advance royalties are essentially prepayments of base overriding royalties and royalty bonuses earned each year, any minimum advance royalties paid in a fiscal quarter are recouped by credits against base overriding royalties and royalty bonuses earned in later fiscal quarters during the year.

The current royalty rate schedule became effective on August 17, 1989 pursuant to the Amended Assignment Agreements, which the Trust entered into with Cyprus Northshore Mining Corporation (“Cyprus NMC”). Pursuant to the Amended Assignment Agreements, overriding royalties are determined by both the volume and selling price of iron ore products shipped. In 1994, Cyprus NMC was sold by its parent corporation to Cliffs and renamed Northshore Mining Company. Cliffs now operates Northshore as a wholly owned subsidiary.

Under the relevant agreements, Northshore has the right to mine and ship iron ore products from lands other than Mesabi Trust Lands. Northshore alone determines whether to conduct mining operations on Mesabi Trust Lands and/or such other lands based on its current mining and engineering plan. The Trustees do not exert any influence over mining operational decisions. To encourage the use of iron ore products from Mesabi Trust Lands, Mesabi Trust receives royalties on stated percentages of iron ore shipped, whether or not the iron ore products are from Mesabi Trust Lands. Mesabi Trust receives royalties at the greater of (i) the aggregate quantity of iron ore products shipped that were mined from Mesabi Trust Lands, and (ii) a portion of the aggregate quantity of all iron ore products shipped that were mined from any lands, such portion being 90% of the first four million tons shipped during such year, 85% of the next two million tons shipped during such year, and 25% of all tonnage shipped during such year in excess of six million tons. The royalty percentage paid to the Trust increases as the aggregate tonnage of iron ore products shipped, attributable to the Trust, in any calendar year increases past each of the 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 ton volume thresholds.

During the course of its typical fiscal year, some portion of royalties expected to be paid to Mesabi Trust is based in part on estimated prices for certain iron ore products sold under some of the Cliffs’ Customer Contracts. Some of the Cliffs’ Customer Contracts use estimated prices which are subject to interim and final pricing adjustments, which can be positive or negative, and are dependent in part on multiple price and inflation index factors that are not known until after the end of a contract year. Even though Mesabi Trust is not a party to the Cliffs’ Customer Contracts, these adjustments can result in significant variations in royalties payable to Mesabi Trust (and, in turn, the resulting amount available for distribution to Unitholders by the Trust) from quarter to quarter and on a comparative historical basis, and these variations, which can be positive or negative, cannot be predicted by the Trust. In either case, these price adjustments will impact future royalties payable to the Trust and, in turn, will impact cash reserves that may become available for distribution to Unitholders.

According to Cliffs’ SEC filings, 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 of each factor varies based upon the specific terms of each agreement. The price adjustment factors have been evaluated to determine

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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 94.5% of all the iron ore products shipped during calendar 2022 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, on May 1, 2022, Cliffs idled Northshore. On July 22, 2022, Cliffs announced that it extended the idling of Northshore to at least April 2023. On April 25, 2023, Cliffs announced that “higher levels of steel production have led to the partial restart of some operations at … [its] iron ore mining and pelletizing swing facility at Northshore earlier this month.” In addition, Cliffs announced that it “…will continue to treat that facility as our swing operation. And at this time, we still do not expect to operate Northshore in full any time this year.” The Trustees of Mesabi Trust have not been provided with any additional information regarding the anticipated volume of production, stockpiling or shipping of iron ore products at the Northshore operations in Babbitt and Silver Bay, Minnesota.

Deutsche Bank Trust Company Americas, the Corporate Trustee of Mesabi Trust, performs certain administrative functions for Mesabi Trust. The Trust maintains a website at www.mesabi-trust.com. The Trust makes available (free of charge) its annual, quarterly and current reports (and any amendments thereto) filed with the SEC through its website as soon as reasonably practicable after electronically filing or furnishing such material with or to the SEC.

Results of Operations

Comparison of Iron Ore Pellet Production and Shipments for the Three and Six Months Ended July 31, 2023 and July 31, 2022

As shown in the table below, during the three months ended July 31, 2023, production of iron ore pellets at Northshore from Mesabi Trust Lands totaled 1,049,281 tons, and shipments over the same period totaled 1,049,281 tons. By comparison, pellet production and shipments for the comparable period in 2022 were – zero tons and – zero tons, respectively. The increase in production and shipments is attributable to the restart of Northshore’s facilities during the current period as compared to the prior period. For the three months ended July 31, 2023, approximately 88.3% of shipments originated from Trust lands.


	Pellets Produced from	Pellets Shipped from
	Trust Lands	Trust Lands
Three Months Ended	(Tons)	(Tons)
July 31, 2023	1,049,281	1,049,281
July 31, 2022	—	—

As shown in the table below, during the six months ended July 31, 2023, production of iron ore pellets at Northshore from Mesabi Trust Lands totaled 1,204,581 tons, and shipments over the same period totaled 1,204,581 tons. By comparison, pellet production and shipments for the comparable period in 2022 were 906,952 tons and 906,952 tons, respectively. The increase in production and shipments is attributable to the restart of Northshore’s facilities during the current period as compared to the idling that occurred during part of the prior period. For the six months ended July 31, 2023, approximately 87.8% of shipments originated from Trust lands.


	Pellets Produced from	Pellets Shipped from
	Trust Lands	Trust Lands
Six Months Ended	(Tons)	(Tons)
July 31, 2023	1,204,581	1,204,581
July 31, 2022	906,952	906,952

Comparison of Royalty Income for the Three and Six Months Ended July 31, 2023 and July 31, 2022

As reflected in the table below, the Trust’s total royalty income for the three months ended July 31, 2023 increased by $14,131,645 to $9,730,596 as compared to the three months ended July 31, 2022. The increase in total royalty income is due to the restart of Northshore’s facilities during the three months ended July 31, 2023, as compared to the idling of Northshore during the three months ended July 31, 2022. In addition, due to Cliffs announcing on July 22, 2022 that it was extending the ongoing idle at Northshore operations through at least April of 2023, the Trust’s estimate of the variable consideration relating to the base overriding

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royalties to be received that was recorded in the first fiscal quarter ended April 30, 2022 was determined to be constrained during the second fiscal quarter ended July 31, 2022, and all variable consideration expected to be received through the end of the fiscal year ended January 31, 2023 was reversed in the second fiscal quarter ended July 31, 2022, resulting in negative base overriding royalties during that quarter. With the restart of operations in the second fiscal quarter ended July 31, 2023, the Trust has recommenced recording a contract asset for variable consideration in the current fiscal year, which is included in royalty income for the three months ended July 31, 2023.

The table below shows that the base overriding royalties increased $9,776,169 and the bonus royalties increased by $4,090,104 for the three months ended July 31, 2023, as compared to the three months ended July 31, 2022. Fee royalties increased by $265,372 over the same period. The increase in the base overriding royalties, bonus royalties and fee royalties is attributable to the restart 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 three months ended July 31, 2023 and July 31, 2022, respectively:


	Three Months Ended July 31,
	2023		2022
Base overriding royalties	$	5,373,668	$	(4,402,501)
Bonus royalties		4,090,094		(10)
Fee royalties		266,834		1,462
Total royalty income (loss)	$	9,730,596	$	(4,401,049)

As reflected in the table below, the Trust’s total royalty income for the six months ended July 31, 2023 increased by $1,647,472 to $11,441,912 as compared to the six months ended July 31, 2022.

The table below shows that the base overriding royalties increased $2,505,746 and the bonus royalties decreased by $924,383 for the six months ended July 31, 2023, as compared to the six months ended July 31, 2022. Fee royalties increased by $66,109 over the same period. The increase in the base overriding royalties and fee royalties is attributable to a higher volume of shipments during the current six months ended July 31, 2023, as compared to the prior comparable period. The decrease in the bonus royalties is attributable to lower prices received during the six months ended July 31, 2023 as compared to the six months ended July 31, 2022.

The table below summarizes the components of Mesabi Trust’s total royalty income for the six months ended July 31, 2023 and July 31, 2022, respectively:


	Six Months Ended July 31,
	2023		2022
Base overriding royalties	$	6,335,466	$	3,829,720
Bonus royalties		4,797,934		5,722,317
Fee royalties		308,512		242,403
Total royalty income	$	11,441,912	$	9,794,440

Comparison of Net Income, Expenses and Distributions for the Three and Six Months Ended July 31, 2023 and July 31, 2022

Net income for the three months ended July 31, 2023 was $9,183,340, an increase of $14,040,711 as compared to the three months ended July 31, 2022. The increase in net income for the three months ended July 31, 2023 was due to the restart of Northshore’s facilities during the current period, as compared to the idling of operations in the three months ended July 31, 2022. The Trust’s expenses for the three months ended July 31, 2023 were $705,901, an increase of $215,341 compared to the expenses for the three months ended July 31, 2022. The increase in expenses was primarily attributable to an increase in legal fees and expenses incurred for the three months ended July 31, 2023 (primarily related to the pending arbitration), as compared to the prior comparable period. The table below summarizes the Trust’s income and expenses for the three months ended July 31, 2023 and July 31, 2022, respectively.


	Three Months Ended July 31,
	2023		2022
Total royalty income (loss)	$	9,730,596	$	(4,401,049)
Interest income		158,645		34,238
Total revenues (loss)		9,889,241		(4,366,811)
Expenses		705,901		490,560
Net income (loss)	$	9,183,340	$	(4,857,371)

Net income for the six months ended July 31, 2023 was $10,206,479, an increase of $1,468,665 as compared to the six months ended July 31, 2022. The increase in net income for the six months ended July 31, 2023 was due to a higher volume of

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shipments during the current six months ended July 31, 2023, as compared to the prior comparable period. The Trust’s expenses for the six months ended July 31, 2023 were $1,531,611, an increase of $439,988 compared to the expenses for the six months ended July 31, 2022. The increase in expenses was primarily attributable to an increase in legal fees and expenses (primarily related to the pending arbitration) incurred for the six months ended July 31, 2023, as compared to the prior comparable period. The table below summarizes the Trust’s income and expenses for the six months ended July 31, 2023 and July 31, 2022, respectively.


	Six Months Ended July 31,
	2023		2022
Total royalty income	$	11,441,912	$	9,794,440
Interest income		296,178		34,997
Total revenues		11,738,090		9,829,437
Expenses		1,531,611		1,091,623
Net income	$	10,206,479	$	8,737,814

As presented on the “Trust’s Condensed Statements of Operations” on page 3 of this quarterly report, the Trust’s net income per unit increased $1.0701 per unit to $0.6999 per unit for the fiscal quarter ended July 31, 2023 as compared to the fiscal quarter ended July 31, 2022. On July 14, 2023, the Trust declared no distribution to Unitholders of record. Comparatively, the Trust declared a distribution of $0.84 per unit to Unitholders in July 2022. During the six months ended July 31, 2023 and July 31, 2022 the Trust declared no distribution to Unitholders of record and $1.88 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 by Mesabi Trust and cash available for distribution to Unitholders) as reported to the Trust by Northshore. The Trust accounts for these amounts by using estimated prices and reports such amounts even though accrued income receivable is not available for distribution to Unitholders until it is received by the Trust. Accordingly, distributions declared by the Trust are not equivalent to the Trust’s net income during the periods reported in this quarterly report on Form 10-Q.

Comparison of Unallocated Reserve as of July 31, 2023, July 31, 2022 and January 31, 2023

As set forth in the table below, Unallocated Reserve increased from $14,866,943 as of July 31, 2022 to $21,644,693 as of July 31, 2023. The increase in Unallocated Reserve as of July 31, 2023, as compared to July 31, 2022, is primarily the result of an increase in the unallocated cash and cash equivalents and contract asset. The increase in the unallocated cash and cash equivalents is attributable to an increase in royalties received in the second quarter of 2023 as compared to the second quarter of 2022. The increase in the contract asset portion of the Unallocated Reserve is attributable to the restart of operations in the second fiscal quarter of 2023, compared to the constrained estimate due to the idling of operations in the second fiscal quarter ended July 31, 2022, that resulted in the derecognition of the contract asset as of July 31, 2022, see Note 2 for further discussion.

SEC Form 10-Q filed by Mesabi Trust