Mesabi Trust has a market cap of $218.97 million; its shares were traded at around $16.69 with and P/S ratio of 16.54. The dividend yield of Mesabi Trust stocks is 3%. Mesabi Trust had an annual average earning growth of 15.6% over the past 10 years.
Highlight of Business Operations:· Royalty bonuses. The Trust earns royalty bonuses when iron ore products shipped from Silver Bay are sold at prices above a threshold price per ton. The royalty bonus is based on a percentage of the gross proceeds of product shipped from Silver Bay and sold at prices above a threshold price. The threshold price is adjusted (but not below $30.00 per ton) on an annual basis for inflation and deflation (the Adjusted Threshold Price). The Adjusted Threshold Price was $48.48 per ton for calendar year 2009 and is $48.81 per ton for calendar year 2010. 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 the Cliffs Pellet Agreements and, as described elsewhere in this report, such adjustments may be positive or negative.
As presented on the Trusts Condensed Statements of Income on page 2 of this quarterly report, the Trusts net income per unit increased $0.3037 to $0.3647 for the three months ended April 30, 2010, as compared to the three months ended April 30, 2009. At the same time, distributions declared per unit decreased $0.2550 from $0.3800 for the three months ended April 30, 2009 to $0.1250 for the three months ended April 30, 2010. The decrease in distributions declared despite the significant increase in net income per unit is the result of two factors. First, with respect to the royalty payment payable to the Trust for the three months ended March 31, 2010, $1.77 million that would have been paid to the Trust as a royalty payment was offset by Northshore against $2.8 million of negative pricing adjustments for shipments of iron ore pellets by Northshore during prior years. This offset against royalty payments decreased the cash available for distribution by the Trust in the three months ended April 30, 2010. Second, approximately $3.73 million or $0.284 per unit of the Trusts net income for the three months ended April 30, 2010, was recorded as accrued income receivable. This amount relates to shipping activity for April 2010 and was not included in the royalty payment received by the Trust in the three months ended April 30, 2010. Therefore, such amounts will not available for distribution until July, 2010. See the paragraph below and Notes 2 and 3 to the Trusts Condensed Financial Statements in Item 1 of this Form 10-Q for the three months ended April 30, 2010 for additional information.
In April 2010, the Trust received customary quarterly payment notification from Northshore, which indicated that the Trust was credited a royalty payment of approximately $1.9 million. However, the Trust received only the minimum advance royalty payment of approximately $203,000 on April 30, 2010, because Northshore applied negative pricing adjustments of approximately $2.8 million against the approximately $1.7 million of the $1.9 million royalty payment credited to the Trust for shipments during the three months ended March 31, 2010. This negative pricing adjustment and corresponding offset against royalties otherwise payable to the Trust resulted in a carry forward negative pricing adjustment of approximately $1.1 million and also reduced the deferred royalty revenue component of the Unallocated Reserve. The Trust was advised by Northshore that Northshore intends to offset the approximately $1.1 million carry forward negative price adjustment against royalties payable to the Trust in future periods, which would further reduce the deferred revenue portion of the Unallocated Reserve. The Trusts deferred royalty revenue liability decreased from $2,370,000 as of April 30, 2009 to $972,000 for the three months ended April 30, 2010 as a result of Northshores offset of approximately $1.7 million of negative pricing adjustments against royalties that were credited to the Trust in the first quarter of 2010, increases in pellet prices subsequent to April 30, 2009, and the receipt of $203,000 of minimum advance royalty.
The Trusts cash reserve for potential fixed or contingent future liabilities, represented on the Trusts balance sheet by unallocated cash and U.S. Government securities, increased $331,406 to $1,518,249 as of April 30, 2010 from $1,186,843 as of April 30, 2009. The increase in the Trusts cash reserve is due to the Trustees decision to add to the Trusts cash reserve because of the Trusts deferred royalty revenue, the use of estimates regarding pricing that is potentially subject to negative adjustment in future periods, and as a result of the continuing uncertainty in the economic environment that affects the royalties paid to the Trust by Northshore under Cliffs Pellet Agreements. At the same time, the accrued income receivable portion of the Unallocated Reserve increased from $790,780 as of April 30, 2009 to $3,726,547 as of April 30, 2010. The increase in the accrued income receivable portion of the Unallocated Reserve is the result of increased shipments during the month of April 2010, together with higher prices on pellets shipped by Northshore, both as compared to April 2009.
The Trusts Unallocated Reserve as of April 30, 2010 increased by $3,144,964 as compared to the fiscal year ended January 31, 2010. The increase in the Unallocated Reserve is due to the decrease in deferred royalty revenue and an increase in accrued income receivable due to the increased shipments from Northshore during the month of April 2010, partially offset by a decrease in the cash reserve portion of the Unallocated Reserve. At January 31, 2010, the Unallocated Reserve consisted of $3,023,894 in unallocated cash and U.S. Government securities, $873,938 of accrued income receivable, primarily representing royalties not yet received by the Trust but anticipated to be received in fiscal 2011, less deferred royalty revenue of ($2,770,000). 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 in any particular quarter, or at year end, thereby potentially reducing cash available for distribution to the Trusts Unitholders in future quarters. See discussion under the heading Risk Factors beginning on page 3 of the Trusts Annual Report on Form 10-K for the fiscal year ended January 31, 2010.
The Trustees have determined that the unallocated cash and U.S. Government securities portion of the Unallocated Reserve should be maintained at a prudent level, usually within the range of $500,000 to $1,000,000, to meet present or future liabilities of the Trust. As a result of the deferred royalty revenue recorded by the Trust as a liability, the Trustees determined that it was prudent to increase the unallocated cash and U.S. Government securities portion of the Unallocated Reserve above the range of $500,000 to $1,000,000. Although the actual amount of the Unallocated Reserve will fluctuate from time to time and may increase or decrease from its current level, it is currently intended that future distributions will be highly dependent upon royalty income as it is received 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 and economic conditions, particularly those affecting the steel industry, may adversely affect the amount and timing of such future shipments and sales. The Trustees will continue to monitor the economic circumstances of the Trust to strike a responsible balance between distributions to Unitholders and the need to maintain adequate reserves at a prudent level, given the unpredictable nature of the iron ore industry, the Trusts dependence on the actions of the lessee/operator, and the fact that the Trust essentially has no other liquid assets.
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