Table of Contents

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K

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

For the fiscal year ended January 31, 2020

    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

 

(I.R.S. Employer

incorporation or organization)

 

Identification No.)

 

 

 

 

 

c/o Deutsche Bank Trust Company Americas

 

 

Trust & Agency Services

 

 

60 Wall Street, 16th Floor

 

 

New York, New York

 

10005

(Address of Principal Executive Offices)

 

(Zip Code)

(904) 271-2520

(Registrant’s Telephone Number, Including Area Code)

 

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

 

 

 

 

 

 

Title of each class

 

Trading Symbol(s)

 

Name of each exchange on which registered

Units of Beneficial Interest in Mesabi Trust

 

MSB

 

New York Stock Exchange

Securities registered pursuant to Section 12(g) of the Act:  None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐  No ☒

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐  No ☒

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 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 Act). Yes ☐  No ☒

As of July 31, 2019, the aggregate market value of the Units of Beneficial Interest in the registrant held by non-affiliates of the registrant was $352,209,703 based on the closing sale price as reported on the New York Stock Exchange.  As of April 10, 2020, there were 13,120,010 Units of Beneficial Interest in Mesabi Trust outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

 

 

 

Document

 

Parts Into Which
Incorporated

Annual Report of the Trustees for the Fiscal Year Ended January 31, 2020 (Annual Report)

 

Parts I, II, and IV

 

 

 

 

Table of Contents

MESABI TRUST

ANNUAL REPORT ON FORM 10-K

Table of Contents

 

Page

PART I 

ITEM 1. 

Business

3

ITEM 1A. 

Risk Factors

3

ITEM 1B. 

Unresolved Staff Comments

3

ITEM 2. 

Properties

3

ITEM 3 

Legal Proceedings

4

ITEM 4. 

Mine Safety Disclosures

4

PART II 

ITEM 5. 

Market for Registrant’s Common Equity, Related Unitholder Matters and Issuer Purchases of Equity Securities

4

ITEM 6. 

Selected Financial Data

4

ITEM 7. 

Trustees’ Discussion and Analysis of Financial Condition and Results of Operations

4

ITEM 7A 

Quantitative and Qualitative Disclosures about Market Risk

4

ITEM 8. 

Financial Statements and Supplementary Data

4

ITEM 9. 

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

5

ITEM 9A. 

Controls and Procedures

5

ITEM 9B. 

Other Information

6

PART III 

ITEM 10. 

Directors, Executive Officers and Corporate Governance

7

ITEM 11. 

Executive Compensation

9

ITEM 12. 

Security Ownership of Certain Beneficial Owners and Trustees

11

ITEM 13. 

Certain Relationships and Related Transactions, and Director Independence

12

ITEM 14. 

Principal Accountant Fees and Services

13

PART IV 

ITEM 15. 

Exhibits, Financial Statement Schedules

14

ITEM 16. 

Form 10-K Summary

17

Signatures 

18

 

 

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PART I

ITEM 1.            BUSINESS.

(a)         General Development of Business.

The information under the headings “Trustees’ Discussion and Analysis of Financial Condition and Results of Operations,” “The Trust Estate,” “Leasehold Royalties,” and “Land Trust and Fee Royalties” in the Annual Report of the Trustees of Mesabi Trust for the fiscal year ended January 31, 2020, filed as Exhibit 13 to this Form 10-K (the “Annual Report”) is incorporated herein by reference.

(b)         Financial Information About Segments.

Substantially all of the revenue, operating profits and assets of Mesabi Trust (“Mesabi Trust” or the “Trust”) relate to one business segment—iron ore mining.  The information under the heading “Selected Financial Data” in the Annual Report is incorporated herein by reference.

(c)         Narrative Description of Business.

The information under the headings “Overview,” “Trustees’ Discussion and Analysis of Financial Condition and Results of Operations,” “The Trust Estate,” and “Leasehold Royalties” in the Annual Report is incorporated herein by reference.

(d)         Financial Information About Geographical Areas.

All of the Trust’s revenues are derived from the assets of the Trust, information of which is set forth under the heading “The Trust Estate” of the Annual Report. The information under the heading “Selected Financial Data” in the Annual Report is incorporated herein by reference.

(e)         Availability of Reports on Registrant’s Website.

The information on the cover page of the Annual Report is incorporated herein by reference.

ITEM 1A.         RISK FACTORS.

The information under the heading “Risk Factors” in the Annual Report is incorporated by reference.

ITEM 1B.         UNRESOLVED STAFF COMMENTS.

None.

ITEM 2.            PROPERTIES.

The information under the heading “The Trust Estate,” “Duration of the Trust Estate,” “History of the Trust’s Acquisition of the Trust Estate,” and “Description of the Mineral Properties and Northshore’s Mining Operations,” in the Annual Report is incorporated herein by reference.

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ITEM 3.            LEGAL PROCEEDINGS.

On December 9, 2019, the Trustees of Mesabi Trust announced that the Trust initiated arbitration against Northshore Mining Company (“Northshore”), the lessee/operator of the leased lands, and its parent, Cleveland-Cliffs Inc.  (“Cliffs” and jointly with Northshore, the “Operator”), the lessee/operator of the leased lands.  The arbitration proceeding was commenced with the American Arbitration Association.  The Trust asserts claims concerning the calculation of royalties related to the production, shipment and sale of iron ore, including DR‑grade pellets.  More particularly, the claims involve the Trust’s allegations that the Operator has improperly manipulated royalty amounts with respect to DR-grade pellets by orchestrating isolated sale transactions of low silica iron ore into international markets at prices significantly below standard pellet pricing.  Based on information currently available to the Trust, the Trust seeks an award of damages, along with specific performance and declaratory relief.  The arbitration is in its early stages and no hearings have been set.

ITEM 4.            MINE SAFETY DISCLOSURES.

Not applicable.

PART II

ITEM 5.            MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED UNITHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.

The information under the headings “Unallocated Reserve” and “Certificates of Beneficial Interest” in the Annual Report is incorporated herein by reference.

ITEM 6.            SELECTED FINANCIAL DATA.

The information under the heading “Selected Financial Data” in the Annual Report is incorporated herein by reference.

ITEM 7.            TRUSTEES’ DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

The information under the headings “Trustees’ Discussion and Analysis of Financial Condition and Results of Operations,” “Leasehold Royalties,” “Trust Expenses,” and “Unallocated Reserve” in the Annual Report is incorporated herein by reference.

ITEM 7A.         QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

Not applicable.

ITEM 8.            FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

The financial statements, including the Independent Registered Public Accounting Firm’s report thereon, filed as a part of this Form 10-K, are presented on pages F-3 through F-15 and are incorporated herein by reference.

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ITEM 9.            CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.

None.

ITEM 9A.         CONTROLS AND PROCEDURES.

Evaluation of Disclosure Controls and Procedures.  The Trust maintains a system of disclosure controls and procedures designed to ensure that information required to be disclosed by the Trust in the reports that it furnishes or files under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the rules and regulations of the Securities and Exchange Commission.  Due to the pass-through nature of the Trust, the Trust’s disclosure controls and procedures include controls and procedures designed to ensure that information required to be disclosed by Mesabi Trust is received from Cliffs and its wholly-owned subsidiary, Northshore.  In order to help ensure the accuracy and completeness of the information required to be disclosed in the Trust’s periodic and current reports, the Trust employs certified public accountants, geological consultants, and attorneys.  These professionals hired by the Trust advise the Trust in its review and compilation of the information in this Form 10-K and the other periodic reports filed by the Trust with the SEC.

As part of their evaluation of Mesabi Trust’s disclosure controls and procedures, the Trustees rely on quarterly shipment and royalty calculations provided by Northshore and Cliffs.  Because Northshore has declined to provide a written certification attesting to whether Northshore has established disclosure controls and procedures and internal controls sufficient to enable it to verify that the information furnished to the Trustees is accurate and complete, the Trustees also rely on (a) an annual certification from Northshore and Cliffs, certifying as to the accuracy of the royalty calculations, and (b) the related due diligence review performed by the Trust’s accountants.  In addition, Mesabi Trust’s consultants review the schedule of leasehold royalties payable, and shipping and sales reports provided by Northshore against production and shipment reports prepared by Eveleth Fee Office, Inc., an independent consultant to Mesabi Trust (“Eveleth Fee Office”). Eveleth Fee Office performs inspections of the Northshore mine and its pelletizing operations, observes production and shipping activities, gathers production and shipping information from Northshore and prepares monthly production and shipment reports for the Trustees. Furthermore, as part of its engagement by Mesabi Trust, Eveleth Fee Office also attends Northshore’s calibration and testing of its crude ore scales and boat loader scales which are conducted on a periodic basis.

As of the end of the period covered by this report, the Trustees carried out an evaluation of Mesabi Trust’s disclosure controls and procedures.  The Trustees have concluded that such disclosure controls and procedures are effective.

Trustees’ Report on Internal Control over Financial Reporting.  The Trustees’ Report on Internal Control over Financial Reporting is set forth on page F-2 of the Annual Report.  The attestation report of the Trust’s independent registered public accounting firm on its assessment of the Trust’s internal control over financial reporting is set forth on page F-3 of the Annual Report.

Changes in Internal Control over Financial Reporting.  To the knowledge of the Trustees there were no changes in the Trust’s internal control over financial reporting that occurred during the Trust’s last fiscal quarter that has materially affected, or is likely to materially affect, the Trust’s internal control over financial reporting.  The Trustees note for purposes of clarification that they have no authority over, and make no statement concerning, the internal controls of Northshore or Cliffs.

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ITEM 9B.         OTHER INFORMATION.

None.

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PART III

ITEM 10.          DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.

The Agreement of Trust dated July 18, 1961 (the “Agreement of Trust”) provides for a Corporate Trustee and four individual Trustees (collectively, the “Trustees”).  The Trust does not have, nor does the Agreement of Trust provide for officers, a board of directors or any committees.  Generally, the Trustees continue in office until their resignation or removal.  Any Trustee may be removed at any time, with or without cause, by the holders of two-thirds in interest of the Certificates of Beneficial Interest in the Trust (the “Trust Certificates”) then outstanding.  In the case of an individual Trustee, a successor is appointed if the individual Trustee dies, becomes incapable of acting or is adjudged bankrupt or insolvent.  In the case of the Corporate Trustee, a successor is appointed if a receiver of the Corporate Trustee or of its property is appointed, or if any public officer takes charge or control of the Corporate Trustee or of its property or affairs for the purpose of rehabilitation, conservation or liquidation.  Successor Trustees can only be appointed by the holders of a majority in interest of the Trust Certificates then outstanding.  Because such appointments are not made on a regular or periodic basis, the Trust does not have a standing nominating committee or a policy in place for the recommendation and nomination of successor Trustees.

The Trust’s activities are limited to collecting income, paying expenses and liabilities, distributing net income to the holders of Trust Certificates (the “Unitholders”) after the payment of, or provision for, such expenses and liabilities, and protecting and conserving the assets held.  The Trustees have adopted a Code of Ethics that applies to the Trustees.  A copy of the Code of Ethics is incorporated by reference in Exhibit 14 of this Form 10-K.    We intend to disclose any amendments to and any waivers from a provision of our Code of Ethics on our website within four business days following such amendment or waiver.

The Trust has not designated a separate audit committee comprised of independent committee members relying on an exemption provided by Rule 10A-3 of the Securities Exchange Act of 1934, as amended.  As such, the Trustees have not designated an “audit committee financial expert.”  The Trustees collectively perform the functions of an audit committee.

To carry out the Trustees’ duties under the Agreement of Trust, the Trustees meet on at least a quarterly basis to discuss information and circumstances relevant to the Trust.  The Trustees also conduct telephone conferences from time to time between the quarterly meetings to address developments that require more timely attention.  The Trustees held 24 meetings either in person or via teleconference in fiscal 2020.  All of the Trustees attended at least 75% of the sum of all Trustee meetings held in fiscal 2020.

In the third quarter of each year, the Trustees also conduct an annual inspection trip in which they personally visit and tour Northshore’s mining operations and plant facilities located near Babbitt and in Silver Bay, Minnesota, respectively.  During the inspection trip, the Trustees meet with and interview Northshore personnel with respect to Northshore’s current operations, changes in operations, mining plans, capital equipment and facilities.

Because Mesabi Trustees are appointed until they resign or are removed, at the time of nomination the Trustees believe that it is necessary for each Trustee to possess many qualities and skills.  Set forth below are the present Trustees’ principal occupations and directorships held with other public corporations during the past five years, or longer as material, their ages and the year each of the Trustees was first elected as a Trustee of the Trust.

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Robert C. Berglund

Age: 73

Year Appointed and elected as Individual Trustee: 2009

Retired Vice President and General Manager, Cleveland-Cliffs Inc.

 

Mr. Berglund has extensive experience in the mining industry.  He retired from his position as Vice President and General Manager of Northshore Mining Company in 2003 after spending thirty-five years in mining production and operations management with Cliffs.  Mr. Berglund joined Cliffs after graduating from Penn State University in 1968 with a B.S. in Mining Engineering.  From 1968 until 2003, Mr. Berglund worked onsite at various mines owned and operated by Cliffs across North America.

 

James A. Ehrenberg

Age: 77

Year Appointed and elected as Individual Trustee: 2006

Retired Vice President, U.S. Bank, N.A.

 

Mr. Ehrenberg has extensive experience serving as corporate trustee.  Before retiring from his position as Senior Vice President of U.S. Bank, N.A. Mr. Ehrenberg spent nearly forty years in the corporate trust department of U.S. Bank, N.A. and its predecessor, First Trust Company of Saint Paul.  From 1983 until April 2005, Mr. Ehrenberg was directly responsible for providing corporate trustee services to the Mesabi Land Trust of which Mesabi Trust is the sole trust certificate holder.

 

Michael P. Mlinar

Age: 66

Year Appointed and elected as Individual Trustee: 2014

Retired Vice President of North American Iron Ore Initiative, Cleveland-Cliffs Inc.

 

Mr. Mlinar, appointed and elected as a Mesabi Trustee in 2014, retired from his position as Vice President of North American Iron Ore Initiative in 2013 after spending thirty-six years in mining production and operations management.  Mr. Mlinar was General Manager at five different Cliffs subsidiaries: Tilden, Empire, Hibbing Taconite, United Taconite, and Northshore Mining, and then was Integration Lead for the Bloom Lake Mine, and in 2011 became a Vice President of North American Iron Ore.

 

Mr. Mlinar was a part-time, salaried employee for Krech Ojard & Associates, Inc. (“Krech”), a private engineering consulting firm, which provides consulting services to its customers in diverse industries, including Cliffs and Northshore from October 2014 to August 2019.  Mr. Mlinar was never an owner, partner, officer or director of Krech.  Mr. Mlinar’s part-time employment did not include providing engineering consulting services through Krech for Cliffs or Northshore.

 

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Robin M. Radke

Age: 49

Year Appointed and elected as Individual Trustee: 2019

Associate General Counsel, Merced Capital, L.P.

 

Ms. Radke has more than twenty-five years of business and legal experience, including over fifteen years in private and in-house legal practice.  Since 2014, she has been associate general counsel at Merced Capital, L.P., a privately-held registered investment advisor.  Prior to Merced, Ms. Radke was an attorney with Oppenheimer Wolff & Donnelly LLP (now Fox Rothschild LLP) for eleven years where her work included advising the Trust on securities reporting, internal controls and general matters.  Ms. Radke’s legal practice includes advising internal clients regarding a wide spectrum of industries, including financial services, lending, real estate, energy and shipping.  In addition, she has experience in securities law and general corporate law.

The Trust believes that each of the individual Trustees has a diversified background and extensive financial, business and industry specific expertise that make them an important resource in the oversight of the Trust’s affairs.  There are no family relationships among any of the Individual Trustees.

ITEM 11.          EXECUTIVE COMPENSATION.

Compensation Discussion and Analysis

The Trust does not have a board of directors, executive officers or any employees.  The compensation paid to the Trustees is governed by the Amendment to the Agreement of Trust dated October 25, 1982, as amended (the “Amendment”).  The Amendment does not provide for any stock awards, option awards, non-equity incentive plan compensation, change in pension value, nonqualified deferred compensation earnings or any other compensation.  The Trust does not have severance agreements nor does it provide post-retirement benefits to the Trustees.  Accordingly, all such tables have been omitted from the Annual Report.

Pursuant to the Amendment, each individual Trustee receives at least $20,000 in annual compensation for services as Trustee.  Each year, annual Trustee compensation is adjusted up or down (but not below $20,000) in accordance with changes from the November 1981 level of 295.5 (the “1981 Escalation Level”) in the All Commodities Producer Price Index (with 1967 = 100 as a base).  The All Commodities Producer Price Index is published by the U.S. Department of Labor, Bureau of Labor Statistics.  The adjustment is made at the end of each fiscal year and is calculated on the basis of the proportion between (a) the level of such index for the November preceding the end of such fiscal year, and (b) the 1981 Escalation Level.  Any action to modify or otherwise vary the compensation of the individual Trustees as provided by the Amendment must be approved by the affirmative vote of 66 2/3% in interest of the Trust Certificates then outstanding.  Each of the individual Trustees received total compensation of $40,310 during fiscal 2020.

Under the Amendment, the Corporate Trustee receives annual compensation for services as a Trustee in an amount equal to the greater of (i) $20,000, or such other amount determined in accordance with the adjustments described in the preceding paragraph, or (ii) one quarter of one percent (1/4 of 1%) of the trust moneys, exclusive of proceeds of sale of any part of the Trust Estate (as such terms are defined in the Agreement of Trust), received by the Trustees and distributed to Unitholders.  The compensation paid to Deutsche Bank Trust Company Americas, for services as Corporate Trustee of the Trust, under this second prong of this compensation formula was $172,915 pursuant to the Amendment.

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Additionally, each year the Corporate Trustee receives $62,500 to cover clerical and administrative services to Mesabi Trust, other than services customarily performed by a registrar or transfer agent for which the Corporate Trustee is paid additional service fees.  The Corporate Trustee earned $172,708 in cash compensation for the fiscal year ended January 31, 2020, inclusive of the $62,500 administrative fee.  The Corporate Trustee also received $6,606 for its services as registrar and transfer agent for the year ended January 31, 2020.  Accordingly, the Corporate Trustee earned $179,314 in total compensation for the fiscal year ended January 31, 2020.

Under the Amendment, the Individual Trustees may, in extraordinary circumstances, pay additional compensation to the Corporate Trustee.  The decision to pay such compensation must be unanimously approved by the Individual Trustees.  The Corporate Trustee did not receive any compensation for extraordinary services with respect to the year ended January 31, 2020.

Trustees’ Compensation Report

The Trustees have not designated a compensation committee and are not required to do so by applicable law or regulation.  The Trustees, as a group, have reviewed and discussed the Compensation Discussion and Analysis (“CD&A”) and based on such review and discussion have recommended that the CD&A be included in this Annual Report on Form 10-K for the fiscal year ended January 31, 2020.

 

 

 

MESABI TRUST

 

 

 

Deutsche Bank Trust Company Americas

 

Robert C. Berglund

 

James A. Ehrenberg

 

Michael P. Mlinar

 

Robin M. Radke

 

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Trustee Compensation

Summary Compensation Table

The table below summarizes the total compensation earned by each of the Individual Trustees and the Corporate Trustee in the fiscal year ended January 31, 2020.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Change in

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pension Value

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

and Nonqualified

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-Equity

 

Deferred

 

 

 

 

 

 

 

 

Trustee

 

Stock

 

Option

 

Incentive Plan

 

Compensation

 

All Other

 

 

 

 

 

 

Fees Earned

 

Awards

 

Awards

 

Compensation

 

Earnings

 

Compensation

 

Total

 

Name

    

($)

    

($)

    

($)

    

($)

    

($)

    

($)

    

($)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deutsche Bank Trust Company Americas, Corporate Trustee

 

$

172,708

 

N/A

 

N/A

 

N/A

 

N/A

 

6,606

(1)

$

179,314

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Robert C. Berglund

 

$

40,310

 

N/A

 

N/A

 

N/A

 

N/A

 

N/A

 

$

40,310

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

James A. Ehrenberg

 

$

40,310

 

N/A

 

N/A

 

N/A

 

N/A

 

N/A

 

$

40,310

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Michael P. Mlinar

 

$

40,310

 

N/A

 

N/A

 

N/A

 

N/A

 

N/A

 

$

40,310

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Robin Radke

 

$

40,310

 

N/A

 

N/A

 

N/A

 

N/A

 

N/A

 

$

40,310

 


(1)

Represents fees and disbursements paid to Deutsche Bank Trust Company Americas for its services as registrar and transfer agent of the Units.

 

ITEM 12.          SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND TRUSTEES.

Based on information that has been obtained from Mesabi Trust’s records and a review of statements of beneficial ownership filed with Mesabi Trust pursuant to Rule 13d-1 or Rule 13d-2 under the Securities Exchange Act of 1934, as amended, no person known to Mesabi Trust beneficially owns more than 5% in interest of the Trust Certificates outstanding as of April 1, 2020.

The table below sets forth information as to the Units of Beneficial Interest in Mesabi Trust beneficially owned as of April 1, 2020 by the Trustees individually and as a group.  Except as otherwise indicated and subject to applicable community property laws, each Trustee has sole voting and investment powers with respect to the securities listed.  There were no Certificates of Beneficial Interest of Mesabi Trust

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pledged by the Trustees as of January 31, 2020.  The Trust does not have any compensation plans under which securities of the Trust are authorized for issuance.

 

 

 

 

 

 

 

 

    

Amount of Beneficial

    

Percent of

 

Name

    

Ownership of Units

    

Class

 

 

 

 

 

 

 

Deutsche Bank Trust Company Americas

 

 0

 

 0

 

 

 

 

 

 

 

Robert C. Berglund

 

2,000

 

**

 

 

 

 

 

 

 

James A. Ehrenberg

 

3,000

(1)  

**

 

 

 

 

 

 

 

Michael P. Mlinar

 

4,499

(2)  

**

 

 

 

 

 

 

 

Robin M. Radke

 

595

 

**

 

 

 

 

 

 

 

All Trustees as a group

 

10,094

 

**

 


** Less than 1%

 

(1)

All Units are held by James A. Ehrenberg and Donna Jean Ehrenberg Revocable Trust Dated September 12, 2012. Mr. and Mrs. Ehrenberg, as the trustees of the revocable trust, share the investment and voting power over all of those Units.

(2)

Includes 2,500 Units owned by Mr. Mlinar’s wife.

ITEM 13.          CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE.

Related Person Transaction Policy

During the fiscal year ended January 31, 2020, the Trustees met on at least a quarterly basis and reviewed and approved or ratified certain transactions that occurred during each of the prior fiscal quarters.  In connection with their review of the Trust’s transactions, the Trustees consider whether there have been any related person transactions.  In determining whether to approve a related person transaction, the Trustees consider the following factors, in addition to any other factors they deem necessary or appropriate:

·

whether the transaction is expressly permitted by the Agreement of Trust;

·

whether the terms are fair to the Trust;

·

whether the transaction is material to the Trust;

·

the role of the related person in arranging the related person transaction;

·

the structure of the related person transaction; and

·

the interests of all related persons in the related person transaction.

The Trust maintains a written related person transaction approval policy, which sets forth the Trust’s policies and procedures for the review, approval or ratification of any transaction required to be reported in Mesabi Trust’s filings with the Securities and Exchange Commission.  The policy applies to any financial transaction, arrangement or relationship or any series of similar transactions, arrangements or relationships in which Mesabi Trust is a participant and in which a related person has a direct or indirect interest.

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Certain types of transactions, which would otherwise require review, are pre-approved by the Trustees in accordance with the policy.  These types of transactions include, for example, (i) transactions, when aggregated with the amount of all other transactions between the related person and the Trust, that involve less than $120,000 in a fiscal year; (ii) transactions where the interest of the related person arises only by way of a directorship or minority stake in another organization that is a party to the transaction; (iii) transactions with a related person involving services as a bank depositary of funds, transfer agent, registrar, trustee under a trust indenture, or similar services; and (iv) a transaction that is specifically contemplated by provisions of the Agreement of Trust.

Based on their review of the Trust’s transactions during the fiscal year ended January 31, 2020, the Trustees concluded that there were no related person transactions required to be disclosed in this Annual Report on Form 10-K.

Pass-Through Royalty Trust Exemptions

Because of its legal structure and character as a pass-through royalty trust, the Trust is exempt from Rule 10A-3 of the Securities Exchange Act and the Corporate Governance Standards set forth in Section 303A of the New York Stock Exchange’s Listed Company Manual.

ITEM 14.          PRINCIPAL ACCOUNTANT FEES AND SERVICES.

(a)         Audit Fees.

The aggregate fees paid during fiscal 2020 for professional services rendered by Baker Tilly Virchow Krause, LLP (“Baker Tilly”) for the audit of the Trust’s annual financial statements and internal control over financial reporting and review of the financial statements included in the Trust’s quarterly reports on Form 10-Q were $65,560.

The aggregate fees paid during fiscal 2019 for professional services rendered by Baker Tilly for the audit of the Trust’s annual financial statements, the audit of the Trustees’ assessment of internal control over financial reporting and review of the financial statements included in the Trust’s quarterly reports on Form 10-Q were $69,170.

(b)         Audit-Related Fees.

No fees were paid to Baker Tilly for assurance and related services that were not reasonably related to the performance of the audit or review of the Trust’s financial statements for fiscal 2020 or fiscal 2019.

(c)         Tax Fees.

No fees were paid to Baker Tilly for tax compliance, tax advice and tax planning for Mesabi Trust for fiscal 2020 or fiscal 2019.

(d)         All Other Fees.

No other fees were paid to Baker Tilly for services provided to Mesabi Trust, other than those described in item (a), for fiscal 2020 or fiscal 2019.

Before an independent registered public accounting firm is engaged to perform audit and review services for the Trust, the Trustees approve the engagement.

13

Table of Contents

PART IV

ITEM 15.          EXHIBITS, FINANCIAL STATEMENT SCHEDULES.

(a) 1.     Financial Statements:

The following Financial Statements are incorporated in this Report by reference from the following pages of the Annual Report:

 

 

 

Trustees’ Report on Internal Control over Financial Reporting

    

Page F-2

 

 

 

Report of Independent Registered Public Accounting Firm

 

Page F-3

 

 

 

Balance Sheets as of January 31, 2020 and 2019

 

Page F-4

 

 

 

Statements of Income for the years ended January 31, 2020, 2019, and 2018

 

Page F-5

 

 

 

Statements of Unallocated Reserve and Trust Corpus for the years ended January 31, 2020, 2019, and 2018

 

Page F-6

 

 

 

Statements of Cash Flows for the years ended January 31, 2020, 2019, and 2018

 

Page F-7

 

 

 

Notes to Financial Statements

 

Pages F-8 - F-15

14

Table of Contents

(a) 3.     Exhibits:

 

 

 

 

 

 

Item
No.

    

Item

    

Filing Method

 

 

 

 

 

3 and 4(b)

 

Agreement of Trust dated as of July 18, 1961

 

Incorporated by reference from Exhibit 3 to Mesabi Trust’s Annual Report on Form 10-K for the fiscal year ended January 31, 1987. (filed on paper – hyperlink is not required pursuant to Rule 105 of Regulation S-T)

 

 

 

 

 

3(a) and 4(c)

 

Amendment to the Agreement of Trust dated as of October 25, 1982

 

Incorporated by reference from Exhibit 3(a) to Mesabi Trust’s Annual Report on Form 10-K for the fiscal year ended January 31, 1988. (filed on paper – hyperlink is not required pursuant to Rule 105 of Regulation S-T)

 

 

 

 

 

4(a)

 

Instruments defining the rights of Trust Certificate Holders

 

Incorporated by reference from Exhibit 4 to Mesabi Trust’s Annual Report on Form 10-K for the fiscal year ended January 31, 1987. (filed on paper – hyperlink is not required pursuant to Rule 105 of Regulation S-T)

 

 

 

 

 

4(d)

 

Description of Mesabi Trust’s Securities.

 

Filed herewith.

 

 

 

 

 

10(a)

 

Peters Lease

 

Incorporated by reference from Exhibits 10(a) - 10(d) to Mesabi Trust’s Annual Report on Form 10-K for the fiscal year ended January 31, 1987. (filed on paper – hyperlink is not required pursuant to Rule 105 of Regulation S-T)

 

 

 

 

 

10(b)

 

Amendment of Assignment of Peters Lease

 

Incorporated by reference from Exhibits 10(a) - 10(d) to Mesabi Trust’s Annual Report on Form 10-K for the fiscal year ended January 31, 1987. (filed on paper – hyperlink is not required pursuant to Rule 105 of Regulation S-T)

 

 

 

 

 

10(c)

 

Cloquet Lease

 

Incorporated by reference from Exhibits 10(a) - 10(d) to Mesabi Trust’s Annual Report on Form 10-K for the fiscal year ended January 31, 1987. (filed on paper – hyperlink is not required pursuant to Rule 105 of Regulation S-T)

 

 

 

 

 

15

Table of Contents

 

 

 

 

 

Item
No.

    

Item

    

Filing Method

 

 

 

 

 

10(d)

 

Assignment of Cloquet Lease

 

Incorporated by reference from Exhibits 10(a) - 10(d) to Mesabi Trust’s Annual Report on Form 10-K for the fiscal year ended January 31, 1987. (filed on paper – hyperlink is not required pursuant to Rule 105 of Regulation S-T)

 

 

 

 

 

10(e)

 

Modification of Lease, made as of January 23, 1946

 

Incorporated by reference from Exhibits 10(e) to Mesabi Trust’s Annual Report on Form 10-K for the fiscal year ended January 31, 2015.

 

 

 

 

 

10(f)

 

Modification of Lease and Consent to Assignment dated as of October 22, 1982

 

Incorporated by reference from Exhibit 10(e) to Mesabi Trust’s Annual Report on Form 10-K for the fiscal year ended January 31, 1988. (filed on paper – hyperlink is not required pursuant to Rule 105 of Regulation S-T)

 

 

 

 

 

10(g)

 

Amendment of Assignment, Assumption and Further Assignment of Peters Lease

 

Incorporated by reference from Exhibit A to Mesabi Trust’s Report on Form 8-K dated August 17, 1989. (filed on paper – hyperlink is not required pursuant to Rule 105 of Regulation S-T)

 

 

 

 

 

10(h)

 

Amendment of Assignment, Assumption and Further Assignments of Cloquet Lease

 

Incorporated by reference from Exhibit B to Mesabi Trust’s Report on Form 8-K dated August 17, 1989. (filed on paper – hyperlink is not required pursuant to Rule 105 of Regulation S-T)

 

 

 

 

 

10(i)

 

Summary Description of Trustees’ Compensation

 

Filed herewith.

 

 

 

 

 

13

 

Annual Report of the Trustees of Mesabi Trust for the fiscal year ended January 31, 2020

 

Filed herewith.

 

 

 

 

 

14

 

Trustees Code of Ethics

 

Incorporated by reference from Exhibit 14 to Mesabi Trust’s Annual Report on Form 10-K for the fiscal year ended January 31, 2004.

 

 

 

 

 

31

 

Certification of Corporate Trustee of Mesabi Trust pursuant to Rule 13a-14 of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

 

Filed herewith.

 

 

 

 

 

16

Table of Contents

 

 

 

 

 

Item
No.

    

Item

    

Filing Method

 

 

 

 

 

32

 

Certification of Corporate Trustee of Mesabi Trust pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

Filed herewith.

 

 

 

 

 

101.INS

 

XBRL Instance Document

 

Filed herewith.

 

 

 

 

 

101.SCH

 

XBRL Taxonomy Extension Schema

 

Filed herewith.

 

 

 

 

 

101.CAL

 

XBRL Taxonomy Extension Calculation Linkbase

 

Filed herewith.

 

 

 

 

 

101.LAB

 

XBRL Taxonomy Extension Label Linkbase

 

Filed herewith.

 

 

 

 

 

101.PRE

 

XBRL Taxonomy Extension Presentation Linkbase

 

Filed herewith.

 

 

 

 

 

101.DEF

 

XBRL Taxonomy Extension Definition Linkbase

 

Filed herewith.

 

 

ITEM 16.          FORM 10-K SUMMARY.

 

None.

 

17

Table of Contents

SIGNATURES

 

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

Dated:  April 13, 2020

 

 

 

 

 

 

 

    

MESABI TRUST

 

 

 

 

 

 

 

 

By:

DEUTSCHE BANK TRUST COMPANY

 

 

 

AMERICAS

 

 

 

Corporate Trustee

 

 

 

 

 

 

 

 

 

Principal Administrative Officer and duly authorized signatory:*

 

 

 

 

 

 

 

 

 

By:

/s/ Jeffrey Schoenfeld

 

 

 

Jeffrey Schoenfeld*

 

 

 

Vice President

 

 

 

 


* There are no principal executive officers or principal financial officers of the registrant.

 

Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

 

 

 

 

/s/ Robert C. Berglund

    

April 13, 2020

Robert C. Berglund

 

 

Individual Trustee

 

 

 

 

 

/s/ James A. Ehrenberg

 

April 13, 2020

James A. Ehrenberg

 

 

Individual Trustee

 

 

 

 

 

/s/ Jeffrey Schoenfeld

 

April 13, 2020

Jeffrey Schoenfeld

 

 

Vice President

 

 

Deutsche Bank Trust Company Americas,

 

 

As Corporate Trustee of Mesabi Trust

 

 

 

 

 

 

 

 

/s/ Michael P. Mlinar

 

April 13, 2020

Michael P. Mlinar

 

 

Individual Trustee

 

 

 

 

 

/s/ Robin M. Radke

 

April 13, 2020

Robin M. Radke

 

 

Individual Trustee

 

 

 

18

msb_Ex4_d

Exhibit 4(d)

DESCRIPTION OF THE REGISTRANT’S SECURITIES
REGISTERED PURSUANT TO SECTION 12 OF THE
SECURITIES EXCHANGE ACT OF 1934

As of  January 31, 2020, the Mesabi Trust (the “Trust”) had only one class of securities registered under Section 12 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”): units of beneficial interest (“Units”).

The following description of the Trust’s  Units is a summary and does not purport to be complete.  This description is based upon and is qualified in its entirety by reference to the instruments defining the rights of trust certificate  holders (the “Unitholders”), which instruments are filed as Exhibit 4(a) to our Annual Report on Form 10‑K, of which this Exhibit 4(d) is a part, and are incorporated by reference herein.  We encourage you to read these documents as well as the applicable laws of the State of New York for additional information.

Description of Units of Beneficial Interest

Authorized Units

The beneficial interest in the Trust is represented by 13,120,010 Units distributed to Unitholders of Mesabi Iron Company on July 27, 1961 pursuant to the Agreement of Trust, dated as of July 18, 1961 (the “Agreement of Trust”). As of January 31, 2020, there were 13,120,010 Units outstanding.

The Units are registered under Section 12(b) of the Exchange Act and are traded on the New York Stock Exchange under the trading symbol “MSB.”

In January, April, July and October each year, the Trustees of Mesabi Trust may declare distributions on the Units out of the Trust’s net income, after payment of expenses and liabilities and, to the extent deemed prudent by the Trustees, after reserving funds to provide for potential fixed or contingent future liabilities.  Unitholders are entitled to share ratably in the dividends declared by the Trustees.

Unitholder Meetings

Call of Meetings.  A meeting of Unitholders may be called at any time and from time to time pursuant to the provisions of the Agreement of Trust for the purposes of taking any action which the terms of the Agreement of Trust permits a percentage in interest of the Unitholders to take either acting alone or with the Trustees.

The Trustees may at any time call a meeting of Unitholders to be held at such time and at such place as the Trustees shall determine.  Written notice of every meeting of the Unitholders shall be given by the Trustees, except as otherwise provided in the Agreement of Trust, which written notice will set forth the time and place of such meeting and in general terms the action proposed to be taken at such meeting.  Such notice shall be mailed not more than 40 or less than 20 days before such meeting is to be held to all Unitholders of record not more than 5 days before the date of such mailing.

Alternatively, within 30 days after written request to the Trustees by at least 15% in interest of the Unitholders to call a meeting of Unitholders to take any action authorized in the Agreement of Trust, the Trustees shall proceed to call a meeting of the Unitholders pursuant to the terms of the Agreement of Trust.  If the Trustees fail to call such a meeting within this 30 day period, then such meeting may be called by the 15% in interest of the Unitholders or their designated representative.

Voting.  Each holder of one or more trust certificate on the record date shall be entitled to vote at a meeting of the Unitholders either in person or by his or her proxy duly authorized in writing.  Each Unitholder entitled to vote shall have one vote for each Unit represented by trust certificates he or she holds or represents.  At any meeting of the Unitholders, the presence of the persons holding or representing trust certificates for the number of Units sufficient to take action on any matter for the transaction of which such meeting was called shall be necessary to constitute a quorum.  If less than a quorum is present, the persons holding or representing a majority in interest of the trust certificates represented at the meeting may adjourn such meeting with the same effect and for all intents and purposes as though a quorum has been present.

Any matter shall be deemed to have been approved by the Unitholders if it is approved by the vote of a majority in interest of such Unitholders constituting a quorum.  However, the affirmative vote of 51% in interest of the Unitholders of any account of the Trustees’ administration of the Trust shall, as to all matters and transactions disclosed therein, be final and binding.  Additionally, the affirmative vote of 75% in interest of the Unitholders, in addition to the action of the Trustees, is required to sell, transfer, assign, or dispose all or part of the trust estate for cash or other consideration.  The affirmative vote of 66‑2/3% in interest of the Unitholders, in addition to the action of the Trustees, is required to:

·

Cancel or terminate the Amended Assignment of Peters Lease, the Assignment of Cloquet Lease, and any other instrument forming part of the trust estate;

·

Amend the Amended Assignment of Peters Lease, the Assignment of Cloquet Lease, and any other instrument forming part of the trust estate, or to alter the duration of the boundaries of land covered thereby or so as to reduce or alter the method of calculation of the income or rates of royalty payable under such instruments;

·

Amend the Agreement of Trust; and

·

Borrow money and pledge or mortgage as security for the loan all or any part of the trust estate.

Conduct of Meetings.  The Trustees shall appoint a temporary chairman and temporary secretary of the meeting.  The chairman of the meeting and the secretary of the meeting shall be elected by a  vote of the persons holding or representing a majority in interest of the trust certificates represented at the meeting and entitled to vote.

The vote upon any resolution submitted to any meeting of Unitholders  shall be by written ballot.  Two inspectors of votes shall count all votes cast at the meeting for or against any resolution and shall make and file with the secretary of the meeting their verified written report.

A record of the proceedings of each meeting of the Unitholders shall be prepared by the secretary of the meeting, and there shall be attached to such record the original reports of the

inspectors of votes on any vote by ballot thereat, and the record shall contain a copy of the notice of the meeting and an affidavit of mailing of notice thereof, as provided in the Agreement of Trust.  The record shall be signed and verified pursuant to the Agreement of Trust. Any record so signed and verified shall be conclusive evidence of all the matters therein stated.

Termination of Trust

Duration.  In accordance with the Agreement of Trust, the Trust may continue to remain in force and effect until twenty-one years after the death of the survivor of twenty-five persons named in an exhibit to the Agreement of Trust.

Termination.  If the Trustees sell any part of the trust estate, as permitted in the Agreement of Trust, the trust shall be deemed terminated with respect to the property sold.  Alternatively, the trust may be terminated at any time by the action of 75% in interest of the Unitholders pursuant to the Agreement of Trust.

Liquidation and Dissolution.  In the event of a termination of the trust, in part, as a result of a sale by the Trustees of any part of the trust estate, the Trustees shall distribute to the Unitholders, pro rata according to the number of Units outstanding at the date fixed by the Trustees for distribution, the net proceeds of the sale.  Upon the termination of the trust by passage of time or by action of the Unitholders in accordance with the Agreement of Trust, the Trustees shall convert the trust estate into cash or other property and the Trustees shall distribute to the Unitholders, pro rata according to the number of Units outstanding at the date fixed by the Trustees for distribution, the net proceeds.  However, if the Trustees determine that it will be in the best interests of the Unitholders not to convert part or all of the trust estate in cash or other property, the trust estate not so converted shall be distributed in kind to the Unitholders, pro rata according to the number of Units outstanding at the date of distribution.

After the termination of the Trust and for the purpose of liquidating and winding up the affairs of the Trust, the Trustees shall continue to act as such until their duties have been fully performed.  Upon the distribution of all of the trust estate to the Unitholders and the payment and discharge of all debts, liabilities and obligations of the Trust, the Trustees shall have no further duties or obligations pursuant to the Agreement of Trust except as otherwise provided.

Miscellaneous

Other Rights.  The Unitholders have no preemptive, subscription, redemption, or conversion rights.

Governing Law.  The Agreement of Trust and the rights, powers, duties, and liabilities of the Trustees are governed by and construed in accordance with the laws of the State of New York in effect at any applicable time.

 

msb_Ex10_(i)

Exhibit 10(i)

 

SUMMARY DESCRIPTION OF TRUSTEES’ COMPENSATION

 

The compensation paid to each Individual Trustee and the Corporate Trustee is set forth in the Amendment to the Agreement of Trust dated as of October 25, 1982 (the “Amendment”).  The Amendment is filed as Exhibit 3(a) to the Form 10-K.

 

Pursuant to the Amendment, each Individual Trustee receives at least $20,000 in annual compensation for services as Trustee.  Each year, annual Trustee compensation is adjusted up or down (but not below $20,000) in accordance with changes from the November 1981 level of 295.5 (the “1981 Escalation Level”) in the All Commodities Producer Price Index (with 1967 = 100 as a base).  The All Commodities Producer Price Index is published by the U.S. Department of Labor.  The adjustment is made at the end of each fiscal year and is calculated on the basis of the proportion between (a) the level of such index for the November preceding the end of such fiscal year, and (b) the 1981 Escalation Level.  Each of the Individual Trustees received $40,310 in cash compensation for services to the Trust during the fiscal year ended January 31, 2020.

 

Also pursuant to the Amendment, Deutsche Bank Trust Company Americas, as the Corporate Trustee, receives annual compensation in an amount equal to the greater of (i) $20,000, or such other amount determined in accordance with the adjustments described in the preceding paragraph, or (ii) one quarter of one percent (1/4 of 1%) of the Trust Moneys, exclusive of proceeds of sale of any part of the Trust Estate (as such terms are defined in the Agreement of Trust), received by the Trustees and distributed to Trust Unitholders.  The Corporate Trustee earned $110,208 pursuant to this provision for the fiscal year ended January 31, 2020.

 

Additionally, each year the Corporate Trustee receives $62,500 (or more, if unanimously approved by the Individual Trustees) to cover clerical and administrative services to Mesabi Trust other than services customarily performed by a registrar or transfer agent.  In fiscal 2020, the Trust paid the Corporate Trustee $62,500 to cover clerical and administrative services to Mesabi Trust and $6,606 for services as registrar and transfer agent.  The Corporate Trustee earned $179,314 in total compensation for the fiscal year ended January 31, 2020.

msb_Ex13

Exhibit 13

 

ANNUAL REPORT

OF THE TRUSTEES OF

MESABI TRUST

For The Year Ended January 31, 2020

 

ADDRESS

 

Mesabi Trust

c/o Deutsche Bank Trust Company Americas

Trust & Agency Services

60 Wall Street, 16th Floor

New York, NY 10005

(904) 271-2520 (telephone)

www.mesabi-trust.com

 

REGISTRAR AND TRANSFER AGENT

 

Deutsche Bank Trust Company Americas

 

LEGAL COUNSEL

 

Fox Rothschild LLP

 

REGISTRANT INFORMATION

 

Mesabi Trust maintains a website that provides access to its annual, quarterly, and other reports it files with the Securities and Exchange Commission.  Such reports can be accessed at www.mesabi-trust.com.  Mesabi Trust will provide, upon the written request of any Unitholder addressed to the Trustees at the above address and without charge to such Unitholder, (i) a paper copy of Mesabi Trust’s Annual Report on Form 10-K for the fiscal year ended January 31, 2020 (the “Annual Report”) as filed with the Securities and Exchange Commission pursuant to the Securities Exchange Act of 1934, as amended, and (ii) the Trustees Code of Ethics.

 

 

 

Table of Contents

 

 

Page

OVERVIEW 

1

RISK FACTORS 

3

OVERVIEW OF TRUST’S ROYALTY STRUCTURE 

14

SELECTED FINANCIAL DATA 

17

TRUSTEES’ DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 

17

    Results of Operations

17

    Liquidity and Capital Resources

22

    Off-Balance Sheet Arrangements

23

    Contractual Obligations

23

    New Accounting Standards

23

    Critical Accounting Estimates

23

    Current Developments

25

TO THE HOLDERS OF CERTIFICATES OF BENEFICIAL INTEREST IN MESABI TRUST 

28

    The Trust Estate

28

    Duration of the Trust Estate

29

    History of the Trust’s Acquisition of The Trust Estate

30

    Description of the Mineral Properties and Northshore’s Mining Operations

32

    Leasehold Royalties

35

    Land Trust and Fee Royalties

37

    Trust Expenses

37

    Unallocated Reserve

39

    Certificates of Beneficial Interest

40

    The Trustees

41

INDEX TO FINANCIAL STATEMENTS 

F-1

 

 

 

 

 

Special Note Regarding Forward-Looking Statements

 

Certain statements contained in this document are considered “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995.  All such forward-looking statements, including those statements estimating calendar year 2020 production or shipments, are based on input from the lessee/operator (and its parent corporation) of the mine located on the lands owned and held in trust for the benefit of the holders of Units of Beneficial Interest of Mesabi Trust.  These statements may be identified by the use of forward-looking words, such as “may,” “will,” “could,” “project,” “believe,” “anticipate,” “expect,” “estimate,” “continue,” “potential,” “plan,” “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.  Factors that may cause actual results to differ materially from those contemplated by such forward-looking statements include, but are not limited to, volatility of iron ore and steel prices, market supply and demand, uncertainty or weakness in global economic conditions, reduced economic growth in China, price adjustment provisions in the North American iron ore supply agreements with Cliffs’ customers, regulation or government action, disputes and litigation, and uncertainties about estimates of reserves or the impact of the recent coronavirus (COVID-19), and those described under the caption “Risk Factors” in this Annual Report.  Mesabi Trust undertakes no obligation 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.

 

OVERVIEW

 

Mesabi Trust (“Mesabi Trust” or the “Trust”), formed pursuant to an Agreement of Trust dated July 18, 1961 (the “Agreement of Trust”), is a trust organized under the laws of the State of New York.  Mesabi Trust holds all of the interests formerly owned by Mesabi Iron Company (“MIC”), including all right, title and interest in the Amendment of Assignment, Assumption and Further Assignment of Peters Lease (the “Amended Assignment of Peters Lease”), the Amendment of Assignment, Assumption and Further Assignment of Cloquet Lease (the “Amended Assignment of Cloquet Lease” and together with the Amended Assignment of Peters Lease, the “Amended Assignment Agreements”), the beneficial interest in a trust organized 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”).

 

A pass-through trust with certificates of beneficial interest in the trust traded on the New York Stock Exchange

 

Pursuant to a ruling from the Internal Revenue Service, which ruling was based on the terms of the Agreement of Trust including the prohibition against conducting any business, the Trust is not taxable as a corporation for federal income tax purposes.  Instead, the holders of Certificates of Beneficial Interest in Mesabi Trust (“Unitholders”) are considered “owners” of the Trust and the Trust’s income is taxable directly to the Unitholders.  The Certificates of Beneficial Interest in Mesabi Trust are listed on the New 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.

 

1

Limited authorities and responsibilities of the Trustees

 

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 may deem necessary or proper for the preservation and protection of the Trust Estate (as defined on page 28 of this Annual Report).  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 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.  The Trust has no employees, but it engages consultants to assist the Trustees in, among other things, monitoring the volume and sales prices of iron ore products shipped from Silver Bay, Minnesota, based on information supplied to the Trustees by Northshore Mining Company (“Northshore”), the lessee/operator of the lands leased under the Peters Lease and Cloquet Lease (the “Peters Lease Lands” and “Cloquet Lease Lands,” respectively, as further described on page 30 of this Annual Report) 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, “Mesabi Trust Lands”), and its parent company Cleveland-Cliffs Inc. (“Cliffs”).  References to Northshore in this Annual Report, unless the context requires otherwise, are applicable to Cliffs as well.

 

The information regarding amounts and sales prices of shipped iron ore products is used to compute the royalties payable to the Trust by Northshore.  The Trustees request material information, from time to time, for use in the Trust’s periodic reports and as part of their evaluation of the Trust’s disclosure controls and procedures.  The Trustees rely on Northshore to provide accurate and timely information for use in the Trust’s periodic and current reports filed with the Securities and Exchange Commission (the “SEC”).

 

Duration and Termination of the Trust

 

The Trust is governed by New York trust and estate law, which prohibits creation of any trust estate that suspends the power of alienation by a condition or limitation for a period longer than lives in being at the time of the creation plus a term of twenty-one years.  Pursuant to a ruling from the Internal Revenue Service, which ruling was based on the terms of the Agreement of Trust including the prohibition against entering into any business, the Trust is not taxable as a corporation for federal income tax purposes.

 

Instead, the Unitholders are considered “owners” of the Trust and the Trust’s income is taxable directly to the Unitholders.  In accordance with the Agreement of Trust, the Trust may continue to remain in force and effect until twenty-one years after the death of the survivor of twenty-five persons named in an exhibit to the Agreement of Trust.  Based upon the results of research conducted by the Trust’s outside legal counsel, as of March 2020, the Trustees believed that there are a number of individuals named in the Agreement of Trust who were also alive as of March 2020, the youngest of whom is believed to be 59 years old.

 

The Trust may be terminated earlier at any time by the action of Unitholders holding 75% of the total Units of Beneficial Interest of the Trust as evidenced by any instrument executed by such Unitholders or by such Unitholders’ voting in favor of the termination of the Trust at a duly called and held meeting of the Unitholders.

 

2

RISK FACTORS

 

The results of operations and financial condition of the Trust are subject to various risks.  Some of these risks are described below, and you should take such risks into account in evaluating the Trust or any investment decision involving the Trust.  This section does not describe all risks that may be applicable to the Trust and it is intended only as a summary of certain material risk factors.  More detailed information concerning the risk factors described below may also be contained in other sections of this Annual Report.

The Trustees have no control over the operations, sales and marketing efforts or other activities of Cliffs or Northshore.

Except within the framework of the Amended Assignment Agreements, neither the Trust nor the Trustees have any control over the operations, sales and marketing efforts or other and activities of Cliffs or its wholly-owned subsidiary, Northshore.  Accordingly, the royalty income of the Trust is highly dependent upon the activities, investments and operational decisions of Cliffs and Northshore, including temporary or permanent idling of operations, the supply and demand of suppliers and customers in the iron ore and steel industry in the U.S. and internationally, and the terms and conditions of the Amended Assignment Agreements.  Northshore, together with Cliffs, without any input or influence from the Trust or the Trustees, control:  (i) current operating plans, including iron ore production volumes, marketing of iron ore products, operating and capital expenditures as they relate to Northshore, environmental and other liabilities and the effects of regulatory changes; (ii) plans for Northshore’s future production, operations and capital expenditures, if any; (iii) geological data relating to iron ore reserve estimates; (iv) sales and marketing efforts, and shipments of iron ore products to customers of Cliffs; and (v) the terms and conditions, especially related to pricing, price adjustment mechanisms and delivery terms, of the sale of all iron ore products to Cliffs’ customers, including the Cliffs Pellet Agreements (described on page 14 of this Annual Report).  Any substantial change in Cliffs’ financial condition or business, or the operations, production and shipments of iron ore products by Northshore, including production curtailments, temporary idling or permanent idling of Northshore operations, about which the Trust may have little or no prior notice, could adversely affect the royalty income of the Trust, as well as the resulting cash available for distribution by the Trust to Unitholders.

The Trust is subject to disputes from time to time that could result in litigation, arbitration or other administrative proceedings that could adversely affect the Trust’s operating results and financial condition and the market value of Mesabi Trust Units.

The Trust may become involved in litigation, arbitration or other administrative proceedings from time to time.  These proceedings can be costly, and the results of such proceedings are often difficult to predict.  The Trust may not have adequate insurance coverage or contractual protection to cover costs and liability in the event we are sued, and to the extent we resort to litigation, arbitration or other administrative proceedings to enforce our rights, we may incur significant costs and ultimately be unsuccessful or unable to recover amounts we believe are owed to us or unable to resolve the matter on favorable terms.

More specifically on December 9, 2019, the Trustees of Mesabi Trust announced that the Trust initiated arbitration against Northshore and its parent, Cliffs (jointly, the “Operator”), the lessee/operator of the leased lands.    The arbitration proceeding was commenced with the American Arbitration Association.    The Trust asserts claims concerning the calculation of royalties related to the production, shipment and sale of iron ore, including DR-grade pellets.    More particularly, the claims involve the Trust’s allegations that the Operator has improperly manipulated royalty amounts with respect to DR-grade pellets by orchestrating isolated sale transactions of low silica iron ore into international markets at prices significantly below standard pellet pricing.    Based on information currently available to the Trust, the Trust seeks an award of damages, along with specific performance and declaratory relief. The arbitration is in its early stages and no hearings have been set.

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Any arbitration, legal or administrative proceedings to which the Mesabi Trust is subject could require the significant involvement of Trustees and the professional advisors and consultants to the Trust, and may divert attention from the Trustees’ other roles and responsibilities.    In addition, it is difficult to foresee the results of legal actions, arbitration matters and other proceedings currently involving the Mesabi Trust or of those which may arise in the future, and an adverse result in these matters could have a material adverse effect on the market value of Mesabi Trust units and on Mesabi Trust’s asset value, royalty income, results of operations and financial condition.

Our future royalties could be adversely affected by the recent coronavirus outbreak.

Our future royalties could be adversely affected by the recent coronavirus (COVID-19) outbreak.  In December 2019, a novel strain of coronavirus was reported.  The spread of this virus may lead to the disruption of the business operations of Cliffs or its wholly-owned subsidiary, Northshore, by impacting the global economy as well as their employees, customers, service providers, vendors and suppliers.  For example, on March 20, 2020, Cliffs announced it is temporarily shutting down construction activities at its hot-briquetted iron (HBI) project site in Toledo, Ohio, in accordance with guidelines from the Governor of the State of Ohio about the coronavirus pandemic.  The extent to which the coronavirus may impact the HBI project or Cliffs and Northshore’s other business operations is uncertain and will depend on future developments, which are highly uncertain and cannot be predicted, including new information concerning the severity of the coronavirus and the actions taken to contain the coronavirus or treat its impact, among others.  These events could have a material adverse effect on the business operations of Cliffs and Northshore, which in turn, could have a material adverse effect on future royalties payable to the Trust.

Cliffs’ Annual Report has cited certain economic and market risks, including risks related to the volatility of commodity prices, uncertainty or weakness in global economic conditions, reduced economic growth in China and oversupply of iron ore and excess steel or imported products, any of which could adversely affect Cliffs’ ability to generate revenue, maintain stable cash flow and fund its operations, which in turn could adversely affect Northshore operations and could adversely affect royalties payable to the Trust.

In its annual report on Form 10-K for the fiscal year ended December 31, 2019, filed with the SEC on February 20, 2020 (“Cliffs’ Annual Report”) Cliffs disclosed that, as a mining company, Cliffs’ profitability is dependent upon the price of the products sold to its customers, and that the price of iron ore has fluctuated significantly in the past and is affected by factors beyond its control including steel inventories; changes in the productive capacity of U.S. domestic steel producers; international demand for raw materials used in steel production; rates of global economic growth, especially construction and infrastructure activity that requires significant amounts of steel; changes in the levels of economic activity in the U.S., China, India, Europe and other industrialized or developing countries; changes in China's emissions policies and environmental compliance enforcement practices; changes in production capacity of other iron ore suppliers, especially as additional supplies come online or where there is a significant increase in imports of steel into the U.S. or Europe; changes in trade laws; weather-related disruptions or natural disasters that may impact the global supply of iron ore; and the proximity, capacity and cost of infrastructure and transportation.  Further, Cliffs stated that its earnings may fluctuate with the prices of the products it sells and the products its customers sell.  To the extent that the prices of iron ore and steel, including the Platts 62% price, hot-rolled coil steel price, Atlantic Basin pellet premium, Platts international indexed freight rates and changes in specified PPI, including those for industrial commodities, fuel and steel, significantly decline for an extended period of time, Cliffs may have to revise its operating plans, including curtailing production, reducing operating costs and capital expenditures and discontinuing certain exploration and development programs.  Cliffs also disclosed that it may have to take impairments on its long-lived assets and/or inventory.  Sustained lower prices also could cause Cliffs to reduce existing reserves if certain reserves no longer can be economically mined or processed at prevailing prices.  Cliffs may be unable to decrease its costs in an amount sufficient to offset reductions in revenues and may incur losses.  These events could have a material adverse effect on Cliffs and,

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in certain circumstances, could potentially adversely affect Northshore, which in turn, could have a material adverse effect on future royalties payable to the Trust.

New U.S. trade policies may have a material adverse impact on Cliffs’ business, which could adversely affect Cliffs’ ability to generate revenue, which in turn could adversely affect royalties payable to the Trust.

The U.S. government has adopted a new trade policy and in some cases has sought to renegotiate, or potentially terminate, certain existing bilateral or multi-lateral trade agreements (e.g., the renegotiation of the North American Free Trade Agreement (“NAFTA”), which resulted in the United States–Mexico–Canada Agreement, which, if and when ratified, will replace and supersede NAFTA).  It has also imposed tariffs on certain foreign goods, which included the imposition of significant tariffs on foreign steel.  These measures may, and in some cases already have, resulted in U.S. trading partners, including China, implementing retaliatory trade policies of their own, making it more difficult or costly for Cliffs to export its products abroad.  These events could have a material adverse effect on Cliffs and, in certain circumstances, could potentially adversely affect Northshore, which in turn, could have a material adverse effect on future royalties payable to the Trust, and the Trustees are not able to predict the impact that the new U.S. trade policy, or its results and/or consequences, will have on future royalties payable to the Trust.

Uncertainty or weakness in the global economic conditions and reduced economic growth to China and oversupply of iron ore and excess steel or imported products could adversely affect future royalties payable to the Trust.

The world price of iron ore is strongly influenced by global economic conditions, including international demand and supply for iron ore products.  In particular, the current level of international demand for raw materials used in steel production is driven largely by industrial growth in China.  Cliffs’ Annual Report cautioned that uncertainties or weaknesses in global economic conditions, including the slowing economic growth rate in China, has resulted, and could in the future result, in decreased demand for Cliffs’ products and, together with oversupply of imported products, has and may continue to lead to decreased prices, resulting in lower revenue levels and decreasing margins, which have in the past and may in the future affect adversely its business and negatively impact its financial results.  We are not able to predict how the global economic conditions, including the current slower growth and challenging economic conditions of China, will change or not change, or the impact it may have on Cliffs’ and Northshore’s operations and the iron ore and steel industries in general going forward.

Uncertainties or weaknesses in global economic conditions and national or regional economic or political instability, or other events, including the coronavirus pandemic, could produce major changes in demand patterns and consumption of raw materials used in steel production, which could have a material adverse effect on the royalties payable to the Trust.  The Trustees are not able to predict the impact that the coronavirus pandemic and the volatile global economic conditions will have on future royalties payable to the Trust.

Although Cliffs reported that it has long-term contractual commitments for a majority of its iron ore pellet sales, it cautioned that the uncertainty in global economic conditions may adversely impact the ability of its customers to meet their obligations.  As a result of such market volatility, Cliffs’ customers could approach Cliffs about modifying their supply agreements with Cliffs or fail to perform under such agreements.  Considering Cliffs’ limited base of current and potential blast furnace customers, any modifications to Cliffs’ sales agreements or customers’ failures to perform under such agreements could impact adversely Cliffs’ sales, margins, profitability and cash flows.  Any modifications to such supply agreements, including reductions in pricing, or Cliffs’ customers’ failures to perform under such agreements could materially adversely affect the royalties payable to the Trust and, in turn, the cash available for distribution to Unitholders.

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Due to the lack of industry and geographic diversification, adverse developments in the iron ore mining industry could adversely impact the Trust’s financial condition and reduce its ability to make distributions to the Trust’s Unitholders.

Substantially all of the revenue, operating profits and assets of the Trust relate to one business segment—iron ore mining.  In addition, the principal assets of the Trust consist of two different interests in certain properties in the Mesabi Iron Range located in northern Minnesota.  This concentration could disproportionally expose the Trust’s interests to operational and regulatory risks in that area.  Due to the lack of diversification in industry type and location of the Trust’s interests, adverse developments in the iron ore markets or at the location of the Trust’s real estate interests could have a significantly greater impact on the Trust’s financial condition, results of operations and royalty revenues than if the Trust’s interests were more diversified.

The stability of Cliffs’ North American iron ore operations, pricing and the price adjustment provisions in certain North American iron ore supply agreements with Cliffs’ customers could have a significant effect on the cash available for distribution by the Trust to Unitholders.

In Cliffs’ Annual Report, Cliffs reported that during the twelve months ended December 31, 2019, a majority of its mining and pelletizing sales were made under term supply agreements to a limited number of customers; approximately 99% of its revenue was derived from the North American integrated steel industry of which three customers accounted for 97% of such sales revenue.  Cliffs’ Annual Report also cautioned that as a result of pricing adjustments contained in Cliffs’ existing customer contracts, its financial results are sensitive to changes in iron ore and steel prices.

As discussed elsewhere in the Trust’s Annual Report, the price adjustment mechanisms under certain of Cliffs’ North American long term customer supply agreements, which can be positive or negative, may result in significant variations in royalties payable to the Trust from quarter to quarter and year to year.  These variations could materially adversely affect the royalties payable to the Trust and, in turn, the resulting cash available for distribution to Unitholders.

Royalties received by the Trust, and distributions paid to Unitholders, in any particular quarter or year are not necessarily indicative of royalties or distributions that will be paid in any subsequent quarter or in any full year.

Royalties received by the Trust can fluctuate significantly from quarter to quarter and year to year based upon market prices for iron ore products, the level of orders for iron ore products from Cliffs’ customers, the sales and marketing efforts of Cliffs, the consumption of inventory by Cliffs’ customers, and production decisions made by Northshore.  Moreover, because some of the royalties paid to the Trust in any particular quarter include payments made with respect to pellets shipped and sold at estimated prices that are subject to future interim and final multi-year adjustments in accordance with the supply agreements between Cliffs and its customers, a downward trend in demand and market prices for iron and steel products could result in negative adjustments to royalties in future quarters, some of which may be significant.  These negative price adjustments could have a material adverse effect on the Trust’s royalty income, which in time could result in lower quarterly distributions paid by the Trust to Unitholders, and possibly reduce or even eliminate funds available for distribution in any quarter and in some quarters may completely offset royalties otherwise payable to the Trust.

Due to the factors described above, cash available for distribution to Unitholders in future quarters could materially decrease, and in some cases, such decrease could result in no cash being available for distribution to Unitholders.  As a result, royalties received by the Trust generally can fluctuate materially from quarter to quarter and year to year.  As a result, distributions that may be declared and paid to Unitholders, in any particular quarter, are not necessarily indicative of royalties that will be received, or

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distributions that will be paid, in any subsequent quarter or in any full year.  Based on the foregoing and the current uncertainty in the economic environment, the Trust cannot ensure that there will be adequate cash available to make a distribution to Unitholders in any particular quarter.

Cliffs has disclosed that its hot-briquetted (“HBI”) project will require the commitment of substantial resources.  Any unanticipated costs or delays associated with Cliffs’ HBI project could negatively impact production and shipments of iron ore products by Northshore, which in turn could have a material adverse effect on future royalties payable to the Trust.

In Cliffs’ Annual Report, Cliffs has disclosed that its ongoing efforts with respect to the HBI project require the commitment of substantial capital expenditures.  Cliffs disclosed that it currently expects to incur capital expenditures through 2020 on the HBI project of approximately $830 million plus a contingency of up to 20%, excluding capitalized interest, on the development of the HBI production plant in Toledo, Ohio, of which approximately $700 million was paid as of December 31, 2019.  Cliffs indicated that estimated expenses may increase as personnel and equipment associated with advancing development and commercial production are added.  Further, Cliffs disclosed that the timely completion and successful commercial startup of the HBI project will depend in part on the following:

(i)maintaining required federal, state and local permits;

(ii)completing construction work, commissioning and integration of all of the systems comprising the HBI production plant;

(iii)negotiating sales contracts for its planned production; and

(iv)other factors, many of which are beyond Cliffs’ control.

Any unanticipated costs or delays associated with Cliffs’ HBI project could have a material effect on shipments of iron ore products from Silver Bay, which in turn could materially impact the Trust’s royalty revenue, and thereby impact the cash available for distribution by the Trust.  Further, the Trustees are not able to predict the impact on the Trust’s future potential royalties of either: (i) Northshore’s future anticipated production and shipments of DR-grade pellets from Silver Bay, or (ii) Cliffs’ HBI project.

On March 20, 2020, Cliffs announced it is temporarily shutting down construction activities at its HBI project site in Toledo, Ohio, in accordance with guidelines from the Governor of the State of Ohio about the coronavirus pandemic.  Cliffs indicated in its announcement that it will continue to monitor the situation and will re-start construction of the HBI plant as soon as feasible.  The extent to which the coronavirus may impact or delay the HBI project is uncertain and will depend on future developments, which are highly uncertain and cannot be predicted, including new information concerning the severity of the coronavirus and the actions taken to contain the coronavirus or treat its impact, among others.

Cliffs’ Annual Report has disclosed certain financial risks, including risks related to Cliffs’ existing and future level of indebtedness, risks related to potential limitations on its ability to invest in the ongoing needs of its business, risks concerning its ability to generate sufficient cash flow to service all of its debt, and risks related to adverse changes in credit ratings, which may adversely affect its cost of financing.

Cliffs’ Annual Report has disclosed that (i) due to Cliffs’ existing level of indebtedness, it has to dedicate a portion of its cash flow from operations to the payment of debt service, reducing the availability of its cash flow to fund capital expenditures, acquisitions or other strategic development initiatives and other general corporate purposes, (ii) if Cliffs’ cash flows and capital resources are insufficient to fund its debt service obligations, it may face substantial liquidity problems and may be forced to reduce or delay investments and capital expenditures, or to sell assets, seek additional capital, including additional secured or

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unsecured debt, or restructure or refinance its debt, which could be at higher interest rates and may require it to comply with more onerous covenants, which could further restrict its business operations, and (iii) credit rating agencies could downgrade Cliffs’ ratings either due to various developments, including its merger with AK Steel, factors specific to its business, a prolonged cyclical downturn in the mining industry, or macroeconomic trends (such as global or regional recessions) and trends in credit and capital markets more generally, which would may result in an increase to its cost of financing and limit its access to the capital markets, which would harm its financial condition and results of operations, and hinder its ability to refinance existing indebtedness on acceptable terms, and may affect adversely the terms under which it purchases goods and services.

Cliffs’ Annual Report also disclosed that Cliffs has significant capital requirements, including interest payments for debt service.  If Cliffs incurs significant losses in future periods, Cliffs disclosed that it may be unable to continue as a going concern.  According to Cliffs’ Annual Report, if Cliffs is unable to continue as a going concern, it may consider, among other options, further restructuring its debt although there can be no assurance that these options will be undertaken and, if so undertaken, whether these efforts will succeed.

These potential circumstances, if they become real developments, could have a material adverse effect on Cliffs and Northshore, which in turn, could have a material adverse effect on royalties paid to the Trust in the future.

Equipment failures and other unexpected events at Northshore may lead to production curtailments or shutdown.

Interruptions in production capabilities at the mine operated by Northshore may have an adverse impact on the royalties payable to the Trust.  In addition to planned production shutdowns or curtailments and equipment failures, the Northshore facilities are also subject to the risk of loss due to unanticipated events such as fires, explosions or extreme weather conditions.  The manufacturing processes that take place in Northshore’s mining operations, as well as in Northshore’s crushing, concentrating and pelletizing facilities, depend on critical pieces of equipment, such as drilling and blasting equipment, crushers, grinding mills, pebble mills, thickeners, separators, filters, mixers, furnaces, kilns and rolling equipment, as well as electrical equipment, such as transformers.  It is possible that this equipment may, on occasion, be out of service because of unanticipated failures or unforeseeable acts of vandalism or terrorism.  In addition, because the Northshore processing facilities have been in operation for several decades, some of the equipment is aged.  Because the Trustees have no control over the operations or maintenance of the equipment at Northshore, a shutdown or reduction in capacity may come with little or no advance warning.  The remediation of any interruption in production capability at Northshore could require Cliffs to make large capital expenditures which may take place over an extended period of time.  According to Cliffs’ Annual Report, if Cliffs’ cash flows and capital resources are insufficient to fund its debt service obligations, it may be forced to reduce or delay investments and capital expenditures.  At the end of November 2015, Northshore shut down all of its taconite production lines and remained idle until May 2016.  According to Cliffs, the temporary idle was a result of historic levels of steel imports into the U.S. and reduced demand from its steel-producing customers.  Any additional idling, shutdown, reduction in operations, or production curtailment at Northshore would likely adversely affect the royalties payable to the Trust

The mining operations of Northshore are subject to extensive governmental regulations and Northshore is subject to risks related to its compliance with federal and state environmental regulations.

Northshore, as the operator of the mine on Mesabi Trust Lands, is subject to various federal, state and local laws and regulations on matters such as employee health and safety, air quality, water pollution, plant, wetlands, natural resources and wildlife protection, reclamation and restoration of mining properties, the discharge of materials into the environment, and the effects that mining has on groundwater quality, conductivity and availability.  Northshore is required to maintain numerous permits and approvals issued by

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federal and state regulatory agencies and its mining operations are subject to inspection and regulation by the Mine Safety and Health Administration of the United States Department of Labor (“MSHA”) under the provisions of the Mine Safety and Health Act of 1977.  The Occupational Safety and Health Administration (“OSHA”) has jurisdiction over safety and health standards not covered by MSHA and the Minnesota Pollution Control Agency (“MPCA”) regulates various aspects of Northshore’s operations.  Northshore may from time to time be involved in disputes or litigation with the regulatory agencies over certain aspects of its operation but because the Trust has no control over Northshore’s operations, the potential impact of these proceedings cannot be determined.  Moreover, Northshore is solely responsible for its compliance with all laws, regulations or permits applicable to Northshore’s operations and Northshore may at times fail to operate in compliance with such laws, regulations and permits.  The Trust has no ability to control or determine whether Northshore has been or will in the future operate in compliance with such laws and regulations.  If Northshore fails to comply with these laws, regulations or permits, it could be subject to fines or other sanctions, any of which could have an adverse effect on its operations and its ability to ship iron ore products from Silver Bay, Minnesota, which could, in turn, have a material adverse effect on the royalties paid to the Trust

TMDL (a regulatory term describing a value of the maximum amount of a pollutant that a body of water can receive while still meeting water quality standards under the Clean Water Act) regulations are contained in the Clean Water Act and, as a part of Minnesota’s Mercury TMDL Implementation Plan, in cooperation with the MPCA, the taconite industry developed a Taconite Mercury Reduction Strategy and signed a voluntary agreement to effectuate its terms.  The strategy includes a 75% target reduction of mercury air emissions from Minnesota pellet plants collectively by 2025.  For Cliffs, the requirements in the voluntary agreement do not apply to Northshore.  Late in 2013, however, Minnesota published a draft mercury control rule that would require annual mercury emissions reporting and could require installation of mercury emission control equipment on all Cliffs’ Minnesota facilities including those of Northshore.  On September 22, 2014, Minnesota promulgated the Mercury Air Emissions Reporting and Reduction Rule mandating mercury air emissions reporting and reduction.  The adopted rule expanded applicability to all of Cliffs’ Minnesota operations and required (i) a 70% reduction of mercury emissions from Northshore’s industrial boilers by January 1, 2018, and (ii) by the end of 2018, the submission of a plan to reduce mercury emissions by 72% from all of Cliffs’ Minnesota taconite furnaces, with such plan implementation requirements to become effective on January 1, 2025.  Cliffs expressed its concerns about the technical and economic feasibility to reduce taconite mercury emissions by 72% and conducted detailed engineering analyses to determine the impact of the regulations on each unique iron ore indurating furnace affected by the Mercury Air Emissions Reporting and Reduction Rule.  Cliffs’ Annual Report states that one of the main tenets agreed upon for evaluating potential mercury reduction technologies during TMDL implementation and the 2014 rule development proceedings was that the selected technology must meet the following “Adaptive Management Criteria”:  the technology (i) must be technically feasible; (ii) must be economically feasible; (iii) must not impact pellet quality; and (iv) must not cause excessive corrosion in the indurating furnaces or air pollution control equipment.  According to Cliffs’ Annual Report, there is currently no proven technology to cost-effectively reduce mercury emissions from taconite furnaces to the target level of 72% that would meet all four Adaptive Management Criteria.  Cliffs submitted its mercury reduction plans for its Minnesota facilities to the MPCA in December 2018, and they are currently being reviewed by the MPCA.

The Trustees are unable to predict what impact, if any, the Mercury Air Emissions Reporting and Reduction Rule will have on production and shipments of iron ore products from Northshore or future royalties payable to the Trust.

The Trust does not control the portion of Northshore’s shipments that will come from iron ore mined from Mesabi Trust Lands.

The Trustees do not exert any influence over mining operational decisions at Northshore and Northshore alone determines whether to mine from Mesabi Trust Lands or state-owned lands, based on its

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current production estimates and engineering plan.  Northshore’s mining operations include Mesabi Trust Lands and mineral-producing land owned by the State of Minnesota and others.  Iron ore mined by Northshore from lands other than Mesabi Trust Lands is processed, along with iron ore mined from Mesabi Trust Lands, in Northshore-owned crushing, concentrating and pelletizing facilities and is separately accounted for on a periodic basis. Northshore also has the ability to process and ship iron ore products from lands other than Mesabi Trust Lands.  In certain circumstances, the Trust may be entitled to royalties on those other shipments, but not in all cases.  In general, the Trust will receive higher royalties (assuming all other factors are equal) if a higher percentage of shipments is from Mesabi Trust Lands.  The percentages of shipments from Mesabi Trust Lands were 89.6%, 89.8%, 92.6%, 99.6%, 88.9%, 90.8% and 93.5% in calendar years 2019, 2018, 2017, 2016, 2015, 2014 and 2013, respectively.  If Northshore decides to materially reduce the percentage of iron ore mined, or pellets shipped, from Mesabi Trust Lands, the income of the Trust could be materially adversely affected.

Royalties payable to the Trust could be materially adversely affected by the failure of the Trust’s independent consultants to competently perform.

As permitted by the terms of the Agreement of Trust and the Amendment, the Trustees are authorized to, and in fact do, rely upon certain independent consultants to assist the Trustees in carrying out and fulfilling their obligations as Trustees.  Independent consultants perform a variety of services for the Trust, render advice and produce reports with respect to monthly production and shipments, which include figures on crude iron ore production, iron ore pellet production, iron ore pellet shipments, and discussions concerning the condition and accuracy of the scales used to weigh iron ore pellets produced at Northshore’s facilities.  The Trustees have also retained an accounting firm to provide non-audit services, including preparing financial statements, reviewing financial data related to shipping and sales reports provided by Northshore and reviewing the schedule of leasehold and fee royalties payable to the Trust.  The Trustees believe that the independent consultants engaged by the Trust are qualified to perform the services and functions assigned to them.  Nevertheless, any negligence or the failure of any such independent consultants to competently perform could materially adversely affect the royalties to be received by the Trust.

The Trust relies on Cliffs’ estimates of recoverable reserves, and if those estimates are inaccurate, the total potential future royalty stream to the Trust and distributions payable to Unitholders may be materially adversely affected.

The Trustees do not participate in preparing the recoverable iron ore reserve estimates reported by Cliffs.  According to Cliffs’ Annual Report, Cliffs regularly evaluates its iron ore reserves based on revenues and costs and updates them as required in accordance with Securities Act Industry Guide 7, promulgated by the SEC.  Additionally, according to Cliffs’ Annual Report, Cliffs indicated that it will also update its iron ore reserve estimates to comply (to the extent it is not already compliant) with Final Rule 13-10570, Modernization of Property Disclosures for Mining Registrants, adopted in October 2018 and compliance with which will be required beginning on January 1, 2021, at which point Final Rule 13-10570 will rescind Securities Act Industry Guide 7.  In 2013, the Trustees engaged an independent firm of geological experts to evaluate the process Cliffs uses to estimate the recoverable iron ore reserves at the Peter Mitchell Mine.  Still, there are numerous uncertainties inherent in estimating quantities of reserves of mineral producing lands and such estimates necessarily depend upon a number of variable factors and assumptions, such as production capacity, effects of regulations by governmental agencies, future prices for iron ore, future industry conditions and operating costs, severance and excise taxes, development costs and costs of extraction and reclamation costs, all of which may in fact vary considerably from actual results.  All of these factors are outside of the control and influence of the Trustees.  For these reasons, estimates of the economically recoverable quantities of mineralized deposits attributable to Mesabi Trust Lands and the classifications of such reserves based on the risk of recovery prepared by different engineers or by the same engineers at different times may vary substantially as the criteria change.  Cliffs’ estimate of the iron ore reserves could be negatively affected by future industry conditions, geological conditions and ongoing mine planning at the

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Peter Mitchell Mine.  Actual reserves will likely vary from estimates, and if such variances are negative and material, the expected royalties payable to the Trust could be materially adversely affected and the value of the Trust’s Units could decline.

Cliffs has disclosed certain operational risks, including risks that could arise related to substantial costs from idled production capacity, announced and potential mine closures and risks related to its ability to transport its products to customers at competitive rates and in a timely manner.

According to Cliffs’ Annual Report, Cliffs indicated that its decisions concerning which facilities to operate and at what capacity levels are made based upon its customers’ orders for products, as well as the quality, performance capabilities and production cost of its operations.  During depressed market conditions, Cliffs may concentrate production at certain facilities and not operate others in response to customer demand and as a result Cliffs would incur idle facility costs.  In 2016, two of its Minnesota mines were temporarily idled for a portion of the year and it indefinitely idled the Empire mine in Michigan in August 2016.  When Cliffs restarts idled facilities, it incurs certain costs to replenish inventories, prepare the previously idled facilities for operation, perform the required mine stripping, repair and maintenance activities, and prepare employees to return to work safely and to resume production responsibilities.  The amount of any such costs can be material, depending on a variety of factors, such as the period of idle time, necessary repairs and available employees, and is difficult to project.  In addition, Cliffs stated that faced with overcapacity in the iron ore market it may seek to rationalize assets through asset sales, temporary shutdowns, indefinite idles or facility closures.

Cliffs also disclosed that in its iron ore operations, disruption of the lake, rail and trucking transportation services due to weather-related problems and lack of alternative transportation sources could impair Cliffs’ ability to supply iron ore to its customers at competitive rates or in a timely manner, and thus, could adversely affect its sales, margins and profitability.

These events could have a material adverse effect on Cliffs and potentially Northshore, which in turn, could have a material adverse effect on royalties paid to the Trust in the future.

The operations at Northshore are largely dependent on a single-source energy supplier.

The operations at Northshore are largely dependent on Silver Bay Power Company, a 115 megawatt power plant, for its electrical supply.  Silver Bay Power Company, which is wholly-owned by Northshore, has an interconnection agreement with Minnesota Power, Inc. for backup power when excess generation is necessary.  In May 2016, Silver Bay Power entered into an agreement with Minnesota Power to purchase roughly half of Northshore’s electricity needs from Minnesota Power through 2019.  Cliffs disclosed in its Annual Report that beginning September 15, 2019, it began to purchase 100% of the electricity requirements of Northshore from Minnesota Power, but under certain circumstances, the parties agreed to an interconnection agreement for Silver Bay Power to provide backup power when excess generation is necessary.  Until the transition is complete, a significant interruption in service from Silver Bay Power Company due to vandalism, terrorism, weather conditions, natural disasters, or any other cause could cause a decrease in production capacity or require a temporary shutdown of Northshore’s operations.  In addition, one natural gas pipeline serves all of Cliffs’ Minnesota mines, and a pipeline failure could idle or substantially impair the operations at Northshore.  Any substantial interruption of, or material reduction in, Northshore’s operations could materially adversely affect the royalties payable to the Trust.

If steelmakers use methods other than blast furnace production to produce steel or shut down or reduce production using blast furnaces, the demand for iron ore pellets may decrease.

According to Cliffs’ Annual Report, demand for Cliffs’ iron ore products in North America is largely determined by the operating rates for the blast furnaces of steel companies, although not all finished steel is produced by blast furnaces.  Finished steel also may be produced by other methods that do not require iron

11

ore pellets and use scrap steel, pig iron, hot briquetted iron and direct reduced iron.  North American steel producers can also produce steel using imported iron ore products, which may reduce or eliminate the need for domestic iron ore.  Future environmental restrictions on the use of blast furnaces in North America also may reduce the use of blast furnaces in steel production.  Because the maintenance of blast furnaces can require substantial capital expenditures and may cause prolonged outages, which may reduce demand for pellets, steel manufacturers may choose not to maintain their blast furnaces, and some of them may not have the resources necessary to adequately maintain their blast furnaces.  If steel manufacturers alter the methods they use to produce steel or otherwise substantially reduce their use of iron ore pellets, demand for iron ore pellets will decrease, which could materially adversely affect the royalties payable to the Trust.

Certain risk factors affecting Cliffs’ North American Iron Ore business generally, and Northshore operations in particular, could have a material adverse effect on the royalties payable to the Trust.

Because substantially all of the Trust’s revenue is derived from iron ore products shipped by Northshore from Silver Bay, Northshore’s iron ore pellet processing and shipping activities directly impact the Trust’s revenues in each quarter and each year.  According to Cliffs’ Annual Report, a number of risk factors affect Cliffs’ operations and could impact Northshore’s production and shipment volume.  Cliffs’ Annual Report identified the following seven categories of risk to which Cliffs is subject:  (i) economic and market, (ii) regulatory, (iii) financial, (iv) operational, (v) development and sustainability, (vi) human capital and (vii) risks related to the recently completed merger with AK Steel.  These risk factors include, among others, the global economic climate and financial market conditions, economic conditions in the iron ore industry, extensive governmental regulations relating to environmental matters and the costs and risks related thereto, availability of substitute materials, pricing by domestic and international competitors, long-term customer contracts or arrangements by Northshore or its competitors, price adjustment provisions in Cliffs’ North American term supply agreements (which take into account various price indexes), availability of lake freighters, production at Northshore’s mining operations, natural disasters, shipping conditions in the Great Lakes and production at Northshore’s pelletizing/processing facility.  Specifically, if any portion of Northshore’s pelletizing lines becomes idle for any reason, production, shipments and, consequently, the royalties payable to the Trust could be materially adversely affected.

Furthermore, other events such as terrorist acts, conflicts, wars and geopolitical uncertainties, whether or not occurring in or involving, directly or indirectly, the United States, may cause serious harm to Cliffs’ and/or Northshore’s business, operations and revenue.  The potential for the occurrence of any of these types of events has created global and domestic economic and political uncertainties.  If any of these types of events were to occur, the results would be unpredictable, but may include decreases in demand for iron ore, difficulties related to shipping of iron ore products to Cliffs’ customers, and delays and inefficiencies in Cliffs’ supply chain.  The Trust is uninsured, and cannot obtain insurance, for losses and interruptions caused by any of these types of events.

Certain risks arising from Cliffs’ merger with AK Steel may impact Cliffs’ financial condition and operating results as well as its operations, which in turn could have a material adverse effect on future royalties payable to the Trust.

 

On March 13, 2020, Cliffs announced the completion of its merger with AK Steel.  Cliffs’ Annual Report disclosed a number of risk factors related to the merger.  Cliffs discussed the following potential risks associated with the completion of the merger: (i) the merger may be less accretive than expected, or may be dilutive, which may negatively impact the market price of its common stock, (ii) it will incur significant transaction and merger-related costs, which may be in excess of those anticipated, (iii) its debt may limit its financial flexibility, (iv) it may fail to realize all of the anticipated benefits or the proposed merger, and its integration with AK Steel may not be as successful as anticipated, (v) the market price of its common shares may decline in the future as a result of the sale of its common shares held by former AK Steel stockholders or Cliffs’ current shareholders, (vi) it may record tangible and intangible assets, including goodwill, that could

12

become impaired and result in material non-cash charges to its results of operations in the future, (vii) the ability to use AK Steel’s and its pre-merger net operating loss carryforwards and certain other tax attributes to offset future taxable income may be subject to certain limitations, and (viii) completion of the merger may trigger change in control or other provisions in certain agreements to which AK Steel is a party.  These risks could have a material adverse effect on Cliffs’ financial condition and operating results, which in turn could have a material adverse effect on future royalties payable to the Trust.

 

Cliffs noted in its Annual Report that the merger involves numerous operational, strategic, financial, accounting, legal, tax and other functions, systems and management controls that must be integrated and that difficulties in integrating the two companies may result in the combined company performing differently than expected, in operational challenges or in the failure to realize anticipated expense-related efficiencies. Following completion of the merger, Cliffs indicated it may also experience challenges associated with managing the larger, more complex, integrated businesses.  The integration process may result in the loss of key employees, the disruption of ongoing businesses, or inconsistencies in standards, controls, procedures and policies.  To the extent these issues have a material adverse effect on Cliffs’ operations following the completion of the merger, they in turn could have a material adverse effect on future royalties payable to the Trust.

 

We are dependent upon third party information technology systems, which are subject to cyber threats, disruption, damage and failure.

We are dependent upon third party information systems and other technologies, including those related to our financial and operational management and those related to Cliffs’ and Northshore’s financial and operational management.  Network and information systems-related events, such as computer hackings, cyber-attacks, ransomware, computer viruses, worms or other destructive or disruptive software, process breakdowns, denial of service attacks, malicious social engineering or other malicious activities, or any combination of the foregoing, or power outages, natural disasters, terrorist attacks or other similar events, could result in damage to our information and data that is stored or transmitted by our third party vendors or damage or disruption to Cliffs’ or Northshore’s business operations.  Any security breaches, such as computer viruses and more sophisticated and targeted cyber-related attacks, as well as misappropriation, misuse, leakage, falsification or accidental release or loss of information maintained in these information technology systems could result in significant losses and damage to our reputation, or the reputations of Northshore and/or Cliffs, and require us, Northshore or Cliffs to expend significant capital and other resources to remedy any such security breach.  There can be no assurance that these events and security breaches will not occur in the future or not ultimately have an adverse effect on the royalties payable to the Trust.

The Trustees are not subject to annual election and, as a result, the ability of the holders of Trust Certificates to influence the policies of the Trust may be limited.

Directors of a corporation are generally subject to election at each annual meeting of shareholders or, in the case of staggered boards, at regular intervals.  However, under the Agreement of Trust, the Trust is not required to hold annual meetings of holders of Trust Certificates to elect Trustees and Trustees generally hold office until their death, resignation or disqualification.  As a result, the ability of holders of Trust Certificates to effect changes in the composition of those serving as Trustees and the policies of the Trust is significantly more limited than that of the shareholders of a corporation.

We are subject to the continued listing criteria of the NYSE, and our failure to satisfy these criteria may result in delisting of our Units.

Our Units are currently listed for trading on the NYSE.  In order to maintain the listing, we must maintain certain objective standards such as Unit prices and a minimum number of public Unitholders.  In addition to objective standards, the NYSE may delist the securities of any issuer using subjective standards

13

such as, if in the NYSE’s opinion, the issuer’s financial condition and/or operating results appear unsatisfactory or if any event occurs or any condition exists which makes continued listing on the NYSE inadvisable.

If the NYSE delists our Units, Unitholders may face material adverse consequences, including, but not limited to, a lack of trading market for our Units and reduced liquidity

 

OVERVIEW OF TRUST’S ROYALTY STRUCTURE

 

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 from Silver Bay, Minnesota.  The percentage ranges from 2-1/2% of the gross proceeds for the first one million tons of iron ore products shipped annually to 6% of the gross proceeds for all iron ore products in excess of four million tons so shipped annually.  Base overriding royalties are subject to interim and final price adjustments under the term contracts between Northshore, Cliffs and their customers (the “Cliffs Pellet Agreements”) and, as described elsewhere in this Annual Report, such adjustments may be positive or negative.

 

·

Royalty bonuses.  The Trust earns royalty bonuses when iron ore products shipped from Silver Bay are sold at prices above a threshold price per ton.  The royalty bonus is based on a percentage of the gross proceeds of product shipped from Silver Bay.  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 $55.74 per ton for calendar year 2018 and $56.93 per ton for calendar year 2019, and will be $57.85 per ton for calendar year 2020.  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 Annual Report); such adjustments may be positive or negative.  See the section entitled “Comparison of Financial Results for Fiscal Years ended January 31, 2020 and January 31, 2019” in this Annual Report for more information.

 

·

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.

 

14

·

Minimum advance royalties.  Northshore’s obligation to pay base overriding royalties and royalty bonuses with respect to the sale of iron ore products generally accrues upon the shipment of those products from Silver Bay.  However, regardless of whether any shipment has occurred, 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 $929,320 for calendar year 2018 and $949,295 for calendar year 2019, and will be $964,659 for calendar year 2020.  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 from Silver Bay, 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 from Silver Bay that were mined from any lands, such portion being 90% of the first four million tons shipped from Silver Bay 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.

 

Royalty income, which constitutes the principal source of the Trust’s revenue, comprised 99.1% to 99.7% of the Trust’s total revenue in each of the fiscal years ended January 31, 2020,  January 31, 2019 and January 31, 2018.  A more complete discussion of royalty rates and the manner in which they are determined is set forth under the headings “Leasehold Royalties” and “Land Trust and Fee Royalties,” in this Annual Report.

 

During the course of its fiscal year some portion of royalties expected to be paid to Mesabi Trust is based in part on estimated prices for iron ore products sold under the Cliffs Pellet Agreements.  The Cliffs Pellet Agreements use estimated prices which are subject to interim and final pricing adjustments, which can be positive or negative, and which adjustments are dependent in part on multiple price and inflation index factors that are not known until after the end of a contract year.  Even though Mesabi Trust is not a party to the Cliffs Pellet Agreements, these adjustments can result in significant variations in royalties 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

15

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 become available for distribution to Unitholders. 

 

According to Cliffs’ Annual Report, sales volumes under most of its multi-year supply agreements with Cliffs’ customers are largely dependent on customer requirements and contain a base price that is adjusted annually using one or more adjustment factors.  The factors that could result in price adjustments under Cliffs’ customer contracts include changes in the Platts 62% Price, hot-rolled coil steel price, the Atlantic Basin pellet premium, published Platts international indexed freight rates and changes in specified producer price indices, including those for industrial commodities, fuel and steel.

 

As also described elsewhere in this Annual 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 from Silver Bay and sold at prices above the Adjusted Threshold Price.  Although 93.2% all of the iron ore products shipped from Silver Bay during calendar 2019 were 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.

 

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

16

SELECTED FINANCIAL DATA

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Years ended
January 31

 

2020

 

2019

 

2018

 

2017

 

2016

 

Royalty and interest income(1)

 

$

31,990,874

 

$

47,293,765

 

$

34,495,415

 

$

10,887,193

 

$

9,721,508

 

Trust expenses

 

 

1,935,122

 

 

1,734,721

 

 

1,071,990

 

 

1,123,422

 

 

1,162,667

 

Net income(2)

 

$

30,055,752

 

$

45,559,044

 

$

33,423,425

 

$

9,763,771

 

$

8,558,841

 

Net income per Unit(3)

 

$

2.291

 

$

3.472

 

$

2.548

 

$

0.744

 

$

0.652

 

Distributions declared Per unit(3)(4)

 

$

2.670

 

$

3.000

 

$

2.530

 

$

0.640

 

$

0.090

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Assets

 

$

23,647,374

 

$

35,454,014

 

$

26,222,284

 

$

14,421,288

 

$

9,816,961

 


(1)

In fiscal 2019, we adopted ASU 2014-09, which impacted our annual recognition of revenues and expenses.  Fiscal year 2016 throughout this document has not been adjusted for this new accounting standard.

(2)

The Trust, as a grantor trust, is exempt from federal and state income taxes.

(3)

Based on 13,120,010 Units of Beneficial Interest outstanding during all years.

(4)

In January each year, the Trustees consider whether the Trust will declare a cash distribution, and if so determined, such a distribution would be paid in February, which is in the Trust’s next fiscal year.  Because of this, distributions declared generally do not equal the amount of cash distributed in the same fiscal year.  To further illustrate, during the Trust’s fiscal year ended January 31, 2020, the Trustees distributed a total of $3.36 per Unit (including $1.39 per Unit declared in fiscal 2019 but distributed in fiscal 2020 (February 2019)) and in fiscal 2020 declared a distribution of $0.70 per Unit payable in February 2020, the next fiscal year.  For a complete description of distributions paid and declared in fiscal years ended 2020, 2019, and 2018, see page F-6.

 

TRUSTEES’ DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

 

Results of Operations

 

Comparison of Iron Ore Pellet Production and Shipments for the Fiscal Years Ended January 31, 2020,  January 31, 2019 and January 31, 2018

 

During fiscal 2020, production attributed to Trust lands totaled approximately 4.8 million tons, a decrease of 4.4% as compared to production for fiscal year 2019 and a decrease of 0.1% as compared to production for fiscal 2018.  Shipments to Northshore’s customers attributed to the Trust totaled approximately 4.7 million tons during fiscal 2020.  This represents a decrease of 8.9% as compared to shipments for fiscal year 2019 and a decrease of 4.9% as compared to shipments for fiscal year 2018.  The table below, which is based on information provided to the Trust by Northshore, shows the total production and total shipments of iron ore pellets from Mesabi Trust lands during the prior three fiscal years.

 

 

 

 

 

 

 

 

    

Pellets Produced from

    

Pellets Shipped from

 

 

 

Trust Lands

 

Trust Lands

 

Year Ended

 

(Tons)

 

(Tons)

 

January 31, 2020

 

4,802,269

 

4,678,321

 

January 31, 2019

 

5,025,850

 

5,138,157

 

January 31, 2018

 

4,806,391

 

4,920,633

 

 

Production of iron ore pellets for the fourth quarter of fiscal 2020 decreased 4.6% as compared to production of iron ore pellets for the fourth quarter of fiscal 2019 due primarily to a decrease in orders from Northshore’s customers as they adjusted production based on anticipated future demand from their customers.  Shipments of iron ore pellets by Northshore during the fourth quarter of fiscal 2020 increased by 43.2% as compared to

17

shipments of iron ore pellets during the fourth quarter of fiscal 2019.  The increase in shipments in the fourth quarter of fiscal 2020 was caused by an increase in demand from Northshore’s customers during the quarter.

 

 

 

 

 

 

 

    

Pellets Produced from

    

Pellets Shipped from

 

 

 

Trust Lands

 

Trust Lands

 

Three Months Ended

 

(Tons)

 

(Tons)

 

January 31, 2020

 

1,226,721

 

1,364,254

 

January 31, 2019

 

1,285,735

 

952,740

 

January 31, 2018

 

1,335,413

 

649,469

 

 

The table below shows the change in the percentages of production and shipments from lands owned or leased by Mesabi Trust versus the percentages of production and shipments from lands owned by the State of Minnesota and others for the most recent three fiscal years.

 

 

 

 

 

 

 

 

 

 

 

 

    

 

    

 

    

Percentage of

    

Percentage of

 

 

 

Percentage of

 

Percentage of

 

Pellets

 

Pellets

 

 

 

Pellets Produced

 

Pellets Produced

 

Shipped

 

Shipped

 

 

 

From Trust

 

From Non-Trust

 

From Trust

 

From Non-Trust

 

Fiscal Year ended

 

Lands

 

Lands

 

Lands

 

Lands

 

January 31, 2020

 

90.3%

 

9.7%

 

89.6%

 

10.4%

 

January 31, 2019

 

90.3%

 

9.7%

 

89.8%

 

10.2%

 

January 31, 2018

 

89.1%

 

10.9%

 

92.6%

 

7.4%

 

 

As is the case with the volume of shipments from Silver Bay, Minnesota, the Trustees cannot predict what percentage of production or shipments will be attributable to iron ore mined from Mesabi Trust lands in fiscal 2021.  However, pursuant to the Amendment, Mesabi Trust will be credited with at least 90% of the first four million tons of iron ore pellets shipped from Silver Bay, Minnesota in each calendar year, at least 85% of the next two million tons of pellets shipped from Silver Bay, Minnesota in each calendar year, and at least 25% of all tons of pellets shipped from Silver Bay, Minnesota in each calendar year in excess of six million tons.

 

18

Comparison of Financial Results for Fiscal Years ended January 31, 2020 and January 31, 2019

 

Royalty Income

 

As shown in the table below, in fiscal 2020 base royalties decreased by 33.9%, bonus royalties decreased by 32.3% and fee royalties increased by 20.1%, each as compared to fiscal 2019.  Accordingly, the Trust’s total royalty income decreased by 32.6% in fiscal 2020 as compared to fiscal 2019.  The decrease in royalties received by the Trust is primarily the result of a decrease in iron prices and a decrease in tons shipped in fiscal 2020, as compared to fiscal 2019.

 

 

 

 

 

 

 

 

 

 

 

 

 

Fiscal Year ended January 31, 

 

% increase

 

 

 

2020

    

2019

    

(decrease)

 

Base overriding royalties

 

$

18,538,253

 

$

28,042,592

 

-33.9%

 

Bonus royalties

 

 

12,445,074

 

 

18,387,905

 

-32.3%

 

Minimum advance royalty paid (recouped)

 

 

 

 

 

 

Fee royalties

 

 

724,532

 

 

603,294

 

20.1%

 

Total royalty income

 

$

31,707,859

 

$

47,033,791

 

-32.6%

 

 

The royalty amounts set forth in the table above include pricing adjustments made to royalty payments previously received by the Trust based on shipments from Silver Bay, Minnesota during prior calendar years.  Depending on the year, the volume of shipments, and the interim and final price paid to the Trust for shipments from Silver Bay, Minnesota, the price adjustment provisions of the Cliffs Pellet Agreements may increase or decrease, in some cases materially, the royalties paid to the Trust.  Because the Trust is not a party to the Cliffs Pellet Agreements, the Trustees are unable to predict the extent of any pricing adjustments that may occur under the Cliffs Pellet Agreements or whether the adjustments will increase or decrease royalties payable to the Trust.  With the current volatility in demand and prices for iron ore and steel products, the price adjustment provisions in the Cliffs Pellet Agreements may have a significant impact on future royalties payable to the Trust and the adjustments, depending on whether they are positive or negative, may increase or decrease the distributions payable to Unitholders.

 

Total Revenues, Expenses, Net Income and Distributions

 

As set forth in the table below, net income for fiscal 2020 decreased by 34.0%, as compared to fiscal 2019, primarily due to a decrease in iron prices and a decrease in tons shipped.  Total expenses for fiscal 2020 increased by 11.6% as compared to fiscal 2019.  A more detailed summary of the Trust’s expenses, including legal and consulting expenses, is set forth under the heading “Trust Expenses” in this Annual Report.

 

 

 

 

 

 

 

 

 

 

 

 

 

Fiscal Year ended January 31, 

 

% increase

 

 

    

2020

    

2019

    

(decrease)

 

Total Revenues

 

$

31,990,874

 

$

47,293,765

 

-32.4%

 

Expenses

 

 

1,935,122

 

 

1,734,721

 

11.6%

 

Net Income

 

$

30,055,752

 

$

45,559,044

 

-34.0%

 

 

As discussed in the paragraph above,  the Trust’s total royalty income and net income for fiscal 2020 decreased by 32.4% and 34.0%, respectively, due to a decrease in the iron prices and tons shipped during fiscal 2020, both as compared to fiscal 2019.  The decrease in the Trust’s net income resulted in an 11.0% decrease in total distributions declared to Unitholders in fiscal 2020, as compared to fiscal year 2019.

 

 

 

 

 

 

 

 

 

 

 

 

 

Fiscal Year ended January 31, 

 

% increase

 

 

    

2020

    

2019

    

(decrease)

 

Total Distributions Declared

 

$

35,030,427

 

$

39,360,030

 

-11.0%

 

Distributions Declared per Unit

 

$

2.67

 

$

3.00

 

-11.0%

 

 

19

Unallocated Reserve

 

As set forth in the table below, the Unallocated Reserve decreased by $4,974,675 or 29.6% to $11,831,014, as of January 31, 2020, as compared to $16,805,689 as of January 31, 2019.  As of January 31, 2020, the Unallocated Reserve included $14,326,122 in unallocated cash and U.S. Government Securities, $69,588 of accrued income receivable, and $2,511,720 of a contract liability.  Comparatively, as of January 31, 2019, the Unallocated Reserve included $14,767,308 in unallocated cash and U.S. Government Securities, $2,339,060 of accrued income receivable, and no contract liability.

 

 

 

 

 

 

 

 

 

 

 

 

 

Fiscal Year ended January 31, 

 

% increase

 

 

    

2020

    

2019

    

(decrease)

 

Accrued Income Receivable

 

$

69,588

 

$

2,339,060

 

-97.0%

 

Contract Asset

 

 

 —

 

 

56,357

 

-100.0%

 

Unallocated Cash and U.S. Government Securities

 

 

14,326,122

 

 

14,767,308

 

-3.0%

 

Prepaid Expenses and (Accrued Expenses), net

 

 

(52,976)

 

 

(357,036)

 

-85.2%

 

Contract Liability

 

 

(2,511,720)

 

 

 —

 

100.0%

 

Unallocated Reserve

 

$

11,831,014

 

$

16,805,689

 

-29.6%

 

 

The 29.6% decrease in the Unallocated Reserve for the fiscal year ended January 31, 2020 as compared to the fiscal year ended January 31, 2019,  is primarily the result of an increase in the contract liability, and a decrease in the accrued income receivable.

 

Accrued Income Receivable.  The $2,269,472, or 97.0%, decrease in the accrued income receivable portion of the Unallocated Reserve is the result of positive pricing adjustments recognized and the royalties earned on shipments in the last month of the fiscal year ended January 31, 2020, as compared to the fiscal year ended January 31, 2019.

 

Contract Liability.  The $2,511,720, or 100%, increase in the contract liability portion of the Unallocated Reserve is primarily the result of negative pricing adjustments recognized in the last month of the fiscal year ended January 31, 2020, as compared to the fiscal year ended January 31, 2019.  Also represented in contract liability is iron ore that has not been shipped by Northshore, but for which the Trust has received a royalty payment based on an initial estimated price. The contract liability is also presented on the balance sheet net of the contract asset.

 

Unallocated Cash and U.S. Government Securities.  The Trust’s unallocated cash and U.S. Government Securities for unexpected obligations decreased by 3.0% to $14,326,122 as of January 31, 2020 from $14,767,308 as of January 31, 2019.  The $441,186 decrease in the Trust’s cash reserve resulted from a decrease in the royalty payment received in January 2020 as compared to the royalty payment received in January 2019.

 

As described elsewhere in this Annual Report, pricing estimates are adjusted on a quarterly basis as updated pricing information is received from Northshore.  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 Trust’s Unitholders in future quarters.  See discussion under the heading “Risk Factors” in this Annual Report.

 

20

Comparison of Financial Results for Fiscal Years ended January 31, 2019 and January 31, 2018

 

Royalty Income

 

As shown in the table below, in fiscal 2019 base royalties increased by 45.9%, bonus royalties increased by 25.4% and fee royalties increased by 16.2%, each as compared to fiscal 2018.  Accordingly, the Trust’s total royalty income increased by 36.7% in fiscal 2019 as compared to fiscal 2018.  The increase in royalties received by the Trust is primarily the result of an increase in iron prices and the corresponding bonus royalty rate and an increase in tons shipped in fiscal 2019, as compared to fiscal 2018.

 

 

 

 

 

 

 

 

 

 

 

 

 

Fiscal Year ended January 31, 

 

% increase

 

 

 

2019

    

2018

    

(decrease)

 

Base overriding royalties

 

$

28,042,592

 

$

19,224,492

 

45.9%

 

Bonus royalties

 

 

18,387,905

 

 

14,659,069

 

25.4%

 

Minimum advance royalty paid (recouped)

 

 

 

 

 

 

Fee royalties

 

 

603,294

 

 

519,327

 

16.2%

 

Total royalty income

 

$

47,033,791

 

$

34,402,888

 

36.7%

 

 

The royalty amounts set forth in the table above include pricing adjustments made to royalty payments previously received by the Trust based on shipments from Silver Bay, Minnesota during prior calendar years.  Depending on the year, the volume of shipments, and the interim and final price paid to the Trust for shipments from Silver Bay, Minnesota, the price adjustment provisions of the Cliffs Pellet Agreements may increase or decrease, in some cases materially, the royalties paid to the Trust.  Because the Trust is not a party to the Cliffs Pellet Agreements, the Trustees are unable to predict the extent of any pricing adjustments that may occur under the Cliffs Pellet Agreements or whether the adjustments will increase or decrease royalties payable to the Trust.  With the current volatility in demand and prices for iron ore and steel products, the price adjustment provisions in the Cliffs Pellet Agreements may have a significant impact on future royalties payable to the Trust and the adjustments, depending on whether they are positive or negative, may increase or decrease the distributions payable to Unitholders.

 

Total Revenues, Expenses, Net Income and Distributions

 

As set forth in the table below, net income for fiscal 2019 increased by 36.3%, as compared to fiscal 2018, primarily due to an increase in iron prices and the corresponding bonus royalty rate and an increase in tons shipped.  Total expenses for fiscal 2019 increased by 61.8% as compared to fiscal 2018.  A more detailed summary of the Trust’s expenses, including legal and accounting expenses, is set forth under the heading “Trust Expenses” in this Annual Report.

 

 

 

 

 

 

 

 

 

 

 

 

 

Fiscal Year ended January 31, 

 

% increase

 

 

    

2019

    

2018

    

(decrease)

 

Total Revenues

 

$

47,293,765

 

$

34,495,415

 

37.1%

 

Expenses

 

 

1,734,721

 

 

1,071,990

 

61.8%

 

Net Income

 

$

45,559,044

 

$

33,423,425

 

36.3%

 

 

As discussed in the paragraph above,  the Trust’s total royalty income and net income for fiscal 2019 increased by 37.1% and 36.3%, respectively, due to an increase in the iron prices and the corresponding bonus royalty rate during fiscal 2019, both as compared to fiscal 2018.  The increase in the Trust’s net income

21

resulted in a 18.6% increase in total distributions declared to Unitholders in fiscal 2019, as compared to fiscal year 2018.

 

 

 

 

 

 

 

 

 

 

 

 

 

Fiscal Year ended January 31, 

 

% increase

 

 

    

2019

    

2018

    

(decrease)

 

Total Distributions Declared

 

$

39,360,030

 

$

33,193,626

 

18.6%

 

Distributions Declared per Unit

 

$

3.00

 

$

2.53

 

18.6%

 

 

Unallocated Reserve

 

As set forth in the table below, the Unallocated Reserve increased by $6,199,014 or 58.4% to $16,805,689, as of January 31, 2019, as compared to $10,606,675 as of January 31, 2018.  As of January 31, 2019, the Unallocated Reserve consisted of $14,767,308 in unallocated cash and U.S. Government Securities, and $2,339,060 of accrued income receivable.  Comparatively, as of January 31, 2018, the Unallocated Reserve consisted of $8,630,674 in unallocated cash and U.S. Government Securities, and $1,956,091 of accrued income receivable.

 

 

 

 

 

 

 

 

 

 

 

 

 

Fiscal Year ended January 31, 

 

% increase

 

 

    

2019

    

2018

    

(decrease)

 

Accrued Income Receivable

 

$

2,339,060

 

$

1,956,091

 

19.6%

 

Contract Asset

 

 

56,357

 

 

99,264

 

-43.2%

 

Unallocated Cash and U.S. Government Securities

 

 

14,767,308

 

 

8,630,674

 

71.1%

 

Prepaid Expenses and (Accrued Expenses), net

 

 

(357,036)

 

 

(79,354)

 

349.9%

 

Unallocated Reserve

 

$

16,805,689

 

$

10,606,675

 

58.4%

 

 

The 58.4% increase in the Unallocated Reserve for the fiscal year ended January 31, 2019 as compared to the fiscal year ended January 31, 2018, is primarily the result of an increase in Unallocated Cash and U.S. Government Securities.

 

Accrued Income Receivable.  The $382,969, or 19.6%, increase in the accrued income receivable portion of the Unallocated Reserve is the result of positive pricing adjustments recognized and the royalties earned on shipments in the last month of the fiscal year ended January 31, 2019, as compared to the fiscal year ended January 31, 2018.

 

Unallocated Cash and U.S. Government Securities.  The Trust’s unallocated cash and U.S. Government Securities for unexpected obligations increased by 71.1% to $14,767,308 as of January 31, 2019 from $8,630,674 as of January 31, 2018.  The $6,136,634 increase in the Trust’s cash reserve resulted from an increase in the royalty payment received in January 2019 as compared to the royalty payment received in January 2018.  

 

As described elsewhere in this Annual Report, pricing estimates are adjusted on a quarterly basis as updated pricing information is received from Northshore.  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 Trust’s Unitholders in future quarters.  See discussion under the heading “Risk Factors” in this Annual Report.

 

Liquidity and Capital Resources

 

The Trust’s activities are limited to the collection of royalties, payment of expenses and liabilities, distribution of net income to the Trust’s Unitholders and protection and conservation of Trust assets.  Distributions of net income to the Trust’s Unitholders are based on the amount of total royalty income after providing for the payment of expenses and, to the extent deemed prudent by the Trustees, reserving funds in the Unallocated Reserve to provide for potential fixed or contingent future liabilities, including potential

22

future liabilities that cannot be accurately quantified.  See the discussion of the Trustees’ management of liquidity set forth under the heading “Unallocated Reserve” in this Annual Report.

 

The Trust’s primary short-term liquidity needs are related to the Trust’s distributions to its Unitholders following the Trust’s receipt of royalty payments from Northshore each calendar quarter.  After the Trust receives the royalty payments, the Trust’s current assets are invested in U.S. Government Securities, either through direct purchases of U.S. Government Securities or through investments in a money market fund that invests its assets in U.S. Treasury securities and securities guaranteed by the U.S. government, its agencies or instrumentalities, or the FDIC.  Due to the short-term duration and investment grade nature of these investments, the Trustees believe that the Trust’s current assets are adequate to meet the Trust’s currently foreseeable liquidity needs.  As of January 31, 2020, the Trust held $10,177,655 in cash and cash equivalents, all of which was invested in a money market fund that exclusively invests in obligations of the U.S. Treasury.  In February 2020, the Trust distributed $9,184,007 to Unitholders of record on January 30, 2020.

 

Off-Balance Sheet Arrangements

 

The Trust has no off-balance sheet arrangements.

 

Contractual Obligations

 

The Trust has no payment obligations under any long-term borrowings, capital lease, operating lease, or purchase agreement.

 

New Accounting Standards

 

See Note 2 to the financial statements, Summary of Significant Accounting Policies, for information on our adoption of recently issued accounting standards.

 

Critical Accounting Estimates

 

This “Trustees’ Discussion and Analysis of Financial Condition and Results of Operations” is based upon the Trust’s financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States.  The preparation of these financial statements requires the Trustees to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities.  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.  For a complete description of the Trust’s significant accounting policies, please see Note 2 to the financial statements on pages F-8 through F-12.

Revenue Recognition

 

Royalty income under the Amended Assignment Agreements with Northshore is recognized as it is earned.  Under the Amended Assignment Agreements, royalties are earned upon shipment from Silver Bay, Minnesota, regardless of whether the actual sales proceeds for any shipment are received by Northshore.  The amount of base overriding royalties and royalty bonuses payable to the Trust are determined based on the volume of iron ore tonnage shipped from Silver Bay, Minnesota during each calendar quarter and the

23

proceeds to Cliffs resulting from shipments by Cliffs to its customers in accordance with the iron ore pellet sales agreements between Cliffs and its customers.

 

The Trust’s royalty income includes accrued income receivable.  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 year, 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.

 

The Trust’s royalty income also includes a contract asset. The contract asset represents the revenue recognized on the base overriding royalties, at the estimated prices for iron ore products sold under the Cliffs Pellet Agreements, that will be collected in subsequent quarters as the uncertainty associated with the variable consideration is resolved.  The Trust includes estimated future royalty rates on current contracted volumes within contract asset.

 

Adjustments to royalty income may result from changes in final reconciliations of tonnage shipped by Northshore with the final amounts received from Cliffs’ customers.  Adjustments may also result from revisions to estimated prices previously used to record revenue for tonnage shipped.  Pricing decreases may give rise to negative price adjustments which may be applied against future royalty income recognized by the Trust and changes in iron ore pellet prices may have a significant impact on the revenue recognized by the Trust.

 

During the fourth quarter of fiscal 2020, negative price adjustments were recorded by Mesabi Trust and added to the contract liability due to price adjustment mechanisms in the agreements between Cliffs and its customers that determine the final sales price of the shipments from Northshore with respect to certain shipments during calendar year 2019.  During the fiscal year ended January 31, 2020, negative price adjustments were recorded by Mesabi Trust and added to the contract liability due to price adjustment mechanisms in the agreements between Cliffs and its customers that determine the final sales price of the shipments from Northshore with respect to shipments during calendar year 2018.  As of January 31, 2020, the Trust recognized revenue related to approximately 960,426 tons of iron ore that were shipped by Northshore as of December 31, 2019, but for which Cliffs has indicated that final pricing was not yet known.  Pricing related to these shipments is expected to be finalized in the first quarter of calendar 2021.

 

Also included in royalty income, the contract liability represents an estimate of decreases in pellet revenue related to tons of iron ore that were 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.  Changes in iron ore pellet prices may have a significant impact on the revenue recognized by the Trust.  The contract liability also represents iron ore that has not been shipped by Northshore, but for which the Trust has received a royalty payment based on an initial estimated price.  Revenue will be recognized in accordance with the Trust’s revenue recognition policy at the estimated prices for iron ore products sold under the Cliffs Pellet Agreements as shipments of these products are made.

 

24

Current Developments

 

Quarterly Royalty Report

On January 30, 2020, the Trustees of Mesabi Trust received the quarterly royalty report of iron ore shipments from Silver Bay, Minnesota during the quarter ended December 31, 2019 (the “Royalty Report”) from Cliffs, the parent company of Northshore.

As reported to the Trust by Cliffs in the Royalty Report, based on shipments of iron ore products by Northshore during the three months ended December 31, 2019, Mesabi Trust was credited with a base royalty of $7,763,830.  Also for the three months ended December 31, 2019, Mesabi Trust was credited with a bonus royalty in the amount of $ 3,903,034. Royalties paid to Mesabi Trust reflected the reduction of $2,464,209 as a result of negative pricing adjustments to base and bonus royalty calculations related to changes in price estimates made in prior quarters.  In addition, a royalty payment of $207,738 was paid to the Mesabi Land Trust.  Accordingly, the total royalty payments received by Mesabi Trust on January 30, 2020 from Cliffs were $9,410,394.

The royalties paid to Mesabi Trust are based on the volume of shipments of iron ore pellets for 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 fourth calendar quarter of 2019, Cliffs credited Mesabi Trust with 1,362,171 tons of iron ore shipped, as compared to 1,315,238 tons shipped during the fourth calendar quarter of 2018.

The volume of shipments of iron ore pellets (and other iron ore products) by Northshore varies from quarter to quarter and year to year based on a number of factors, including the requested delivery schedules of customers, general economic conditions in the iron ore industry, and weather conditions on the Great Lakes.  Further, the prices under the Cliffs Pellet Agreements, to which Mesabi Trust is not a party, are subject to interim and final pricing adjustments, dependent in part on multiple price and inflation index factors, some of which are not known until after the end of a contract year.  The factors that could result in price adjustments under Cliffs’ customer contracts include changes in the Platts 62% Price, hot-rolled coil steel price, the Atlantic Basin pellet premium, published Platts international indexed freight rates and changes in specified producer price indices, including those for industrial commodities, fuel and steel.  These multiple factors can result in significant variations in royalties received by Mesabi Trust (and in turn, the resulting funds available for distribution to Unitholders by Mesabi Trust) from quarter to quarter and from year to year.  These variations, which can be positive or negative, cannot be predicted by the Trustees of Mesabi Trust.  Royalty payments anticipated to be received during fiscal 2021 will continue to reflect pricing estimates for shipments of iron ore products that will be subject to positive or negative pricing adjustments pursuant to the Cliffs Pellet Agreements.  Based on the above factors, and as indicated by the Trust’s historical distribution payments, the royalties received by the 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.

With respect to calendar year 2020, Northshore has not advised Mesabi Trust of its expected shipments of iron ore products (except as noted below with regard to DR-grade pellets) or what percentage of 2020 shipments will be from Mesabi Trust iron ore.  In the Cliffs’ Royalty Report, Cliffs stated that the royalty payments being reported were based on estimated iron ore pellet prices under the Cliffs Pellet Agreements, which are subject to change.  It is possible that future negative price adjustments could offset, or even eliminate, royalties or royalty income that would otherwise be payable to Mesabi Trust in any particular quarter, or at year end, thereby potentially reducing cash available for distribution to Mesabi Trust’s Unitholders in future quarters.

25

Cliffs and AK Steel Holding Corporation Announce Merger 

On December 3, 2019, Cliffs and AK Steel Holding Corporation (“AK Steel”) announced that they entered into a definitive merger agreement pursuant to which Cliffs will acquire all of the issued and outstanding shares of AK Steel common stock.

Three existing members of AK Steel’s Board of Directors will join the Cliffs Board, and two existing Cliffs Board members will step down, bringing the Cliffs Board to 12 members in total.  AK Steel will become a direct, wholly-owned subsidiary of Cliffs and will retain its branding and corporate identity.  Cliffs will continue to be listed on the NYSE with its headquarters in Cleveland, Ohio.

According to Cliffs’ December 3, 2019 press release, “The pro forma Cliffs will be a vertically integrated steel company that is expected to drive improved profitability for existing Cliffs and AK Steel shareholders and is well-positioned to serve both the blast furnace and electric arc furnace segments.  In addition, Cliffs’ existing strong balance sheet and self-sufficiency in pellets for the combined company provide flexibility to pursue additional growth opportunities, including the potential future utilization of the blast furnace in Ashland to produce merchant pig iron, an opportunity neither company could pursue on a standalone basis.”

On March 13, 2020, Cliffs announced that it successfully completed the acquisition of AK Steel Holding Corporation.  The combined company will be led by Chairman, President and Chief Executive Officer Lourenço Goncalves.

Mesabi Trust Distribution Announcement 

As previously announced by Mesabi Trust on January 14, 2020, the Trustees declared a distribution of seventy cents ($0.70) per Unit of Beneficial Interest payable on February 20, 2020 to Mesabi Trust Unitholders of record at the close of business on January 30, 2020.  This distribution was paid as announced.

Arbitration Initiated Against Cliffs and Northshore 

On December 9, 2019, the Trustees of Mesabi Trust announced that the Trust initiated arbitration against Northshore and its parent, Cliffs (jointly, the “Operator”), the lessee/operator of the leased lands.  The arbitration proceeding was commenced with the American Arbitration Association.  The Trust asserts claims concerning the calculation of royalties related to the production, shipment and sale of iron ore, including DR‑grade pellets.  More particularly, the claims involve the Trust’s allegations that the Operator has improperly manipulated royalty amounts with respect to DR-grade pellets by orchestrating isolated sale transactions of low silica iron ore into international markets at prices significantly below standard pellet pricing.  Based on information currently available to the Trust, the Trust seeks an award of damages, along with specific performance and declaratory relief.  The arbitration is in its early stages and no hearings have been set.

Cliffs Announces the Temporary Shut Down of Construction of its HBI Project

On March 19, 2020, Cliffs announced that, following guidelines from the office of the Governor of Ohio regarding COVID-19 virus concerns, the Company is temporarily shutting down construction activities at its hot-briquetted iron (HBI) project site in Toledo, Ohio and that all construction activity at the site would cease by the end of business March 20, 2020.   Cliffs said it will continue to monitor the COVID-19 situation and will re-start construction of the HBI plant as soon as feasible.  

26

Important Factors Affecting Mesabi Trust 

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

Neither Mesabi Trust nor the Trustees have any control over the operations and activities of Northshore, except within the framework of the Amended Assignment Agreements.  Cliffs alone controls (i) historical operating data, including iron ore production  volumes, marketing of iron ore products, operating and capital expenditures as they relate to Northshore, environmental and other liabilities and the effects of regulatory changes; (ii) 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 Mesabi Trust and/or state lands, based on Cliffs’ current mining and engineering plan.  The Trustees do not exert any influence over mining operational decisions at Northshore, nor do the Trustees provide any input regarding the ore reserve estimated at Northshore as reported by Cliffs.  While the Trustees request relevant information from Cliffs and Northshore for use in periodic reports as part of their evaluation of Mesabi Trust’s disclosure controls and procedures, the Trustees do not control this information and they rely on the information in Cliffs’ periodic and current filings with the SEC to provide accurate and timely information in Mesabi Trust’s reports filed with the SEC.

In accordance with the Agreement of Trust and the Amendment, the Trustees are entitled to, and in fact do, rely upon certain experts in good faith, including (i) the independent consultants with respect to monthly production and shipment reports, which include figures on crude ore production and iron ore pellet shipments, and discussions concerning the condition and accuracy of the scales and plans regarding the development of Mesabi Trust’s mining property; and (ii) the accounting firm they have contracted with for non-audit services, including reviews of financial data related to shipping and sales reports provided by Northshore and a review of the schedule of leasehold royalties payable to Mesabi Trust.

 

27

TO THE HOLDERS OF

CERTIFICATES OF BENEFICIAL INTEREST IN

MESABI TRUST

 

THE TRUST ESTATE

The principal assets of Mesabi Trust consist of two different interests in certain properties in the Mesabi Iron Range: (i) Mesabi Trust’s interest as assignor in the Amended Assignment of Peters Lease and the Amended Assignment of Cloquet Lease, which together cover properties aggregating approximately 9,750 largely contiguous acres in St. Louis County, Minnesota (the “Peters Lease Lands” and the “Cloquet Lease Lands,” respectively), and (ii) Mesabi Trust’s ownership of the entire beneficial interest in the Mesabi Land Trust, which has a 20% interest as fee owner in the Peters Lease Lands and a 100% fee ownership in certain non-mineral-bearing lands adjacent to the Peters and Cloquet Lease Lands (the “Mesabi Lease Lands,” together with Mesabi Trust Lands, the “Trust Estate”).  The map below shows the approximate location of the Trust Estate.

Picture 28

 

The boxed area indicates the approximate location of Mesabi Trust’s Trust Estate (not drawn to scale), as defined above under the “Trust Estate,” which is a small part of the region known as the Mesabi Iron Range.  Mesabi Trust does not own any property interests other than those in the Trust Estate

 

Under the Amended Assignment Agreements, Northshore produces iron ore from Mesabi Trust Lands for the manufacture of iron ore products to be sold to various customers of Cliffs.  Mesabi Trust receives royalties on the crude ore extracted from such lands and the pellets produced from such crude ore,

28

and in each case the royalties are based upon the volume of iron ore products shipped and the prices charged to Cliffs’ customers.

 

DURATION OF THE TRUST ESTATE

 

The largest component of the Trust Estate is the Peters Lease Lands.  The Peters Lease provides that the leasehold estate thereunder will continue until the reserves of iron ore, taconite and other minerals or materials on the land subject to the Peters Lease are exhausted.  The Amended Assignment of Peters Lease terminates when the Peters Lease terminates.  The Cloquet Lease, executed in 1916, provides that the leasehold estate thereunder will continue until the reserves of iron ore, taconite and other minerals or materials on the land subject to the Cloquet Lease are exhausted.  The Amended Assignment of Cloquet Lease terminates when the Cloquet Lease terminates.  If Northshore decides to terminate or surrender either the Amended Assignment of Peters Lease or the Amended Assignment of Cloquet Lease, or both of them, it must first give Mesabi Trust at least six months’ notice of its intention to do so and, at Mesabi Trust’s request, reassign all of such leasehold interests to Mesabi Trust.  If any such reassignment occurs, Northshore must transfer the leasehold interests to Mesabi Trust free and clear of liens, except public highways.  In return, Mesabi Trust must assume Northshore’s future obligations as lessee under the reassigned leases.  Upon termination of the lease under either the Amended Assignment of Peters Lease or the Amended Assignment of Cloquet Lease, or both of them, Northshore is obligated to remove within 90 days all engines, tools, machinery, railroad tracks and structures erected or placed by it, or under its direction, on the lands but may not remove or impair any supports placed in the mines, nor any timber or frameworks necessary to the use and maintenance of the shafts or other approaches to the mine.

 

The Peters Lease Lands and the Cloquet Lease Lands are located at the northeastern end of the Mesabi Iron Range and contain mineral deposits consisting of a highly metamorphosed sedimentary bed of banded magnetite in siliceous gangue, a form of low-grade iron ore known as taconite, approximately three tons of which must be beneficiated to produce one ton of high-grade pellets.  The Mesabi Lease Lands contain substantially no commercial ore deposits and have been used principally in connection with mining the taconite from other parts of the Trust Estate, such as the provision of an area for location of service roads, supporting plants and equipment and dump sites for overburden.

 

Because the Trust is not involved with the mining operations at Northshore, the Trust relies on the ore reserve estimates reported in Cliffs’ Form 10-K filed with the SEC each year.  In Cliffs’ Annual Report, the following information was provided by Cliffs regarding the estimated ore reserves at Northshore.

 

Mining and Pelletizing Mineral Reserves

As of December 31, 2019

(In Millions of Long Tons)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Proven

 

Probable

 

Proven & Probable

 

Saleable Product(1), (2)

 

Previous Year

 

 

    

Cliffs'

    

 

    

%

    

 

    

%

    

 

    

%

    

Process

    

 

    

P&P Crude

    

Saleable

 

Property

 

Share

 

Tonnage

 

Grade

 

Tonnage

 

Grade

 

Tonnage

 

Grade(3)  

 

Recovery(4)

 

Tonnage

 

Ore

 

Product

 

Northshore

 

100%

 

275.1

 

25.3

 

540.9

 

23.7

 

816.0

 

24.3

 

33%

 

265.3

 

835.1

 

270.2

 


(1)

Saleable product is a standard pellet containing 65 to 66 percent Fe calculated from both proven and probable mineral reserves.

(2)

Saleable product is reported on a dry basis; shipped products typically contain 1% to 4% moisture.

(3)

Cutoff grade was 19%.

(4)

Process recovery includes all factors for converting crude ore tonnage to saleable product.

 

According to Cliffs’ Annual Report, reserve estimates are based on pricing that does not exceed the three-year trailing average index price of iron ore adjusted to Cliffs’ realized price.  The latest reserve estimate for Northshore was completed in 2018.  In Cliffs’ Annual Report, Cliffs reported that the

29

international average benchmark price of 62 percent Fe CFR China was $93 per dry metric ton for the year ended December 31, 2019.

 

The Trustees engaged an independent geological consulting firm, Roscoe Postle Associates, Inc.  (“RPA”), to confirm that the process used by Cliffs to estimate the ore reserves in the mine at Northshore is reasonable.  RPA delivered its report to the Trustees in March 2018.  In its report to the Trustees, RPA summarized its review and evaluation of Cliffs’ ore reserve estimation process which was performed by Cliffs in 2015.  RPA reported to the Trustees that the reserve estimation process used by Cliffs is reasonable and comports with the reporting requirements set forth in Securities Act Industry Guide 7.  Based on the report of RPA, at least 90% of the ore reserves in the mine at Northshore, as reported by Cliffs, is attributable to Mesabi Trust Lands.

 

HISTORY OF THE TRUST’S ACQUISITION OF THE TRUST ESTATE

 

Prior to the creation of Mesabi Trust and Mesabi Land Trust on July 18, 1961, MIC, the Trust’s predecessor in interest, owned the interests in the Peters Lease Lands, Cloquet Lease Lands and Mesabi Lease Lands.  MIC obtained its interests as follows:

Peters Lease Lands.  MIC owned a 20% interest in the fee ownership in the Peters Lease Lands.  Originally, the Peters Lease Lands were owned by East Mesaba Iron Company and Dunka River Iron Company which were wholly-owned subsidiaries of Dunka-Mesaba Security Company (“Dunka-Mesaba”).  In August 1951, East Mesaba Iron Company and Dunka River Iron Company conveyed the Peters Lease Lands to their parent company, Dunka-Mesaba, which in turn conveyed to each of its stockholders an undivided interest in the Peters Lease Lands in proportion to each stockholder’s ownership in the parent company.  Accordingly, MIC, which had been the owner of 20% of the outstanding capital stock of Dunka-Mesaba, acquired a 20% undivided interest in the Peters Lease Lands and the right to receive a 20% fee royalty under the Peters Lease.

By an instrument dated October 1, 1917, as of April 30, 1915, East Mesaba and Dunka River leased their properties to Claude W.  Peters.  This instrument, as modified by instruments dated February 3, 1921, July 17, 1939 and July 31, 1951, is known as the “Peters Lease.”  Claude W. Peters acquired the Peters Lease on behalf of MIC and an assignment of the Peters Lease from Claude W. Peters to MIC was recorded in 1919.  In 1939, MIC assigned the Peters Lease to Reserve Mining Company (“RMC”) in consideration for which RMC agreed to pay MIC a percentage of its net profits.  Later, these payments were changed to royalty payments.

Cloquet Lease Lands.  MIC held a leasehold interest in the Cloquet Lease Lands pursuant to the Indenture of Lease dated May 1, 1916.  In 1939, MIC assigned its interest in the Cloquet Lease as lessee to RMC.

Mesabi Lease Lands.  MIC held a fee interest in the Mesabi Lease Lands, subject to earlier grants of mineral rights to other parties.  In 1939, MIC leased its interest in the Mesabi Lease Lands to RMC (“Mesabi Lease”).

Acquisition of Interests from MIC.  MIC had not engaged in actual mining operations since 1939, with all of its ownership of land in fee having been leased out and its leaseholds in land assigned to RMC in exchange for royalty payments.  Because MIC’s activities in connection with the administration of its assets were limited to the collection of income, the payment of expenses and liabilities, the distribution of the net income and the protection and conservation of the assets held, in July 1961 its board of directors proposed, and its stockholders subsequently approved, to adopt a plan of complete liquidation as a result of which MIC’s assets were transferred to and administered by two trust entities.

30

To comply with the law of the State of Minnesota, which requires that a trust holding real property located in that state must be administered under Minnesota law, the Mesabi Land Trust was created under Minnesota law on July 18, 1961 pursuant to an Agreement of Trust of even date.  MIC transferred to the Mesabi Land Trust its 20% interest as fee owner in the Peters Lease Lands and its interest as 100% fee owner in the Mesabi Lease Lands and as lessor of the Mesabi Lease (subject to the reservation of mineral rights described above).

Also pursuant to an Agreement of Trust, the Mesabi Trust was created under New York law on July 18, 1961.  MIC transferred to the Mesabi Trust instruments assigning the Amended Assignment of Peters Lease and the Amended Assignment of Cloquet Lease (covering its interest as assignor of the entire leasehold interest in the Peters Lease Lands and the Cloquet Lease Lands), together with cash, marketable securities and other assets.  The Mesabi Trust also received all of the beneficial interest in the Mesabi Land Trust.

RMC, the original lessee, operated the mine until it closed on July 31, 1986.  Cyprus Minerals Company (“Cyprus”) purchased substantially all of RMC’s assets on August 17, 1989 and resumed operations as Cyprus NMC.  On September 30, 1994, Cliffs purchased all of Cyprus NMC’s capital stock from Cyprus.  Cliffs renamed the operation Northshore Mining Company.

Since the creation of Mesabi Land Trust and Mesabi Trust, although the mining operators have changed and the Peters Lease, the Cloquet Lease and the Mesabi Lease have been further amended and assigned, the Trust Estate has not changed beyond the forfeiture of one parcel of the Mesabi Lease Lands described above.

The diagram below illustrates the relationships of the various parties that own the lands and have interests in the lands the Trust has interests in:

Picture 29

 

31

DESCRIPTION OF THE MINERAL PROPERTIES AND NORTHSHORE’S MINING OPERATIONS

 

Mine and Rock Formation.  The Trust Estate, including the ore mine, are located in northeastern Minnesota, approximately two miles south of Babbitt, Minnesota.  The ore mine on the Trust Estate is called the Peter Mitchell Mine, an open pit mine consisting of a 10-mile long segment of a host rock called the Biwabik Iron Formation, which is a very hard cherty rock containing magnetite as the ore mineral.  The Biwabik Iron Formation extends west and southwest for over 100 miles and constitutes the Mesabi Iron Range.  Recoverable iron grades range from 21% magnetic iron in the west end of the mine open pit to 26% magnetic iron in the central portion and east end.  The ore body dips south under the hanging wall called the Virginia Formation.  To date, the Mesabi Trust properties have been explored for their iron ore potential.  To the knowledge of the Mesabi Trustees, no other minerals have been explored on the Trust Estate.

Mining Properties.  As disclosed elsewhere in this Annual Report, Northshore, a wholly-owned subsidiary of Cliffs, currently conducts the mining operation upon the Trust Estate.  The main entrance to the Northshore mine is accessed by means of a gravel road and is located off County Road 70.  Northshore’s processing facilities are located in Silver Bay, Minnesota, near Lake Superior, on U.S. Highway 61.  Each year, the Trustees visit the Northshore mine in Babbitt, Minnesota and the processing plant in Silver Bay, Minnesota.  During such visits, the Trustees inspect the condition of the mining properties as well as mining equipment and facilities.  Based on information provided to the Trustees during the most recent inspection trip in September 2019, the mining properties and facilities at Northshore were in good operating condition.

Northshore’s Operations.  Because Mesabi Trust is not involved in Northshore’s mining operations, the Trustees do not have detailed firsthand information relating to such operations or the equipment and facilities used by Northshore.  Therefore, the Trustees rely on information provided by Northshore personnel, disclosures by Cliffs in its periodic and current reports filed with the SEC and, to some extent, information provided in other reports published by independent organizations, such as Skillings Mining Review, in providing the information relating to Northshore’s mining operations, equipment and facilities.

·

Mining and Railroad.  Drilling at the Northshore mine is conducted with three rotary units.  The drilling is followed with blasts using a gassed sensitized emulsion which breaks an average of 700,000 to 1,200,000 tons of crude taconite.  After blasts, taconite is then removed by a loading fleet consisting of five electric rope shovels and one loader.  A haulage fleet of twelve production trucks carry crude taconite to the primary and secondary crushers located about two miles away.  At the crushers, taconite is emptied from the end-dump trucks into a primary gyratory unit and four secondary crushers for reduction to a nominal size coarse ore.  The coarse ore is then fed into 90-ton capacity ore cars for transportation to Silver Bay via a 47-mile-long, single track railroad owned by Northshore.  Each train is pulled by two diesel electric locomotives.

 

·

Concentrating and Pelletizing Process.  Upon arrival at the pelletizing facility in Silver Bay, the coarse taconite ore first passes through a fine crushing stage where it is reduced in size.  Non-magnetic material is rejected through a dry cobber magnetic separation stage and then rail-hauled seven miles to the Mile Post 7 disposal site.  Magnetic material is fed into one of the seventeen active grinding lines.  Each line includes one rod mill and two ball mills.  The final grinding of the crude taconite is reduced to 90% minus 325 mesh.

 

During the concentrating process, ore concentrate is separated by a two-stage magnetic separation, which removes low grade tailings from the ore concentrate.  The tailings are pumped uphill to the Mile Post 7 disposal site.  The concentrate is then fed into hydro-separators followed by a final flotation upgrading accomplished with two flotation cells per grinding line.  Next, the concentrate proceeds to a central filtering facility, through which the moisture content in the concentrate is reduced and the final concentrate becomes ready for pelletizing.  The pelletizing

32

process first feeds the ore concentrate, to which bentonite and organic binder has been added as a binder, into a balling drum.  The revolving action of the drum causes the concentrate to build up into green balls.  Next, the green balls are conveyed to one of four moving grates and enter into an accompanying high temperature furnace where they are heated to over 2,400°F and are hardened into the final pellet product.  From the four furnaces the pellets are conveyed to a dockside storage area with a 5 million ton storage capacity.  Northshore’s sheltered harbor at Silver Bay can handle lake-going vessels with capacities up to 55,000 tons.

 

·

Capital Expenditures for DR-Grade Pellets at Northshore and HBI Plant at Toledo, Ohio.  According to Cliffs’ Annual Report, Cliffs reported that it currently expects to incur capital expenditures through 2020 of approximately $830 million plus a contingency of up to 20%, excluding capitalized interest, on the development of the HBI production plant in Toledo, Ohio, of which approximately $700 million was paid as of December 31, 2019, and that it has completed upgrades at the Northshore plant to enable it to produce significantly increased levels of DR-grade pellets that could be used as feedstock for the HBI production plant and/or sold commercially.  Cliffs indicated that these estimated expenses may increase as personnel and equipment associated with advancing development and commercial production are added.

·

Northshore Mine Safety and Health Administration Safety Data.  The operation of the Northshore mine is subject to regulation by MSHA under the U.S. Federal Mine Safety and Health Act 1977, as amended (the “FMSH Act”).  In Cliffs’ Annual Report, Cliffs reported that MSHA inspects its mines on a regular basis and issues various citations and orders when it believes a violation has occurred under the FMSH Act.  In Cliffs’ Annual Report, Cliffs provided information regarding certain mining safety and health citations which MSHA has issued with respect to Northshore’s mining operations.  In evaluating this information, consideration should be given to factors such as: (i) the number of citations and orders will vary depending on the size of the mine, (ii) the number of citations issued will vary from inspector to inspector, and (iii) citations and orders can be contested and appealed, and in that process, are often reduced in severity and amount, and are sometimes dismissed.

Under the Dodd-Frank Act, each operator of a coal or other mine is required to include certain mine safety results within its periodic reports filed with the SEC.  As required by the reporting requirements included in §1503(a) of the Dodd-Frank Act, in Cliffs’ Annual Report, Cliffs presented the following items regarding certain mining safety and health matters for the Northshore Mine.

 

(A)

The total number of violations of mandatory health or safety standards that could significantly and substantially contribute to the cause and effect of a mine safety or health hazard under section 104 of the FMSH Act (30 U.S.C. 814) for which the operator received a citation from MSHA;

 

(B)

The total number of orders issued under section 104(b) of the FMSH Act (30 U.S.C.  814(b));

 

(C)

The total number of citations and orders for unwarrantable failure of the mine operator to comply with mandatory health or safety standards under section 104(d) of the FMSH Act (30 U.S.C.  814(d));

 

(D)

The total number of imminent danger orders issued under section 107(a) of the FMSH Act (30 U.S.C.  817(a));

(E)

The total dollar value of proposed assessments from MSHA under the FMSH Act (30 U.S.C. 801 et seq.);

 

33

(F)

Legal actions pending before Federal Mine Safety and Health Review Commission involving such mine as of the last day of the period;

 

(G)

Legal actions initiated before the Federal Mine Safety and Health Review Commission involving such mine during the period; and

 

(H)

Legal actions resolved before the Federal Mine Safety and Health Review Commission involving such mine during the period.

 

In Cliffs’ Annual Report, Cliffs reported that the Northshore mine did not receive any flagrant violations under Section 110(b)(2) of the FMSH Act (30 U.S.C. 820(b)(2)) and did not receive any written notices of a pattern of violations, or the potential to have a pattern of such violations, under section 104(e) of the FMSH Act (30 U.S.C. 814(e)) during the year ended December 31, 2019.  In addition, according to Cliffs there were no mining-related fatalities at the Northshore mine during the same period.

 

Following is a summary of the information listed above with respect to Northshore for the year ended December 31, 2019.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year Ended December 31, 2019

 

 

    

 

    

(A)

    

(B)

    

(C)

    

(D)

    

(E)

    

(F)

    

(G)

    

(H)

 

 

 

 

 

 

 

 

 

 

 

Section

 

 

 

 

 

Legal

 

Legal

 

 

 

 

 

 

 

 

 

 

 

107(a)

 

Total Dollar

 

 

 

Actions

 

Actions

 

 

 

 

 

Section

 

Section

 

Section

 

Citations

 

Value of MSHA

 

 

 

Instituted

 

Resolved

 

 

 

 

 

104 S&S

 

104(b)

 

104(d)

 

&

 

Proposed

 

Pending

 

During

 

During

 

Mine Location

 

Operation

 

Citations

 

Orders

 

Orders

 

Orders

 

Assessments $ (1)

 

Legal Action

 

Period

 

Period

 

Northshore Plant

 

Iron Ore

 

 9

 

 —

 

 —

 

 —

 

122,498

 

13

(2)  

 8

 

10

 

Northshore Mine

 

Iron Ore

 

 4

 

 —

 

 —

 

 1

 

29,976

 

 5

(3)

 5

 

 5

 


(1)

Amounts included under the heading “Total Dollar Value of MSHA Proposed Assessments” are the total dollar amounts for proposed assessments received from MSHA on or before December 31, 2019.

(2)

This number consists of 13 pending legal actions related to contests of proposed penalties referenced in Subpart C of FMSH Act’s procedural rules.

(3)

This number consists of three pending legal actions related to contests of citations and orders referenced in Subpart B of FMSH Act’s procedural rule and two pending legal actions related to contests of proposed penalties referenced in Subpart C of FMSH Act’s procedural rules.

 

34

LEASEHOLD ROYALTIES

 

Northshore is obligated to pay to Mesabi Trust base overriding royalties and royalty bonuses on all pellets (and other iron ore products) produced from the Peters Lease Lands and the Cloquet Lease Lands (“Mesabi Ore”) and shipped from Silver Bay in each calendar year.  The royalties are based on prices per unit of product, volumes of product shipped and where on the escalating scale of royalties—2-1/2% on the first million long tons to 6% on shipments above four million long tons per calendar year—each shipment falls.

 

Base overriding royalties.  Base overriding royalties are calculated on the basis of an escalating scale of percentages of gross sales proceeds of iron ore shipped.  The applicable percentage is determined by reference to the tonnage of pellets (and other iron ore products) previously shipped in the then current calendar year, as follows:

 

 

 

 

 

 

    

Applicable royalty

 

 

 

(expressed as a percentage

 

Tons of iron ore products

 

of gross sales proceeds

 

shipped in calendar year

 

within each tranche)

 

one million or less

 

2-1/2%

 

more than one but not more than two million

 

3-1/2%

 

more than two but not more than three million

 

5%

 

more than three but not more than four million

 

5-1/2%

 

more than four million

 

6%

 

 

Royalty bonuses.  Royalty bonuses are payable on all iron ore products produced from Mesabi Ore shipped from Silver Bay during a calendar quarter and sold at prices above the Adjusted Threshold Price.  The Adjusted Threshold Price was $55.74 for calendar year 2018 and $56.93 for calendar year 2019, and will be $57.85 for calendar year 2020.  The Adjusted Threshold Price is subject to adjustment (but not below $30 per ton) for inflation and deflation and is determined each year on the basis of the change in the Gross Domestic Product Implicit Price Deflator, a broad-based index of inflation and deflation published quarterly by the U.S. Department of Commerce.

 

The amount of royalty bonuses payable for any calendar quarter is calculated on the basis of an escalating scale of percentages of the gross sales proceeds to Northshore of pellets produced from Mesabi Ore that are sold at prices above the Adjusted Threshold Price.  The applicable percentage is determined by reference to the amount by which the sales prices for a particular quantity of pellets exceeds the Adjusted Threshold Price, as follows:

 

 

 

 

 

Amount by which sales price per ton

    

Applicable

 

exceeds Adjusted Threshold Price

 

Percentage

 

$2 or less

 

1/2 of 1%

 

more than $2 but not more than $4

 

1%

 

more than $4 but not more than $6

 

1-1/2%

 

more than $6 but not more than $8

 

2%

 

more than $8 but not more than $10

 

2-1/2%

 

more than $10

 

3%

 

 

35

Leasehold royalty example.  To illustrate the calculation of base overriding royalties and royalty bonuses, assume that no shipments of iron ore products were made during the first calendar quarter of 2020, and further assume that pellets were shipped from Silver Bay in the second and third calendar quarters of 2020 in the following tonnage quantities and rendering the following gross proceeds:

 

 

 

 

 

 

 

 

 

 

 

 

    

Tonnage

    

Sales Price per Ton

    

Gross Proceeds

 

2nd Quarter:

 

500,000

 

$

57

 

$

28,500,000

 

3rd Quarter:

 

500,000

 

$

59

 

$

29,500,000

 

 

 

1,000,000

 

$

61

 

$

61,000,000

 

 

 

1,000,000

 

$

63

 

$

63,000,000

 

 

 

1,000,000

 

$

67

 

$

67,000,000

 

 

 

1,500,000

 

$

69

 

$

103,500,000

 

 

In this example, the base overriding royalties payable in respect of the second and third calendar quarters of 2020 would be as follows:

 

 

 

 

 

 

 

 

 

 

2nd Quarter:

    

$

28,500,000 x 2-1/2%

=

    

$

712,500

 

3rd Quarter:

 

$

29,500,000 x 2-1/2%

=

 

$

737,500

 

 

 

$

61,000,000 x 3-1/2%

=

 

$

2,135,000

 

 

 

$

63,000,000 x 5%

=

 

$

3,150,000

 

 

 

$

67,000,000 x 5-1/2%

=

 

$

3,685,000

 

 

 

$

103,500,000 x 6%

=

 

$

6,210,000

 

 

Based on the same example, the base overriding royalty percentage applicable for all iron ore products shipped in the fourth calendar quarter of 2020 would be 6%, because more than four million tons were shipped during the first three quarters.

 

Further, the royalty bonuses payable in respect of the second and third calendar quarters of 2020 would be as follows (with reference to the Adjusted Threshold Price (“ATP”) of $57.85

 

 

 

 

 

 

 

 

 

 

 

2nd Quarter:

    

$

 57.00/ton falls below ATP: no bonus payable

 

=

    

 

None

 

3rd Quarter:

 

$

29,500,000 x 0.5%

 

=

 

$

147,500

 

 

 

$

61,000,000 x 1.0%

 

=

 

$

610,000

 

 

 

$

63,000,000 x 1.5%

 

=

 

$

945,000

 

 

 

$

67,000,000 x 2.5%

 

=

 

$

1,675,000

 

 

 

$

103,500,000 x 3.0%

 

=

 

$

3,105,000

 

 

The above figures are provided only to illustrate the method for calculating base overriding royalties and royalty bonuses and do not indicate the amount of base overriding royalties or royalty bonuses the Trustees expect Mesabi Trust to earn in calendar 2020 or any other calendar or fiscal year.  Accordingly, the foregoing example illustrating the calculation of base overriding royalties and royalty bonuses should not be considered a prediction of the amount of base overriding royalties or royalty bonuses Mesabi Trust will receive.

 

Bonuses on other ore.  Northshore also must pay base overriding royalties and royalty bonuses on pellets produced from lands other than Mesabi Trust Lands (“Other Ore”) to the extent necessary to assure payment of base overriding royalties and royalty bonuses on at least 90% of the first four million tons of pellets shipped from Silver Bay in each calendar year, at least 85% of the next two million tons of pellets shipped therefrom in each calendar year, and at least 25% of all tonnage of pellets shipped therefrom in each calendar year in excess of six million tons.  Base overriding royalties and royalty bonuses payable on Other Ore can be recouped by Northshore out of base overriding royalties and royalty bonuses paid on Mesabi Ore.  The amount of base overriding royalties and royalty bonuses on Other Ore that can be recouped on any payment date cannot, however, exceed 20% of the amount of Mesabi Ore royalties and royalty bonuses which are otherwise payable on that payment date.

36

Advance royalties.  Northshore is obligated to pay Mesabi Trust advance royalties in equal quarterly installments.  The advance royalty was  $929,320 for calendar year 2018,  $949,295 for calendar year 2019,  and is $964,659 for calendar year 2020.  The amount of advance royalties payable is subject to adjustment (but not below $500,000 per annum) for inflation and deflation and is determined each year in the same manner as the Adjusted Threshold Price.  All payments of advance royalties are credited against payments of base overriding royalties and royalty bonuses payable on Mesabi Ore until fully recouped by Northshore.  The amount of advance royalties payable in respect of each calendar quarter constitutes the minimum overriding royalty amount payable by Northshore in respect of that calendar quarter.

 

Other leasehold royalty information.  Base overriding royalties and royalty bonuses are payable quarterly and accrue upon shipment, whether or not the actual sales proceeds for any shipment are received by Northshore.  The amount of base overriding royalties and royalty bonuses payable with respect to the first three quarters in any calendar year are determined on the basis of tonnage shipped during each such calendar quarter and the actual sales proceeds of such shipments, with an adjustment made to the royalties payable with respect to the last quarter in any calendar year to account for adjustments.

 

LAND TRUST AND FEE ROYALTIES

 

Mesabi Land Trust holds 20% interest as fee owner in the Peters Lease Lands and a 100% interest as fee owner in the Mesabi Lease Lands as lessor of the Mesabi Lease.  Mesabi Trust holds the entire beneficial interest in Mesabi Land Trust and is entitled to receive the net income of Mesabi Land Trust after payment of expenses.  Northshore is not obligated to pay royalties or rental to Mesabi Land Trust as fee owner of the non-mineral bearing Mesabi Lease Lands, a consideration having been paid in that respect at the inception of the Mesabi Lease.

 

Northshore is required to pay a base royalty to the fee owners in an amount which, at its option, is either (a) 11-2/3¢ per gross ton of crude ore it mines from the Peters Lease Lands, or (b) $0.0056 for each 1% of metallic iron ore natural contained in each gross ton of pellets it produces from the Peters Lease Lands and ships.  The base fee royalty rate is adjusted up or down each quarter (but not below the base royalty specified above) by adding or subtracting an amount to be determined by reference to changes in Lower Lake Mesabi Range pellet prices and the All Commodities Producer Price Index.  The adjustment factor is computed by multiplying the base fee royalty rate specified above by a percentage that is the sum of (a) one-half of the percentage change, if any, by which the then prevailing price per iron unit of Mesabi Range taconite pellets delivered by rail or vessel at Lower Lake Erie ports exceeds 80.5¢ (the price per iron unit in effect in January 1982), plus (b) one-half of the percentage change, if any, by which the All Commodities Producer Price Index exceeds 295.8 (the level of the Index for December 1981).  Fee royalties aggregating $724,532 with respect to crude ore mined by Northshore were earned by Mesabi Land Trust during the fiscal year ended January 31, 2020.

 

TRUST EXPENSES

 

Total Trust Expenses

 

Total Trust expenses for the fiscal year ended January 31, 2020 were $1,935,122, representing an increase of $200,401, or 11.6%, from the $1,734,721 of total Trust expenses in fiscal 2019.  The increase in Trust expenses from fiscal 2020 to fiscal 2019 was due primarily to an increase in legal fees and expenses.

 

Total Trust expenses for the fiscal year ended January 31, 2019 were $1,734,721, representing an increase of $662,731, or 61.8%, from the $1,071,990 of total Trust expenses in fiscal 2018.  The increase in Trust expenses from fiscal 2019 over fiscal 2018 was due primarily to an increase in (i) legal fees and expenses, (ii) proxy administrative and solicitation service expenses, and (iii) consulting fees and expenses for services rendered to the Trust as discussed further in the “Trust Legal Expenses” section below, and to

37

significant one-time costs related to the election and appointment of a new Trustee during the fiscal year.  These one-time costs are included in the table in the “Trust Legal Expenses” section below under footnote (2) “Other Trust Expenses.”

 

Trust Legal Expenses

 

Mesabi Trust paid Fox Rothschild LLP $928,586 for legal services provided to the Trust during the fiscal year ended January 31, 2020.  Comparatively, Mesabi Trust paid Fox Rothschild LLP $636,224 and $366,205 for legal services provided to the Trust during fiscal years ended January 31, 2019 and January 31, 2018, respectively.

 

In each of the last three fiscal years, Fox Rothschild LLP represented the Trust and assisted the Trustees in the preparation and filing of the Trust’s current, periodic and annual reports with the SEC, a variety of corporate trust law matters, iron ore royalty matters and securities law and NYSE compliance matters.

 

The total amount of Fox Rothschild’s legal fees for services rendered during fiscal 2020 increased approximately $292,362, or 46.0% as compared to fiscal 2019.  The increase in legal fees in fiscal 2020, as compared to fiscal 2019, resulted primarily from the increased legal services provided to the Trust and Trustees during fiscal 2020 relating to the following:  reviewing reports and analyzing iron ore royalty matters, including analysis of Mesabi Trust’s legal rights regarding the calculation of royalties related to DR‑grade pellets and other low silica products, representing Mesabi Trust in a variety of meetings and conferences with Cliffs’ management, representing Mesabi Trust in the pending arbitration proceeding commenced in December 2019; representation regarding engagement of consultants and advisors; advice and representation concerning Unitholder and third party inquiries; and planning and participating in Trustees’ meetings (for which the total number of Trustees’ meetings increased to 24 during fiscal 2020 compared with 22 meetings during the prior year, most of which were telephonic).

 

The total amount of Fox Rothschild’s legal fees for services rendered during fiscal 2019 increased approximately $270,019, or 73.7% as compared to fiscal 2018.  The increase in legal fees in fiscal 2019, as compared to fiscal 2018, resulted primarily from the increased legal services provided to the Trust and Trustees during fiscal 2019 relating to the following: Trustee succession planning and implementation (including compliance with governance aspects related thereto) following the announced retirement of Richard G. Lareau; planning and conducting a Unitholder special meeting (including an adjournment thereof) and proxy statement and SEC filings related to the same; reviewing and analyzing iron ore royalty matters; representation regarding engagement of consultants and advisors; advice and representation concerning Unitholder and third party inquiries; and planning and participating in Trustees’ meetings (for which the total number of Trustees’ meetings increased to 22 during fiscal 2019 compared with 11 meetings during the prior year, most of which were telephonic).

 

38

Total Trust expenses by category for fiscal 2020,  2019 and 2018 are set forth in the table below.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fiscal Year ended January 31, 

 

 

    

2020

    

2019

    

2018

 

Compensation of Trustees

 

$

271,449

 

$

264,278

(1)

$

207,520

 

Corporate Trustee’s Administrative Fees

 

 

62,500

 

 

62,500

 

 

62,500

 

Professional fees and expenses

 

 

 

 

 

 

 

 

 

 

Legal

 

 

928,586

 

 

636,224

 

 

366,205

 

Accounting and auditing

 

 

185,109

 

 

140,938

 

 

142,214

 

Mining consultant and field representatives

 

 

30,574

 

 

33,468

 

 

56,100

 

Insurance

 

 

134,683

 

 

119,224

 

 

118,392

 

Annual stock exchange fee

 

 

68,000

 

 

65,255

 

 

59,967

 

Transfer agent’s and registrar’s fees

 

 

6,606

 

 

7,244

 

 

7,366

 

Other Trust Expenses

 

 

247,615

(3)

 

405,590

(2)

 

51,726

 

 

 

$

1,935,122

 

$

1,734,721

 

$

1,071,990

 


(1)Includes $9,500 paid to Robin M. Radke who was appointed Trustee of Mesabi Trust on January 23, 2019, and was appointed Trustee of Mesabi Land Trust on October 2, 2018.

 

(2)“Other Trust Expenses” for fiscal year ended January 31, 2019 included the following fees and costs incurred by the Trust in connection with the special meeting of Unitholders held during December 2018 and January 2019 (as adjourned): $170,373 for services rendered by Georgeson LLC for proxy advisor and solicitation agent services; $134,128 for services rendered by Broadridge Financial Solutions, Inc. for proxy administration, communication, mailing, vote tabulation and related services; and $38,278 for services rendered by Grant Thornton LLP, for consulting services on Trustee compensation matters.

 

(3)“Other Trust Expenses” for fiscal year ended January 31, 2020 included additional consulting fees and costs incurred by the Trust in connection with study, review and analysis of iron ore royalty and markets.

 

UNALLOCATED RESERVE

 

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 known or contingent) in determining an appropriate level of unallocated reserve for the Trust in order to be in position to meet the current and ongoing challenges in the iron ore and steel industries.  The actual amount of the Unallocated Reserve will fluctuate from time to time and may increase or decrease from its current level.  Accordingly, although the actual amount of the Unallocated Reserve will fluctuate from time to time, and may increase or decrease from its current level, it is currently expected that future distributions will be highly dependent upon royalty payments received quarterly and the level of Trust expenses that the Trustees anticipate occurring in subsequent quarters.  Pursuant to the Agreement of Trust, the Trust makes 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 5 for further information.  See “Current Developments” — “Review of Unallocated Reserve” in this Annual Report.  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.  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 Trust’s Unitholders in future quarters.  See discussion under the heading “Risk Factors” in this Annual Report.

 

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 reserves at a prudent level, given the

39

unpredictable nature of the iron ore industry, the Trust’s dependence on the actions of Cliffs and Northshore, and the fact that the Trust essentially has no other liquid assets.

 

CERTIFICATES OF BENEFICIAL INTEREST

 

The Mesabi Trust’s Certificates of Beneficial Interest are traded on the New York Stock Exchange under the symbol “MSB.”  Distributions declared to Unitholders during the fiscal year ended January 31, 2020 totaled $35,030,427 as compared to $39,360,030 during fiscal year ended January 31, 2019, and $33,193,626 during the fiscal year ended January 31, 2018.  The Trust paid Unitholders distributions of $2.67 per Unit for the fiscal year ended January 31, 2020, compared with distributions of $3.00 and $2.53 per Unit for the fiscal years ended January 31, 2019 and 2018, respectively.

 

During the past two fiscal years, the market ranges of the certificates for each quarterly period and the distributions declared for such quarterly periods were as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

 

    

 

 

    

Distribution

    

Distribution

 

Fiscal Quarter Ended

 

High

 

Low

 

Declared

 

Per Unit

 

April 30, 2019

 

$

32.39

 

$

27.46

 

$

11,676,809

 

$

0.89

 

July 31, 2019

 

$

31.50

 

$

26.47

 

 

2,755,202

 

 

0.21

 

October 31, 2019

 

$

26.76

 

$

21.55

 

 

11,414,409

 

 

0.87

 

January 31, 2020

 

$

24.38

 

$

20.25

 

 

9,184,007

 

 

0.70

 

 

 

 

  

 

 

  

 

$

35,030,427

 

$

2.67

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

 

    

 

 

    

Distribution

    

Distribution

 

Fiscal Quarter Ended

 

High

 

Low

 

Declared

 

Per Unit

 

April 30, 2018

 

$

28.40

 

$

21.60

 

$

5,904,005

 

$

0.45

 

July 31, 2018

 

$

28.75

 

$

21.80

 

 

2,886,402

 

 

0.22

 

October 31, 2018

 

$

32.68

 

$

25.50

 

 

12,332,809

 

 

0.94

 

January 31, 2019

 

$

29.98

 

$

22.88

 

 

18,236,814

 

 

1.39

 

 

 

 

  

 

 

  

 

$

39,360,030

 

$

3.00

 

 

As of the close of business on April 10, 2020, the beneficial interest in Mesabi Trust was represented by 13,120,010 Units, 242,836 Units of which were held by 781 holders of record. 

 

 

40

THE TRUSTEES

 

The name and address of each Trustee and the principal occupation of each individual Trustee are as follows:

 

Name and Address of Trustee

   

Principal Occupation

 

 

 

Deutsche Bank Trust Company Americas
Corporate Trustee
60 Wall Street, 16
th Floor
New York, New York  10005

 

New York banking corporation

 

 

 

Robert C.  Berglund
Individual Trustee
c/o Deutsche Bank Trust Company Americas
Corporate Trustee
60 Wall Street, 16
th Floor
New York, New York  10005

 

Retired Vice President and General Manager

Cleveland-Cliffs Inc.

 

 

 

James A.  Ehrenberg
Individual Trustee
c/o Deutsche Bank Trust Company Americas
Corporate Trustee
60 Wall Street, 16
th Floor
New York, New York  10005

 

Until April 2005, Senior Vice
President, Corporate Trust Services,
U.S. Bank, N.A.

 

 

 

Michael P.  Mlinar
Individual Trustee
c/o Deutsche Bank Trust Company Americas
Corporate Trustee
60 Wall Street, 16
th Floor
New York, New York  10005

 

Retired Vice President of North American Iron Ore Initiative

Cleveland-Cliffs Inc.

 

 

 

Robin M. Radke

Individual Trustee

c/o Deutsche Bank Trust Company Americas
Corporate Trustee
60 Wall Street, 16
th Floor
New York, New York  10005

 

Associate General Counsel

 

 

 

April 13, 2020

 

Respectfully submitted,

 

DEUTSCHE BANK TRUST
COMPANY AMERICAS

 

ROBERT C. BERGLUND
JAMES A. EHRENBERG
MICHAEL P. MLINAR
ROBIN M. RADKE

 

 

 

 

41

 

INDEX TO FINANCIAL STATEMENTS

 

Trustees’ Report on Internal Control over Financial Reporting 

    

Page F-2

 

 

 

Report of Independent Registered Public Accounting Firm 

 

Page F-3

 

 

 

Balance Sheets as of January 31, 2020 and 2019 

 

Page F-4

 

 

 

Statements of Income for the years ended January 31, 2020, 2019, and 2018 

 

Page F-5

 

 

 

Statements of Unallocated Reserve and Trust Corpus for the years ended January 31, 2020, 2019, and 2018 

 

Page F-6

 

 

 

Statements of Cash Flows for the years ended January 31, 2020, 2019, and 2018 

 

Page F-7

 

 

 

Notes to Financial Statements 

 

Pages F-8 —  F-1

 

 

F-1

 

TRUSTEES’ REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

 

The Mesabi Trustees are responsible for establishing and maintaining adequate internal control over financial reporting for Mesabi Trust.  The Trust’s internal control system was designed to provide reasonable assurance to the Trustees regarding the preparation and fair presentation of published financial statements.

 

All internal control systems, no matter how well designed, have inherent limitations.  Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.

 

The Mesabi Trustees assessed the effectiveness of the Trust’s internal control over financial reporting as of January 31, 2020.  In making this assessment, they used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control — Integrated Framework (2013).  Based on their assessment, the Trustees believe that, as of January 31, 2020, the Trust’s internal control over financial reporting is effective, based on those criteria.

 

Baker Tilly Virchow Krause, LLP, the Trust’s independent registered public accounting firm, has issued an audit report on its assessment of the Trust’s internal control over financial reporting as of January 31, 2020.  This report appears immediately below.

 

 

 

F-2

Picture 3

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Unitholders and Trustees of Mesabi Trust:

Opinions on the Financial Statements and Internal Control over Financial Reporting

We have audited the accompanying balance sheets of Mesabi Trust as of January 31, 2020 and 2019, and the related statements of income, unallocated reserve and trust corpus, and cash flows for each of the three years in the period ended January 31, 2020, and the related notes (collectively referred to as the "financial statements").  We also have audited the Trust’s internal control over financial reporting as of January 31, 2020, based on criteria established in Internal Control – Integrated Framework: (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

In our opinion, the financial statements present fairly, in all material respects, the financial position of the Trust as of January 31, 2020 and 2019, and the results of its operations and its cash flows for each of the years ended January 31, 2020, 2019 and 2018, in conformity with accounting principles generally accepted in the United States of America.  Also in our opinion, the Trust maintained, in all material respects, effective internal control over financial reporting as of January 31, 2020, based on criteria established in Internal Control – Integrated Framework: (2013) issued by COSO.

Basis for Opinion

The Trust’s Trustees are responsible for these financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Trustees’ Report on Internal Control over Financial Reporting.  Our responsibility is to express an opinion on the Trust’s financial statements and an opinion on the Trust’s internal control over financial reporting based on our audits.  We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with respect to the Trust in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB.  Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud and whether effective internal control over financial reporting was maintained in all material respects. 

Our audits of the financial statements included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks.  Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements.  Our audits also included evaluating the accounting principles used and significant estimates made by the Trustees, as well as evaluating the overall presentation of the financial statements.  Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk.  Our audits also included performing such other procedures as we considered necessary in the circumstances.  We believe that our audits provide a reasonable basis for our opinion.

Definition and Limitations of Internal Control Over Financial Reporting

An entity’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.  An entity’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the entity; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the entity are being made only in accordance with authorizations of the trustees of the entity; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the entity's assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.  Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

/s/ Baker Tilly Virchow Krause, LLP

We have served as the Trust’s auditor since 2012.

Minneapolis, Minnesota

April 13, 2020

 

 

F-3

 

MESABI TRUST

BALANCE SHEETS

AS OF JANUARY 31, 2020 AND 2019

 

 

 

 

 

 

 

 

 

 

    

2020

    

2019

 

 

 

 

 

 

 

 

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

10,177,655

 

$

881,810

 

 

 

 

 

 

 

 

 

U.S. Government securities, at amortized cost (which approximates fair value)

 

 

13,332,474

 

 

32,122,312

 

 

 

 

 

 

 

 

 

Accrued income receivable

 

 

69,588

 

 

2,339,060

 

Contract asset

 

 

 —

 

 

56,357

 

Prepaid expenses

 

 

67,654

 

 

54,472

 

Current assets

 

 

23,647,371

 

 

35,454,011

 

 

 

 

 

 

 

 

 

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

 

$

23,647,374

 

$

35,454,014

 

 

 

 

 

 

 

 

 

Liabilities, Unallocated Reserve And Trust Corpus

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

Distribution payable

 

$

9,184,007

 

$

18,236,814

 

Accrued expenses

 

 

120,630

 

 

411,508

 

Contract liability

 

 

2,511,720

 

 

 —

 

Total liabilities

 

 

11,816,357

 

 

18,648,322

 

 

 

 

 

 

 

 

 

Unallocated reserve

 

 

11,831,014

 

 

16,805,689

 

 

 

 

 

 

 

 

 

Trust corpus

 

 

 3

 

 

 3

 

 

 

 

 

 

 

 

 

Total liabilities, unallocated reserve and trust corpus

 

$

23,647,374

 

$

35,454,014

 

 

See Notes to Financial Statements

 

F-4

 

MESABI TRUST

STATEMENTS OF INCOME

YEARS ENDED JANUARY 31, 2020,  2019, AND 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2020

    

2019

    

2018

 

 

 

 

 

 

 

 

 

 

 

 

Revenues

 

 

 

 

 

 

 

 

 

 

  Royalties under amended lease agreements

 

$

30,983,327

 

$

46,430,497

 

$

33,883,561

 

  Royalties under Peters Lease fee

 

 

724,532

 

 

603,294

 

 

519,327

 

Interest

 

 

283,015

 

 

259,974

 

 

92,527

 

 

 

 

 

 

 

 

 

 

 

 

Total revenues

 

 

31,990,874

 

 

47,293,765

 

 

34,495,415

 

 

 

 

 

 

 

 

 

 

 

 

Expenses

 

 

 

 

 

 

 

 

 

 

 Compensation of Trustees

 

 

271,449

 

 

264,278

 

 

207,520

 

 Corporate Trustee’s administrative fees

 

 

62,500

 

 

62,500

 

 

62,500

 

 Professional fees and expenses:

 

 

 

 

 

 

 

 

 

 

 Legal

 

 

928,586

 

 

636,224

 

 

366,205

 

 Accounting and auditing

 

 

185,109

 

 

140,938

 

 

142,214

 

 Mining consultant and field representatives

 

 

30,574

 

 

33,468

 

 

56,100

 

 Insurance

 

 

134,683

 

 

119,224

 

 

118,392

 

 Annual stock exchange fee

 

 

68,000

 

 

65,255

 

 

59,967

 

 Transfer agent’s and registrar’s fees

 

 

6,606

 

 

7,244

 

 

7,366

 

 Other Trust expenses

 

 

247,615

 

 

405,590

 

 

51,726

 

 

 

 

 

 

 

 

 

 

 

 

Total expenses

 

 

1,935,122

 

 

1,734,721

 

 

1,071,990

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

30,055,752

 

$

45,559,044

 

$

33,423,425

 

 

 

 

 

 

 

 

 

 

 

 

WEIGHTED AVERAGE NUMBER OF UNITS OUTSTANDING

 

 

13,120,010

 

 

13,120,010

 

 

13,120,010

 

 

 

 

 

 

 

 

 

 

 

 

Net income per unit (Note 2)

 

$

2.291

 

$

3.472

 

$

2.548

 

 

 

 

 

 

 

 

 

 

 

 

 

See Notes to Financial Statements

 

F-5

 

MESABI TRUST

STATEMENTS OF UNALLOCATED RESERVE AND TRUST CORPUS

YEARS ENDED JANUARY 31, 2020,  2019, AND 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

Unallocated Reserve

 

 

 

 

 

 

Number of

 

    

 

 

Trust

 

 

    

Units

    

Amount

    

Corpus

 

 

 

 

 

 

 

 

 

 

 

BALANCE, JANUARY 31, 2017

 

13,120,010

 

$

10,376,876

 

$

 3

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

 

33,423,425

 

 

 

Distribution paid May 20, 2017, $.55 per unit

 

 

 

(7,216,006)

 

 

 

Distribution paid August 20, 2017, $.16 per unit

 

 

 

(2,099,202)

 

 

 

Distribution paid November 20, 2017, $.64 per unit

 

 

 

(8,396,806)

 

 

 

Distribution declared January 30, 2018, paid February 20, 2018, $1.18 per unit

 

 

 

(15,481,612)

 

 

 

 

 

 

 

 

 

 

 

 

 

BALANCE, JANUARY 31, 2018

 

13,120,010

 

$

10,606,675

 

$

 3

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

 

45,559,044

 

 

 

Distribution paid May 20, 2018, $.45 per unit

 

 

 

(5,904,005)

 

 

 

Distribution paid August 20, 2018, $.22 per unit

 

 

 

(2,886,402)

 

 

 

Distribution paid November 20, 2018, $.94 per unit

 

 

 

(12,332,809)

 

 

 

Distribution declared January 30, 2019, paid February 20, 2019, $1.39 per unit

 

 

 

(18,236,814)

 

 

 

 

 

 

 

 

 

 

 

 

 

BALANCE, JANUARY 31, 2019

 

13,120,010

 

$

16,805,689

 

$

 3

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

 

30,055,752

 

 

 

Distribution paid May 20, 2019, $.89 per unit

 

 

 

(11,676,809)

 

 

 

Distribution paid August 20, 2019, $.21 per unit

 

 

 

(2,755,202)

 

 

 

Distribution paid November 20, 2019, $.87 per unit

 

 

 

(11,414,409)

 

 

 

Distribution declared January 30, 2020, paid February 20, 2020, $.70 per unit

 

 

 

(9,184,007)

 

 

 

 

 

 

 

 

 

 

 

 

 

BALANCE, JANUARY 31, 2020

 

13,120,010

 

$

11,831,014

 

$

 3

 

 

See Notes to Financial Statements

F-6

 

MESABI TRUST

STATEMENTS OF CASH FLOWS

YEARS ENDED JANUARY 31, 2020,  2019, AND 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

    

2020

    

2019

    

2018

 

 

 

 

 

 

 

 

 

 

 

 

Operating activities

 

 

 

 

 

 

 

 

 

 

Royalties received

 

$

36,531,459

 

$

46,705,036

 

$

30,470,480

 

Interest received

 

 

296,964

 

 

248,667

 

 

86,616

 

Expenses paid

 

 

(2,239,182)

 

 

(1,457,039)

 

 

(1,047,221)

 

 

 

 

 

 

 

 

 

 

 

 

Net cash from operating activities

 

 

34,589,241

 

 

45,496,664

 

 

29,509,875

 

 

 

 

 

 

 

 

 

 

 

 

Investing activities

 

 

 

 

 

 

 

 

 

 

Maturities of U.S. Government securities

 

 

90,434,386

 

 

81,835,668

 

 

37,636,412

 

Sales of U.S. Government securities

 

 

 —

 

 

99,740

 

 

 —

 

Purchases of U.S. Government securities

 

 

(71,644,548)

 

 

(90,260,269)

 

 

(60,977,805)

 

 

 

 

 

 

 

 

 

 

 

 

Net cash from (used for) investing activities

 

 

18,789,838

 

 

(8,324,861)

 

 

(23,341,393)

 

 

 

 

 

 

 

 

 

 

 

 

Financing activity

 

 

 

 

 

 

 

 

 

 

Distributions to unitholders

 

 

(44,083,234)

 

 

(36,604,828)

 

 

(19,548,815)

 

 

 

 

 

 

 

 

 

 

 

 

Net change in cash and cash equivalents

 

 

9,295,845

 

 

566,975

 

 

(13,380,333)

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents, beginning of period

 

 

881,810

 

 

314,835

 

 

13,695,168

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents, end of period

 

$

10,177,655

 

$

881,810

 

$

314,835

 

 

 

 

 

 

 

 

 

 

 

 

Reconciliation of net income to net cash from operating activities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

30,055,752

 

$

45,559,044

 

$

33,423,425

 

Decrease (increase) in accrued income receivable

 

 

2,269,472

 

 

(382,969)

 

 

(1,911,046)

 

Decrease in contract asset

 

 

56,357

 

 

42,907

 

 

72,142

 

Decrease (increase) in prepaid expense

 

 

(13,182)

 

 

168

 

 

(1,032)

 

Increase (decrease) in accrued expenses

 

 

(290,878)

 

 

277,514

 

 

25,801

 

Increase (decrease) in contract liability

 

 

2,511,720

 

 

 —

 

 

(2,099,415)

 

 

 

 

 

 

 

 

 

 

 

 

Net cash from operating activities

 

$

34,589,241

 

$

45,496,664

 

$

29,509,875

 

 

 

 

 

 

 

 

 

 

 

 

Non cash financing activity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Distributions declared and payable

 

$

9,184,007

 

$

18,236,814

 

$

15,481,612

 

 

See Notes to Financial Statements

 

 

F-7

 

MESABI TRUST

NOTES TO FINANCIAL STATEMENTS

JANUARY 31, 2020,  2019, AND 2018

 

NOTE 1 - NATURE OF BUSINESS AND ORGANIZATION

 

Nature of Business

 

Mesabi Trust (“Mesabi Trust” or the “Trust”), formed pursuant to an Agreement of Trust dated July 18, 1961 (the “Agreement of Trust”), is a trust organized under the laws of the State of New York.  Mesabi Trust holds all of the interests formerly owned by Mesabi Iron Company (“MIC”), including all right, title and interest in the Amendment of Assignment, Assumption and Further Assignment of Peters Lease (the “Amended Assisnment 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 Assisnment 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”).

 

Mesabi Trust was created in 1961 upon the liquidation of Mesabi Iron Company.  The sole purpose of the Trust, as set forth in the Agreement of Trust dated as of July 18, 1961, is to conserve and protect the Trust Estate and to collect and distribute the income and proceeds there from to the Trust’s certificate holders after the payment of, or provision for, expenses and liabilities.  The Agreement of Trust prohibits the Trust from engaging in any business.  In accordance with the Agreement of Trust, the Trust will terminate twenty-one years after the death of the survivor of twenty-five persons named in an exhibit to the Agreement of Trust, the youngest of whom was believed to be fifty-four years old as of October 1, 2014.

 

The lessee/operator of Mesabi Trust’s mineral interests is Northshore Mining Corporation (NMC), a subsidiary of Cleveland-Cliffs Inc. (Cliffs).  Prior to September 30, 1994, the lessee/operator had been a subsidiary of Cyprus Amax Minerals Company and was named Cyprus Northshore Mining Corporation (Cyprus NMC).

 

Organization

 

The beneficial interest in Mesabi Trust is represented by 13,120,010 transferable units distributed on July 27, 1961 to shareholders of Mesabi Iron Company.

 

The Trust’s status as a grantor trust was confirmed by letter ruling addressed to Mesabi Iron Company from the Internal Revenue Service in 1961.  As a grantor trust, Mesabi is exempt from Federal income taxes and its income is taxable directly to the Unitholders.

 

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Cash and Cash Equivalents

 

The Trust considers all highly liquid investments with an original maturity of three months or less to be cash equivalents.  As of January 31, 2020 and 2019, the Trust held $768,512 and $209,709, respectively, in a

F-8

 

money market fund that invests primarily in obligations of the U.S. Treasury, which it considers to be cash and cash equivalents.

 

Investments

 

The Trust invests solely in U.S. Government Securities.  The Trustees determine the appropriate classifications of the securities at the time they are acquired and evaluate the appropriateness of such classifications as of each balance sheet date.

 

The U.S. Government Securities are classified as held-to-maturity securities as the Trust has the positive intent and ability to hold to maturity and are therefore stated at amortized cost.

 

Revenue Recognition

 

Base Overriding Royalties

 

The performance obligation for the base overriding royalty consists of providing Northshore Mining Company (“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 under the Amended Assignment Agreements relates to the volume of iron ore shipped from Silver Bay, Minnesota by Northshore.  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.  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 for the calendar year.  The Trust estimates the variable consideration it expects to be entitled to receive over the contractual period associated with royalty agreement, which resets the royalty percentages 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 shipments for the fiscal quarter at the estimated royalty percentage as described above and based on the estimated prices for iron ore products sold under the Cliffs Pellet Agreements.

 

Bonus Royalties

 

The performance obligation for the bonus royalties consists of providing Northshore Mining 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 under the Amended Assignment Agreements relates to the volume of iron ore shipped by Northshore.  The Trust recognizes bonus royalties on a quarterly basis based on the actual shipments of the fiscal quarter at the actual royalty percentage for those shipments and based on the anticipated prices for iron ore products sold under the Cliffs Pellet Agreements.

 

F-9

 

Fee Royalties

 

The performance obligation for 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.

 

Accrued Income Receivable

 

The accrued income receivable represents royalty income earned but not yet received by the Trust under the royalty agreements described elsewhere in these notes.  Accrued income receivable is calculated based on (i) shipments during the last month of Mesabi Trust’s fiscal year, if any, and (ii) net price adjustments resulting from the price adjustment mechanisms in the agreements between Cliffs and its customers that determine the final sales price of the shipments from Silver Bay, Minnesota. 

 

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 liability in the amount of $2,511,720 is reflected on the Balance Sheet as of January 31, 2020. The net contract liability is made up of a contract asset in the amount of $192,059 and a contract liability in the amount of $2,703,779. As of January 31, 2019, the Trust recorded a net contract asset of $56,357, made up entirely of a contract asset. The contract asset is based on the revenue recognized on the base overriding royalties, at the estimated prices for iron ore products sold under the Cliffs Pellet Agreements, 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 iron ore that has not been shipped by Northshore, but for which the Trust has received a royalty payment during the fiscal year ended January 31, 2020 based on an initial estimated price. Revenue will be recognized in accordance with the Trust’s revenue recognition policy at the estimated prices for iron ore products sold under the Cliffs Pellet Agreements as shipments of these products are made. The contract liability also represents an estimate of decreases in royalty revenue related to tons of iron ore that were 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.

 

Fixed Property, Including Intangibles

 

The Trust’s fixed property, including intangibles, is recorded at nominal values and includes the following:

 

1.

The entire beneficial interest as assignor in the Amended Peters Lease Assignment and the Amended Cloquet Lease Assignment covering taconite properties in Minnesota which are leased to NMC.

 

2.

The entire beneficial interest in Mesabi Land Trust which owns a 20% fee interest in the lands subject to the Peters Lease and the entire fee interest in other properties in Minnesota.

 

Net Income Per Unit

 

Net income per unit is computed by dividing net income by the weighted average number of units outstanding.

 

F-10

 

Concentration of Credit Risk

 

Financial instruments which potentially subject the Trust to concentrations of credit risk consist primarily of cash that is maintained at an FDIC insured financial institution.  At times during the year, the Trust’s cash balance may exceed insured limits.

 

As further described in Note 1, NMC is the lessee/operator of the Mesabi Trust land.  All royalty income earned by the Trust is received from NMC, and accordingly, substantially all of the accrued income receivable is also due from NMC.

 

Accounting Estimates

 

The preparation of financial statements in conformity with accounting principles generally accepted in the United States (“GAAP”) requires the Trustees to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.  Actual results could differ from those estimates.  Specifically, the accrued income receivable, contract asset, contract liability and related royalty revenue are significant estimates which are subject to change in the near term, and changes to these estimates could have a material effect on the Trust’s financial statements.

 

On December 9, 2019, the Trustees of Mesabi Trust announced that the Trust initiated arbitration against Northshore and its parent, Cliffs (jointly, the “Operator”), the lessee/operator of the leased lands. The arbitration proceeding was commenced with the American Arbitration Association. The Trust asserts claims concerning the calculation of royalties related to the production, shipment and sale of iron ore, including DR-grade pellets. More particularly, the claims involve the Trust’s allegations that the Operator has improperly manipulated royalty amounts with respect to DR-grade pellets by orchestrating isolated sale transactions of low silica iron ore into international markets at prices significantly below standard pellet pricing. Based on information currently available to the Trust, the Trust seeks an award of damages, along with specific performance and declaratory relief. The arbitration is in its early stages and no hearings have been set.

 

Any arbitration, legal or administrative proceedings to which the Mesabi Trust is subject could require the significant involvement of Trustees and the professional advisors and consultants to the Trust, and may divert attention from the Trustees’ other roles and responsibilities. In addition, it is difficult to foresee the results of legal actions, arbitration matters and other proceedings currently involving the Mesabi Trust or of those which may arise in the future, and an adverse result in these matters could have a material adverse effect on the market value of Mesabi Trust units and on Mesabi Trust’s asset value, royalty income, results of operations and financial condition.

 

Subsequent Events

 

Subsequent to year-end, the Trust has started to evaluate the possible effects of the world-wide coronavirus pandemic. The Trust is closely monitoring its financial position and liquidity and is actively working to minimize the current and future impact of this situation. Because NMC is the sole lessee/ operator of mineral interests of the Trust, any impact to the operations of NMC, will likely have an impact on the Trust. As of the date of issuance of these financial statements, the full impact to the Trust’s future financial statements is not known.

 

Material subsequent events are evaluated for recognition or disclosure in the accompanying financial statements.

 

F-11

 

Fair Value Measures

 

Valuation Hierarchy

 

GAAP establishes a three-level valuation hierarchy for classification of fair value measurements.  The valuation hierarchy is based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date.

 

·

Level 1 — Valuation is based upon quoted prices (unadjusted) for identical assets or liabilities in active markets.

·

Level 2 — Valuation is based upon quoted prices for similar assets and liabilities in active markets, or other inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.

·

Level 3 — Valuation is based upon other unobservable inputs that are significant to the fair value measurement.

 

The classification of assets and liabilities within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement in its entirety.

 

The carrying amounts of financial instruments approximated fair value as of January 31, 2020 and 2019, because of the relative short maturity of these instruments.

 

Recent Accounting Pronouncements

 

Various accounting standards and interpretations were issued during the fiscal year ended January 31, 2020.  The Trust has evaluated the recently issued accounting pronouncements that are effective for the fiscal year ended January 31, 2020 and believe they will not have a material effect on the Trust’s financial position, results of operations or cash flows when adopted.

 

In June 2016, the FASB issued ASU 2016- 13, "Financial Instruments- Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments." The standard modifies the measurement approach for credit losses on financial instruments, including accrued income receivables, from an incurred loss method to a current expected credit loss method (“CECL”). The CECL model requires estimating all expected credit losses for certain types of financial instruments, including accrued income receivables, held at the reporting date based on historical experience, current conditions and reasonable and supportable forecasts. The standard is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years; early adoption is permitted. The standard must be adopted by applying a cumulative adjustment to the unallocated reserve. The Trust anticipates adopting the standard in the first quarter of fiscal 2021, although it does not expect a material impact to the Trust's Financial Statements.

 

 

F-12

 

NOTE 3 - U.S. GOVERNMENT SECURITIES

 

U.S. Government Securities at January 31, 2020 and 2019 are classified as held-to-maturity and mature as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2020

 

2019

 

 

 

Carrying

 

    

 

 

Carrying

 

    

 

 

 

    

Value

    

Fair Value

    

Value

    

Fair Value

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Due within one year

 

$

13,332,474

 

$

13,337,529

 

$

32,122,312

 

$

32,138,647

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Due after one year

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

13,332,474

 

$

13,337,529

 

$

32,122,312

 

$

32,138,647

 

 

The fair value of U.S. Government Securities have been valued using level 1 inputs.

 

NOTE 4 - ROYALTY AGREEMENT

 

The current royalty rate schedule became effective on August 17, 1989, which was established pursuant to the Amended Assignment Agreements 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.

 

Pursuant to the Amended Assignment Agreements, NMC is obligated to pay Mesabi Trust base overriding royalties, in varying amounts constituting a percentage of the gross proceeds of shipments, from Silver Bay, Minnesota, of iron ore product produced from Mesabi Trust lands or, to a limited extent, other lands.  NMC is obligated to make payments of overriding royalties on product shipments within 30 days following the calendar quarter in which such shipments occur.  NMC resumed mining operations and shipping product from Silver Bay in the second calendar quarter of 1990, and the first payment of overriding royalties was made in July 1990.

 

Royalty bonuses are payable on all iron ore products produced from Mesabi Ore shipped from Silver Bay during a calendar quarter and sold at prices above the Adjusted Threshold Price.  The Adjusted Threshold Price was $55.74 per ton for calendar year 2018,  $56.93 per ton for calendar year 2019, and will be $57.85 per ton for calendar year 2020.  The Adjusted Threshold Price is subject to adjustment (but not below $30 per ton) for inflation and deflation and is determined each year on the basis of the change in the Gross Domestic Product Implicit Price Deflator, a broad based index of inflation and deflation published quarterly by the U.S. Department of Commerce.

 

NMC is obligated to pay to Mesabi Trust a minimum advance royalty of $500,000 per annum, subject to adjustment for inflation and deflation (but not below $500,000), which is credited against base overriding royalties and royalty bonuses.  NMC is obligated to make quarterly payments of the minimum advance royalty in January, April, July and October of each year.  For the calendar year ending December 31, 2020, the minimum advance royalty threshold is $964,659.  The minimum annual advance royalty threshold was $949,295 and $929,320, for the calendar years ended December 31, 2019 and 2018, respectively.

 

NOTE 5 - UNALLOCATED RESERVE AND DISTRIBUTIONS

 

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 known or contingent) in determining a prudent level of unallocated reserve in light of the unpredictable nature of the iron ore industry and current economic conditions.  The actual amount of the Unallocated Reserve will fluctuate from time to time and may increase or decrease from its current level.  Accordingly, although the

F-13

 

actual amount of the Unallocated Reserve will fluctuate from time to time, and may increase or decrease from its current level, it is currently expected that future distributions will be highly dependent upon royalty payments received quarterly and the level of Trust expenses that the Trustees anticipate occurring in subsequent quarters.

 

As of January 31, 2020 and January 31, 2019, the unallocated cash and U.S. Government Securities portion of the Trust’s Unallocated Reserve consisted of the following components:

 

 

 

 

 

 

 

 

 

 

 

January 31, 2020

 

January 31, 2019

 

Cash and U.S. Government securities

 

$

23,510,129

 

$

33,004,122

 

Distribution payable

 

 

(9,184,007)

 

 

(18,236,814)

 

 

 

 

 

 

 

 

 

Unallocated cash and U.S. Government securities

 

$

14,326,122

 

$

14,767,308

 

 

A reconciliation of the Trust’s Unallocated Reserve from January 31, 2019 to January 31, 2020 is as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unallocated

 

 

Trust

 

 

 

 

 

 

 

Reserve

 

 

Corpus

 

 

Total

 

Balances at January 31, 2019

    

$

16,805,689

 

$

 3

 

$

16,805,692

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

30,055,752

 

 

 —

 

 

30,055,752

 

Distributions declared

 

 

(35,030,427)

 

 

 —

 

 

(35,030,427)

 

 

 

 

 

 

 

 

 

 

 

 

Balances at January 31, 2020

 

$

11,831,014

 

$

 3

 

$

11,831,017

 

 

The Trustees determine the level of distributions on a quarterly basis after receiving notification from NMC as to the amount of royalty income that will be received and after determination of any known or anticipated expenses, liabilities and obligations of the Trust.  As a result of fluctuations in the accrued income receivable portion of the Unallocated Reserve, future distributions may vary depending upon the adjustments to royalty income, which are determined by NMC, and the level of Trust expenses that the Trustees anticipate occurring in subsequent quarters.

 

During the fiscal years ended January 31, 2020,  2019, and 2018, the Trustees distributed cash payments totaling $44,083,234 ($3.36 per Unit), $36,604,828 ($2.79 per Unit), and $19,548,815 ($1.49 per Unit), respectively.  In addition, in January 2020, the Trustees declared a distribution of $0.70 per Unit of beneficial interest, which was paid in February 2020.

 

NOTE 6 - SUMMARY OF QUARTERLY EARNINGS (UNAUDITED)

 

The quarterly results of operations for the years ended January 31, 2020 and 2019 are presented below:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2020

 

 

 

First

 

Second

 

Third

 

Fourth

 

 

    

Quarter

    

Quarter

    

Quarter

    

Quarter

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenue

 

$

5,466,873

 

$

14,344,224

 

$

6,560,841

 

$

5,618,936

 

Expenses

 

 

556,585

 

 

432,537

 

 

410,645

 

 

535,355

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

4,910,288

 

$

13,911,687

 

$

6,150,196

 

$

5,083,581

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income per unit

 

$

0.374

 

$

1.060

 

$

0.469

 

$

0.387

 

 

 

F-14

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2019

 

 

 

First

 

Second

 

Third

 

Fourth

 

 

    

Quarter

    

Quarter

    

Quarter

    

Quarter

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenue

 

$

6,684,047

 

$

19,151,952

 

$

13,973,843

 

$

7,483,923

 

Expenses

 

 

368,199

 

 

280,497

 

 

388,781

 

 

697,244

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

6,315,848

 

$

18,871,455

 

$

13,585,062

 

$

6,786,679

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income per unit

 

$

0.481

 

$

1.438

 

$

1.035

 

$

0.517

 

 

F-15

msb_Ex31

Exhibit 31

 

CERTIFICATION

 

I, Jeffrey Schoenfeld, certify that:

 

1.

I have reviewed this annual report on Form 10-K of Mesabi Trust, for which Deutsche Bank Trust Company Americas acts as Corporate Trustee;

 

2.

Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;

 

3.

Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, distributable income and changes in trust corpus of the registrant as of, and for, the period presented in this annual report;

 

4.

I am responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)), or for causing such controls and procedures and internal control over financial reporting to be established and maintained, for the registrant and have:

 

a)

designed such disclosure controls and procedures, or caused such controls and procedures to be designed under my supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to me by others within those entities, particularly during the period in which this annual report is being prepared;

 

b)

designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under my supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 

c)

evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this annual report my conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this annual report based on such evaluation; and

 

d)

disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

 

5.

I have disclosed, based on my most recent evaluation of internal control over financial reporting, to the registrant’s auditors:

 

a)

all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

 

b)

any fraud, whether or not material, that involves persons who have a significant role in the registrant’s internal control over financial reporting.

 

In giving the foregoing certifications in paragraphs 4 and 5, I have relied to the extent I consider reasonable on information provided to me by Eveleth Fee Office, Inc., Northshore Mining Company and Cleveland-Cliffs Inc.

 

 

 

 

Date: April 13, 2020

By:

/s/ Jeffrey Schoenfeld

 

 

Jeffrey Schoenfeld *

 

 

Vice President

 

 

Deutsche Bank Trust Company Americas, as Corporate Trustee


* There are no principal executive officers or principal financial officers of the registrant.

msb_Ex32

Exhibit 32

 

PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

 

I, the Corporate Trustee of Mesabi Trust, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to the best of my knowledge, the Annual Report of Mesabi Trust on Form 10-K for the fiscal year ended January 31, 2020 fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, and that information contained in such Form 10-K fairly presents in all material respects the financial condition and results of operations of Mesabi Trust.

 

 

 

 

/s/ Jeffrey Schoenfeld

    

April 13, 2020

Jeffrey Schoenfeld *

 

 

Vice President

 

 

Deutsche Bank Trust Company Americas, as Corporate Trustee

 

 


* There are no principal executive officers or principal financial officers of the registrant.

 

A signed original of this written statement required by Section 906 has been provided to Mesabi Trust and will be retained by Mesabi Trust and furnished to the Securities and Exchange Commission or its staff upon request.

v3.20.1
UNALLOCATED RESERVE AND DISTRIBUTIONS
12 Months Ended
Jan. 31, 2020
UNALLOCATED RESERVE AND DISTRIBUTIONS  
UNALLOCATED RESERVE AND DISTRIBUTIONS

NOTE 5 - UNALLOCATED RESERVE AND DISTRIBUTIONS

 

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 known or contingent) in determining a prudent level of unallocated reserve in light of the unpredictable nature of the iron ore industry and current economic conditions.  The actual amount of the Unallocated Reserve will fluctuate from time to time and may increase or decrease from its current level.  Accordingly, although the actual amount of the Unallocated Reserve will fluctuate from time to time, and may increase or decrease from its current level, it is currently expected that future distributions will be highly dependent upon royalty payments received quarterly and the level of Trust expenses that the Trustees anticipate occurring in subsequent quarters.

 

As of January 31, 2020 and January 31, 2019, the unallocated cash and U.S. Government Securities portion of the Trust’s Unallocated Reserve consisted of the following components:

 

 

 

 

 

 

 

 

 

 

 

January 31, 2020

 

January 31, 2019

 

Cash and U.S. Government securities

 

$

23,510,129

 

$

33,004,122

 

Distribution payable

 

 

(9,184,007)

 

 

(18,236,814)

 

 

 

 

 

 

 

 

 

Unallocated cash and U.S. Government securities

 

$

14,326,122

 

$

14,767,308

 

 

A reconciliation of the Trust’s Unallocated Reserve from January 31, 2019 to January 31, 2020 is as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unallocated

 

 

Trust

 

 

 

 

 

 

 

Reserve

 

 

Corpus

 

 

Total

 

Balances at January 31, 2019

    

$

16,805,689

 

$

 3

 

$

16,805,692

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

30,055,752

 

 

 —

 

 

30,055,752

 

Distributions declared

 

 

(35,030,427)

 

 

 —

 

 

(35,030,427)

 

 

 

 

 

 

 

 

 

 

 

 

Balances at January 31, 2020

 

$

11,831,014

 

$

 3

 

$

11,831,017

 

 

The Trustees determine the level of distributions on a quarterly basis after receiving notification from NMC as to the amount of royalty income that will be received and after determination of any known or anticipated expenses, liabilities and obligations of the Trust.  As a result of fluctuations in the accrued income receivable portion of the Unallocated Reserve, future distributions may vary depending upon the adjustments to royalty income, which are determined by NMC, and the level of Trust expenses that the Trustees anticipate occurring in subsequent quarters.

 

During the fiscal years ended January 31, 2020,  2019, and 2018, the Trustees distributed cash payments totaling $44,083,234 ($3.36 per Unit), $36,604,828 ($2.79 per Unit), and $19,548,815 ($1.49 per Unit), respectively.  In addition, in January 2020, the Trustees declared a distribution of $0.70 per Unit of beneficial interest, which was paid in February 2020.

v3.20.1
UNALLOCATED RESERVE AND DISTRIBUTIONS (Tables)
12 Months Ended
Jan. 31, 2020
UNALLOCATED RESERVE AND DISTRIBUTIONS  
Schedule of unallocated cash and U.S. Government securities portion of the Trust's Unallocated Reserve

 

 

 

 

 

 

 

 

 

 

January 31, 2020

 

January 31, 2019

 

Cash and U.S. Government securities

 

$

23,510,129

 

$

33,004,122

 

Distribution payable

 

 

(9,184,007)

 

 

(18,236,814)

 

 

 

 

 

 

 

 

 

Unallocated cash and U.S. Government securities

 

$

14,326,122

 

$

14,767,308

 

 

Schedule of reconciliation of Trust's Unallocated Reserve

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unallocated

 

 

Trust

 

 

 

 

 

 

 

Reserve

 

 

Corpus

 

 

Total

 

Balances at January 31, 2019

    

$

16,805,689

 

$

 3

 

$

16,805,692

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

30,055,752

 

 

 —

 

 

30,055,752

 

Distributions declared

 

 

(35,030,427)

 

 

 —

 

 

(35,030,427)

 

 

 

 

 

 

 

 

 

 

 

 

Balances at January 31, 2020

 

$

11,831,014

 

$

 3

 

$

11,831,017

 

 

v3.20.1
Balance Sheets - USD ($)
Jan. 31, 2020
Jan. 31, 2019
ASSETS    
Cash and cash equivalents $ 10,177,655 $ 881,810
U.S. Government securities, at amortized cost (which approximates fair value) 13,332,474 32,122,312
Accrued income receivable 69,588 2,339,060
Net contract asset   56,357
Prepaid expenses 67,654 54,472
Current assets 23,647,371 35,454,011
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
Total fixed property 3 3
Total assets 23,647,374 35,454,014
LIABILITIES, UNALLOCATED RESERVE AND TRUST CORPUS    
Distribution payable 9,184,007 18,236,814
Accrued expenses 120,630 411,508
Net contract liability 2,511,720  
Total liabilities 11,816,357 18,648,322
Unallocated reserve 11,831,014 16,805,689
Trust corpus 3 3
Total liabilities, unallocated reserve and trust corpus $ 23,647,374 $ 35,454,014
v3.20.1
STATEMENTS OF UNALLOCATED RESERVE AND TRUST CORPUS (Parenthetical) - $ / shares
12 Months Ended
Jan. 31, 2020
Jan. 31, 2019
Jan. 31, 2018
STATEMENTS OF UNALLOCATED RESERVE AND TRUST CORPUS      
First Quarterly Distribution Paid Per Unit $ 0.89 $ 0.45 $ 0.55
Second Quarterly Distribution Paid Per Unit 0.21 0.22 0.16
Third Quarterly Distribution Paid Per Unit 0.87 0.94 0.64
Fourth Quarterly Distribution Declared Or Paid Per Unit $ 0.70 $ 1.39 $ 1.18
v3.20.1
U. S. GOVERNMENT SECURITIES (Details) - U.S. government securities - USD ($)
Jan. 31, 2020
Jan. 31, 2019
Carrying Value    
Due within one year $ 13,332,474 $ 32,122,312
Total 13,332,474 32,122,312
Fair Value, Inputs, Level 1 [Member]    
Fair Value    
Due within one year 13,337,529 32,138,647
Total $ 13,337,529 $ 32,138,647
v3.20.1
ROYALTY AGREEMENT (Details) - Cyprus NMC
12 Months Ended
Dec. 31, 2020
USD ($)
$ / T
Jan. 31, 2020
USD ($)
$ / T
Dec. 31, 2019
USD ($)
$ / T
Dec. 31, 2018
USD ($)
$ / T
ROYALTY AGREEMENT        
Adjusted threshold price (in dollars per ton)     56.93 55.74
Maximum        
ROYALTY AGREEMENT        
Period for payments of overriding royalties on product shipments   30 days    
Minimum        
ROYALTY AGREEMENT        
Adjusted threshold price (in dollars per ton)   30    
Advance royalty threshold | $   $ 500,000 $ 949,295 $ 929,320
Forecast [Member]        
ROYALTY AGREEMENT        
Adjusted threshold price (in dollars per ton) 57.85      
Forecast [Member] | Minimum        
ROYALTY AGREEMENT        
Advance royalty threshold | $ $ 964,659      
v3.20.1
SUMMARY OF QUARTERLY EARNINGS (UNAUDITED)
12 Months Ended
Jan. 31, 2020
SUMMARY OF QUARTERLY EARNINGS (UNAUDITED)  
SUMMARY OF QUARTERLY EARNINGS (UNAUDITED)

NOTE 6 - SUMMARY OF QUARTERLY EARNINGS (UNAUDITED)

 

The quarterly results of operations for the years ended January 31, 2020 and 2019 are presented below:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2020

 

 

 

First

 

Second

 

Third

 

Fourth

 

 

    

Quarter

    

Quarter

    

Quarter

    

Quarter

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenue

 

$

5,466,873

 

$

14,344,224

 

$

6,560,841

 

$

5,618,936

 

Expenses

 

 

556,585

 

 

432,537

 

 

410,645

 

 

535,355

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

4,910,288

 

$

13,911,687

 

$

6,150,196

 

$

5,083,581

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income per unit

 

$

0.374

 

$

1.060

 

$

0.469

 

$

0.387

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2019

 

 

 

First

 

Second

 

Third

 

Fourth

 

 

    

Quarter

    

Quarter

    

Quarter

    

Quarter

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenue

 

$

6,684,047

 

$

19,151,952

 

$

13,973,843

 

$

7,483,923

 

Expenses

 

 

368,199

 

 

280,497

 

 

388,781

 

 

697,244

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

6,315,848

 

$

18,871,455

 

$

13,585,062

 

$

6,786,679

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income per unit

 

$

0.481

 

$

1.438

 

$

1.035

 

$

0.517

 

 

v3.20.1
SUMMARY OF QUARTERLY EARNINGS (UNAUDITED) (Tables)
12 Months Ended
Jan. 31, 2020
SUMMARY OF QUARTERLY EARNINGS (UNAUDITED)  
Summary of quarterly results of operations

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2020

 

 

 

First

 

Second

 

Third

 

Fourth

 

 

    

Quarter

    

Quarter

    

Quarter

    

Quarter

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenue

 

$

5,466,873

 

$

14,344,224

 

$

6,560,841

 

$

5,618,936

 

Expenses

 

 

556,585

 

 

432,537

 

 

410,645

 

 

535,355

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

4,910,288

 

$

13,911,687

 

$

6,150,196

 

$

5,083,581

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income per unit

 

$

0.374

 

$

1.060

 

$

0.469

 

$

0.387

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2019

 

 

 

First

 

Second

 

Third

 

Fourth

 

 

    

Quarter

    

Quarter

    

Quarter

    

Quarter

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenue

 

$

6,684,047

 

$

19,151,952

 

$

13,973,843

 

$

7,483,923

 

Expenses

 

 

368,199

 

 

280,497

 

 

388,781

 

 

697,244

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

6,315,848

 

$

18,871,455

 

$

13,585,062

 

$

6,786,679

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income per unit

 

$

0.481

 

$

1.438

 

$

1.035

 

$

0.517

 

 

v3.20.1
Balance Sheets (Parenthetical) - shares
Jan. 31, 2020
Jan. 31, 2019
Balance Sheets    
Certificate of beneficial interest of Land Trust, units 13,120,010 13,120,010
v3.20.1
Statements of Cash Flows - USD ($)
12 Months Ended
Jan. 31, 2020
Jan. 31, 2019
Jan. 31, 2018
Operating activities      
Royalties received $ 36,531,459 $ 46,705,036 $ 30,470,480
Interest received 296,964 248,667 86,616
Expenses paid (2,239,182) (1,457,039) (1,047,221)
Net cash from operating activities 34,589,241 45,496,664 29,509,875
Investing activities      
Maturities of U.S. Government securities 90,434,386 81,835,668 37,636,412
Sales of U.S. Government securities   99,740  
Purchases of U.S. Government securities (71,644,548) (90,260,269) (60,977,805)
Net cash from (used for) investing activities 18,789,838 (8,324,861) (23,341,393)
Financing activity      
Distributions to unitholders (44,083,234) (36,604,828) (19,548,815)
Net change in cash and cash equivalents 9,295,845 566,975 (13,380,333)
Cash and cash equivalents, beginning of period 881,810 314,835 13,695,168
Cash and cash equivalents, end of period 10,177,655 881,810 314,835
Reconciliation of net income to net cash from operating activities      
Net income 30,055,752 45,559,044 33,423,425
Decrease (increase) in accrued income receivable 2,269,472 (382,969) (1,911,046)
Decrease in contract asset 56,357 42,907 72,142
Decrease (increase) in prepaid expense (13,182) 168 (1,032)
Increase (decrease) in accrued expenses (290,878) 277,514 25,801
Increase (decrease) in contract liability 2,511,720   (2,099,415)
Net cash from operating activities 34,589,241 45,496,664 29,509,875
Non cash financing activity      
Distributions declared and payable $ 9,184,007 $ 18,236,814 $ 15,481,612
v3.20.1
SUMMARY OF QUARTERLY EARNINGS (UNAUDITED) (Details) - USD ($)
3 Months Ended 12 Months Ended
Jan. 31, 2020
Oct. 31, 2019
Jul. 31, 2019
Apr. 30, 2019
Jan. 31, 2019
Oct. 31, 2018
Jul. 31, 2018
Apr. 30, 2018
Jan. 31, 2020
Jan. 31, 2019
Jan. 31, 2018
SUMMARY OF QUARTERLY EARNINGS (UNAUDITED)                      
Revenue $ 5,618,936 $ 6,560,841 $ 14,344,224 $ 5,466,873 $ 7,483,923 $ 13,973,843 $ 19,151,952 $ 6,684,047 $ 31,990,874 $ 47,293,765 $ 34,495,415
Expenses 535,355 410,645 432,537 556,585 697,244 388,781 280,497 368,199 1,935,122 1,734,721 1,071,990
Net income $ 5,083,581 $ 6,150,196 $ 13,911,687 $ 4,910,288 $ 6,786,679 $ 13,585,062 $ 18,871,455 $ 6,315,848 $ 30,055,752 $ 45,559,044 $ 33,423,425
Net income (loss) per unit (in dollars per unit) $ 0.387 $ 0.469 $ 1.060 $ 0.374 $ 0.517 $ 1.035 $ 1.438 $ 0.481 $ 2.291 $ 3.472 $ 2.548
v3.20.1
ROYALTY AGREEMENT
12 Months Ended
Jan. 31, 2020
ROYALTY AGREEMENT  
ROYALTY AGREEMENT

NOTE 4 - ROYALTY AGREEMENT

 

The current royalty rate schedule became effective on August 17, 1989, which was established pursuant to the Amended Assignment Agreements 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.

 

Pursuant to the Amended Assignment Agreements, NMC is obligated to pay Mesabi Trust base overriding royalties, in varying amounts constituting a percentage of the gross proceeds of shipments, from Silver Bay, Minnesota, of iron ore product produced from Mesabi Trust lands or, to a limited extent, other lands.  NMC is obligated to make payments of overriding royalties on product shipments within 30 days following the calendar quarter in which such shipments occur.  NMC resumed mining operations and shipping product from Silver Bay in the second calendar quarter of 1990, and the first payment of overriding royalties was made in July 1990.

 

Royalty bonuses are payable on all iron ore products produced from Mesabi Ore shipped from Silver Bay during a calendar quarter and sold at prices above the Adjusted Threshold Price.  The Adjusted Threshold Price was $55.74 per ton for calendar year 2018,  $56.93 per ton for calendar year 2019, and will be $57.85 per ton for calendar year 2020.  The Adjusted Threshold Price is subject to adjustment (but not below $30 per ton) for inflation and deflation and is determined each year on the basis of the change in the Gross Domestic Product Implicit Price Deflator, a broad based index of inflation and deflation published quarterly by the U.S. Department of Commerce.

 

NMC is obligated to pay to Mesabi Trust a minimum advance royalty of $500,000 per annum, subject to adjustment for inflation and deflation (but not below $500,000), which is credited against base overriding royalties and royalty bonuses.  NMC is obligated to make quarterly payments of the minimum advance royalty in January, April, July and October of each year.  For the calendar year ending December 31, 2020, the minimum advance royalty threshold is $964,659.  The minimum annual advance royalty threshold was $949,295 and $929,320, for the calendar years ended December 31, 2019 and 2018, respectively.

v3.20.1
U. S. GOVERNMENT SECURITIES (Tables)
12 Months Ended
Jan. 31, 2020
U. S. GOVERNMENT SECURITIES  
Schedule of U.S. government securities classified as held-to-maturity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2020

 

2019

 

 

 

Carrying

 

    

 

 

Carrying

 

    

 

 

 

    

Value

    

Fair Value

    

Value

    

Fair Value

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Due within one year

 

$

13,332,474

 

$

13,337,529

 

$

32,122,312

 

$

32,138,647

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Due after one year

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

13,332,474

 

$

13,337,529

 

$

32,122,312

 

$

32,138,647

 

 

v3.20.1
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Details)
12 Months Ended
Jan. 31, 2020
USD ($)
contract
item
MT
Jan. 31, 2019
USD ($)
Cash and Cash Equivalents    
Amount held by the Trust in a money market fund | $ $ 768,512 $ 209,709
Revenue from Contract with Customer [Abstract]    
Number of customer contracts | contract 1  
Net contract liability | $ $ 2,511,720  
Contract asset | $ 192,059 $ 56,357
Contract liability | $ $ 2,703,779  
Fixed Property, Including Intangibles    
Percentage of fee interest owned by Mesabi Land Trust in the lands subject to the Peters Lease 20.00%  
Base Overriding Royalties    
Revenue from Contract with Customer [Abstract]    
Base overriding royalties, first tier portion percentage 90.00%  
Base overriding royalties, first tier shipment ceiling (in million tons) | MT 4  
Base overriding royalties, second tier portion percentage 85.00%  
Base overriding royalties, second tier shipment ceiling (in million tons) | MT 2  
Base overriding royalties, third tier portion percentage 25.00%  
Base overriding royalties, third tier shipment threshold (in million tons) | MT 6  
Base overriding royalties, number of volume thresholds for transaction price | item 4  
Base overriding royalties, volume threshold for transaction price | MT 1  
v3.20.1
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
12 Months Ended
Jan. 31, 2020
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES  
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Cash and Cash Equivalents

 

The Trust considers all highly liquid investments with an original maturity of three months or less to be cash equivalents.  As of January 31, 2020 and 2019, the Trust held $768,512 and $209,709, respectively, in a money market fund that invests primarily in obligations of the U.S. Treasury, which it considers to be cash and cash equivalents.

 

Investments

 

The Trust invests solely in U.S. Government Securities.  The Trustees determine the appropriate classifications of the securities at the time they are acquired and evaluate the appropriateness of such classifications as of each balance sheet date.

 

The U.S. Government Securities are classified as held-to-maturity securities as the Trust has the positive intent and ability to hold to maturity and are therefore stated at amortized cost.

 

Revenue Recognition

 

Base Overriding Royalties

 

The performance obligation for the base overriding royalty consists of providing Northshore Mining Company (“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 under the Amended Assignment Agreements relates to the volume of iron ore shipped from Silver Bay, Minnesota by Northshore.  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.  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 for the calendar year.  The Trust estimates the variable consideration it expects to be entitled to receive over the contractual period associated with royalty agreement, which resets the royalty percentages 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 shipments for the fiscal quarter at the estimated royalty percentage as described above and based on the estimated prices for iron ore products sold under the Cliffs Pellet Agreements.

 

Bonus Royalties

 

The performance obligation for the bonus royalties consists of providing Northshore Mining 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 under the Amended Assignment Agreements relates to the volume of iron ore shipped by Northshore.  The Trust recognizes bonus royalties on a quarterly basis based on the actual shipments of the fiscal quarter at the actual royalty percentage for those shipments and based on the anticipated prices for iron ore products sold under the Cliffs Pellet Agreements.

 

Fee Royalties

 

The performance obligation for 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.

 

Accrued Income Receivable

 

The accrued income receivable represents royalty income earned but not yet received by the Trust under the royalty agreements described elsewhere in these notes.  Accrued income receivable is calculated based on (i) shipments during the last month of Mesabi Trust’s fiscal year, if any, and (ii) net price adjustments resulting from the price adjustment mechanisms in the agreements between Cliffs and its customers that determine the final sales price of the shipments from Silver Bay, Minnesota. 

 

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 liability in the amount of $2,511,720 is reflected on the Balance Sheet as of January 31, 2020. The net contract liability is made up of a contract asset in the amount of $192,059 and a contract liability in the amount of $2,703,779. As of January 31, 2019, the Trust recorded a net contract asset of $56,357, made up entirely of a contract asset. The contract asset is based on the revenue recognized on the base overriding royalties, at the estimated prices for iron ore products sold under the Cliffs Pellet Agreements, 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 iron ore that has not been shipped by Northshore, but for which the Trust has received a royalty payment during the fiscal year ended January 31, 2020 based on an initial estimated price. Revenue will be recognized in accordance with the Trust’s revenue recognition policy at the estimated prices for iron ore products sold under the Cliffs Pellet Agreements as shipments of these products are made. The contract liability also represents an estimate of decreases in royalty revenue related to tons of iron ore that were 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.

 

Fixed Property, Including Intangibles

 

The Trust’s fixed property, including intangibles, is recorded at nominal values and includes the following:

 

1.

The entire beneficial interest as assignor in the Amended Peters Lease Assignment and the Amended Cloquet Lease Assignment covering taconite properties in Minnesota which are leased to NMC.

 

2.

The entire beneficial interest in Mesabi Land Trust which owns a 20% fee interest in the lands subject to the Peters Lease and the entire fee interest in other properties in Minnesota.

 

Net Income Per Unit

 

Net income per unit is computed by dividing net income by the weighted average number of units outstanding.

 

Concentration of Credit Risk

 

Financial instruments which potentially subject the Trust to concentrations of credit risk consist primarily of cash that is maintained at an FDIC insured financial institution.  At times during the year, the Trust’s cash balance may exceed insured limits.

 

As further described in Note 1, NMC is the lessee/operator of the Mesabi Trust land.  All royalty income earned by the Trust is received from NMC, and accordingly, substantially all of the accrued income receivable is also due from NMC.

 

Accounting Estimates

 

The preparation of financial statements in conformity with accounting principles generally accepted in the United States (“GAAP”) requires the Trustees to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.  Actual results could differ from those estimates.  Specifically, the accrued income receivable, contract asset, contract liability and related royalty revenue are significant estimates which are subject to change in the near term, and changes to these estimates could have a material effect on the Trust’s financial statements.

 

On December 9, 2019, the Trustees of Mesabi Trust announced that the Trust initiated arbitration against Northshore and its parent, Cliffs (jointly, the “Operator”), the lessee/operator of the leased lands. The arbitration proceeding was commenced with the American Arbitration Association. The Trust asserts claims concerning the calculation of royalties related to the production, shipment and sale of iron ore, including DR-grade pellets. More particularly, the claims involve the Trust’s allegations that the Operator has improperly manipulated royalty amounts with respect to DR-grade pellets by orchestrating isolated sale transactions of low silica iron ore into international markets at prices significantly below standard pellet pricing. Based on information currently available to the Trust, the Trust seeks an award of damages, along with specific performance and declaratory relief. The arbitration is in its early stages and no hearings have been set.

 

Any arbitration, legal or administrative proceedings to which the Mesabi Trust is subject could require the significant involvement of Trustees and the professional advisors and consultants to the Trust, and may divert attention from the Trustees’ other roles and responsibilities. In addition, it is difficult to foresee the results of legal actions, arbitration matters and other proceedings currently involving the Mesabi Trust or of those which may arise in the future, and an adverse result in these matters could have a material adverse effect on the market value of Mesabi Trust units and on Mesabi Trust’s asset value, royalty income, results of operations and financial condition.

 

Subsequent Events

 

Subsequent to year-end, the Trust has started to evaluate the possible effects of the world-wide coronavirus pandemic. The Trust is closely monitoring its financial position and liquidity and is actively working to minimize the current and future impact of this situation. Because NMC is the sole lessee/ operator of mineral interests of the Trust, any impact to the operations of NMC, will likely have an impact on the Trust. As of the date of issuance of these financial statements, the full impact to the Trust’s future financial statements is not known.

 

Material subsequent events are evaluated for recognition or disclosure in the accompanying financial statements.

 

Fair Value Measures

 

Valuation Hierarchy

 

GAAP establishes a three-level valuation hierarchy for classification of fair value measurements.  The valuation hierarchy is based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date.

 

·

Level 1 — Valuation is based upon quoted prices (unadjusted) for identical assets or liabilities in active markets.

·

Level 2 — Valuation is based upon quoted prices for similar assets and liabilities in active markets, or other inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.

·

Level 3 — Valuation is based upon other unobservable inputs that are significant to the fair value measurement.

 

The classification of assets and liabilities within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement in its entirety.

 

The carrying amounts of financial instruments approximated fair value as of January 31, 2020 and 2019, because of the relative short maturity of these instruments.

 

Recent Accounting Pronouncements

 

Various accounting standards and interpretations were issued during the fiscal year ended January 31, 2020.  The Trust has evaluated the recently issued accounting pronouncements that are effective for the fiscal year ended January 31, 2020 and believe they will not have a material effect on the Trust’s financial position, results of operations or cash flows when adopted.

 

In June 2016, the FASB issued ASU 2016- 13, "Financial Instruments- Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments." The standard modifies the measurement approach for credit losses on financial instruments, including accrued income receivables, from an incurred loss method to a current expected credit loss method (“CECL”). The CECL model requires estimating all expected credit losses for certain types of financial instruments, including accrued income receivables, held at the reporting date based on historical experience, current conditions and reasonable and supportable forecasts. The standard is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years; early adoption is permitted. The standard must be adopted by applying a cumulative adjustment to the unallocated reserve. The Trust anticipates adopting the standard in the first quarter of fiscal 2021, although it does not expect a material impact to the Trust's Financial Statements.

 

v3.20.1
Document and Entity Information - USD ($)
12 Months Ended
Jan. 31, 2020
Apr. 10, 2020
Jul. 31, 2019
Document and Entity Information      
Document Type 10-K    
Document Period End Date Jan. 31, 2020    
Entity Registrant Name Mesabi Trust    
Entity Well-known Seasoned Issuer No    
Entity Voluntary Filers No    
Entity Current Reporting Status Yes    
Entity Interactive Data Current Yes    
Entity Filer Category Accelerated Filer    
Entity Small Business false    
Entity Emerging Growth Company false    
Entity Shell Company false    
Entity Common Stock, Shares Outstanding   13,120,010  
Entity Public Float     $ 352,209,703
Current Fiscal Year End Date --01-31    
Document Fiscal Year Focus 2020    
Document Fiscal Period Focus FY    
Entity Central Index Key 0000065172    
Amendment Flag false    
v3.20.1
STATEMENTS OF UNALLOCATED RESERVE AND TRUST CORPUS (Equity) - USD ($)
Unallocated Reserve
Trust Corpus
Total
Beginning Balance at Jan. 31, 2017 $ 10,376,876 $ 3  
Units, Beginning Balance at Jan. 31, 2017 13,120,010    
Increase (Decrease) in Unallocated Reserve and Trust Corpus      
Net income $ 33,423,425   $ 33,423,425
First quarter's distribution paid (7,216,006)    
Second quarter's distribution paid (2,099,202)    
Third quarter's distribution paid (8,396,806)    
Fourth quarter's distribution declared/paid (15,481,612)    
Ending Balance at Jan. 31, 2018 $ 10,606,675 3  
Units, Ending Balance at Jan. 31, 2018 13,120,010    
Increase (Decrease) in Unallocated Reserve and Trust Corpus      
Net income $ 45,559,044   45,559,044
First quarter's distribution paid (5,904,005)    
Second quarter's distribution paid (2,886,402)    
Third quarter's distribution paid (12,332,809)    
Fourth quarter's distribution declared/paid (18,236,814)    
Ending Balance at Jan. 31, 2019 $ 16,805,689 3 $ 16,805,692
Units, Ending Balance at Jan. 31, 2019 13,120,010   13,120,010
Increase (Decrease) in Unallocated Reserve and Trust Corpus      
Net income $ 30,055,752   $ 30,055,752
First quarter's distribution paid (11,676,809)    
Second quarter's distribution paid (2,755,202)    
Third quarter's distribution paid (11,414,409)    
Fourth quarter's distribution declared/paid (9,184,007)    
Ending Balance at Jan. 31, 2020 $ 11,831,014 $ 3 $ 11,831,017
Units, Ending Balance at Jan. 31, 2020 13,120,010   13,120,010
v3.20.1
NATURE OF BUSINESS AND ORGANIZATION (Details)
12 Months Ended
Jan. 31, 2020
item
shares
Jan. 31, 2019
shares
NATURE OF BUSINESS AND ORGANIZATION    
Period of termination of the Trust after the death of the survivor of persons named in the exhibit 21 years  
Number of persons named in the exhibit to the Agreement of Trust | item 25  
Age of the youngest survivor 54 years  
Beneficial interest in the Trust (in units) | shares 13,120,010 13,120,010
v3.20.1
U. S. GOVERNMENT SECURITIES
12 Months Ended
Jan. 31, 2020
U. S. GOVERNMENT SECURITIES  
U. S. GOVERNMENT SECURITIES

NOTE 3 - U.S. GOVERNMENT SECURITIES

 

U.S. Government Securities at January 31, 2020 and 2019 are classified as held-to-maturity and mature as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2020

 

2019

 

 

 

Carrying

 

    

 

 

Carrying

 

    

 

 

 

    

Value

    

Fair Value

    

Value

    

Fair Value

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Due within one year

 

$

13,332,474

 

$

13,337,529

 

$

32,122,312

 

$

32,138,647

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Due after one year

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

13,332,474

 

$

13,337,529

 

$

32,122,312

 

$

32,138,647

 

 

The fair value of U.S. Government Securities have been valued using level 1 inputs.

v3.20.1
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Policies)
12 Months Ended
Jan. 31, 2020
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES  
Cash and Cash Equivalents

 

Cash and Cash Equivalents

 

The Trust considers all highly liquid investments with an original maturity of three months or less to be cash equivalents.  As of January 31, 2020 and 2019, the Trust held $768,512 and $209,709, respectively, in a money market fund that invests primarily in obligations of the U.S. Treasury, which it considers to be cash and cash equivalents.

Investments

Investments

 

The Trust invests solely in U.S. Government Securities.  The Trustees determine the appropriate classifications of the securities at the time they are acquired and evaluate the appropriateness of such classifications as of each balance sheet date.

 

The U.S. Government Securities are classified as held-to-maturity securities as the Trust has the positive intent and ability to hold to maturity and are therefore stated at amortized cost.

Revenue recognition

Revenue Recognition

 

Base Overriding Royalties

 

The performance obligation for the base overriding royalty consists of providing Northshore Mining Company (“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 under the Amended Assignment Agreements relates to the volume of iron ore shipped from Silver Bay, Minnesota by Northshore.  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.  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 for the calendar year.  The Trust estimates the variable consideration it expects to be entitled to receive over the contractual period associated with royalty agreement, which resets the royalty percentages 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 shipments for the fiscal quarter at the estimated royalty percentage as described above and based on the estimated prices for iron ore products sold under the Cliffs Pellet Agreements.

 

Bonus Royalties

 

The performance obligation for the bonus royalties consists of providing Northshore Mining 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 under the Amended Assignment Agreements relates to the volume of iron ore shipped by Northshore.  The Trust recognizes bonus royalties on a quarterly basis based on the actual shipments of the fiscal quarter at the actual royalty percentage for those shipments and based on the anticipated prices for iron ore products sold under the Cliffs Pellet Agreements.

 

Fee Royalties

 

The performance obligation for 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.

 

Accrued Income Receivable

 

The accrued income receivable represents royalty income earned but not yet received by the Trust under the royalty agreements described elsewhere in these notes.  Accrued income receivable is calculated based on (i) shipments during the last month of Mesabi Trust’s fiscal year, if any, and (ii) net price adjustments resulting from the price adjustment mechanisms in the agreements between Cliffs and its customers that determine the final sales price of the shipments from Silver Bay, Minnesota. 

 

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 liability in the amount of $2,511,720 is reflected on the Balance Sheet as of January 31, 2020. The net contract liability is made up of a contract asset in the amount of $192,059 and a contract liability in the amount of $2,703,779. As of January 31, 2019, the Trust recorded a net contract asset of $56,357, made up entirely of a contract asset. The contract asset is based on the revenue recognized on the base overriding royalties, at the estimated prices for iron ore products sold under the Cliffs Pellet Agreements, 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 iron ore that has not been shipped by Northshore, but for which the Trust has received a royalty payment during the fiscal year ended January 31, 2020 based on an initial estimated price. Revenue will be recognized in accordance with the Trust’s revenue recognition policy at the estimated prices for iron ore products sold under the Cliffs Pellet Agreements as shipments of these products are made. The contract liability also represents an estimate of decreases in royalty revenue related to tons of iron ore that were 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.

Fixed Property, Including Intangibles

Fixed Property, Including Intangibles

 

The Trust’s fixed property, including intangibles, is recorded at nominal values and includes the following:

 

1.

The entire beneficial interest as assignor in the Amended Peters Lease Assignment and the Amended Cloquet Lease Assignment covering taconite properties in Minnesota which are leased to NMC.

 

2.

The entire beneficial interest in Mesabi Land Trust which owns a 20% fee interest in the lands subject to the Peters Lease and the entire fee interest in other properties in Minnesota.

 

Net Income Per Unit

Net Income Per Unit

 

Net income per unit is computed by dividing net income by the weighted average number of units outstanding.

 

Concentration of Credit Risk

Concentration of Credit Risk

 

Financial instruments which potentially subject the Trust to concentrations of credit risk consist primarily of cash that is maintained at an FDIC insured financial institution.  At times during the year, the Trust’s cash balance may exceed insured limits.

 

As further described in Note 1, NMC is the lessee/operator of the Mesabi Trust land.  All royalty income earned by the Trust is received from NMC, and accordingly, substantially all of the accrued income receivable is also due from NMC.

 

Accounting Estimates

Accounting Estimates

 

The preparation of financial statements in conformity with accounting principles generally accepted in the United States (“GAAP”) requires the Trustees to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.  Actual results could differ from those estimates.  Specifically, the accrued income receivable, contract asset, contract liability and related royalty revenue are significant estimates which are subject to change in the near term, and changes to these estimates could have a material effect on the Trust’s financial statements.

 

On December 9, 2019, the Trustees of Mesabi Trust announced that the Trust initiated arbitration against Northshore and its parent, Cliffs (jointly, the “Operator”), the lessee/operator of the leased lands. The arbitration proceeding was commenced with the American Arbitration Association. The Trust asserts claims concerning the calculation of royalties related to the production, shipment and sale of iron ore, including DR-grade pellets. More particularly, the claims involve the Trust’s allegations that the Operator has improperly manipulated royalty amounts with respect to DR-grade pellets by orchestrating isolated sale transactions of low silica iron ore into international markets at prices significantly below standard pellet pricing. Based on information currently available to the Trust, the Trust seeks an award of damages, along with specific performance and declaratory relief. The arbitration is in its early stages and no hearings have been set.

 

Any arbitration, legal or administrative proceedings to which the Mesabi Trust is subject could require the significant involvement of Trustees and the professional advisors and consultants to the Trust, and may divert attention from the Trustees’ other roles and responsibilities. In addition, it is difficult to foresee the results of legal actions, arbitration matters and other proceedings currently involving the Mesabi Trust or of those which may arise in the future, and an adverse result in these matters could have a material adverse effect on the market value of Mesabi Trust units and on Mesabi Trust’s asset value, royalty income, results of operations and financial condition.

Subsequent Events

Subsequent Events

 

Subsequent to year-end, the Trust has started to evaluate the possible effects of the world-wide coronavirus pandemic. The Trust is closely monitoring its financial position and liquidity and is actively working to minimize the current and future impact of this situation. Because NMC is the sole lessee/ operator of mineral interests of the Trust, any impact to the operations of NMC, will likely have an impact on the Trust. As of the date of issuance of these financial statements, the full impact to the Trust’s future financial statements is not known.

 

Material subsequent events are evaluated for recognition or disclosure in the accompanying financial statements.

Fair Value Measures

Fair Value Measures

 

Valuation Hierarchy

 

GAAP establishes a three-level valuation hierarchy for classification of fair value measurements.  The valuation hierarchy is based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date.

 

·

Level 1 — Valuation is based upon quoted prices (unadjusted) for identical assets or liabilities in active markets.

·

Level 2 — Valuation is based upon quoted prices for similar assets and liabilities in active markets, or other inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.

·

Level 3 — Valuation is based upon other unobservable inputs that are significant to the fair value measurement.

 

The classification of assets and liabilities within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement in its entirety.

 

The carrying amounts of financial instruments approximated fair value as of January 31, 2020 and 2019, because of the relative short maturity of these instruments.

Recent Accounting Pronouncements

Recent Accounting Pronouncements

 

Various accounting standards and interpretations were issued during the fiscal year ended January 31, 2020.  The Trust has evaluated the recently issued accounting pronouncements that are effective for the fiscal year ended January 31, 2020 and believe they will not have a material effect on the Trust’s financial position, results of operations or cash flows when adopted.

 

In June 2016, the FASB issued ASU 2016- 13, "Financial Instruments- Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments." The standard modifies the measurement approach for credit losses on financial instruments, including accrued income receivables, from an incurred loss method to a current expected credit loss method (“CECL”). The CECL model requires estimating all expected credit losses for certain types of financial instruments, including accrued income receivables, held at the reporting date based on historical experience, current conditions and reasonable and supportable forecasts. The standard is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years; early adoption is permitted. The standard must be adopted by applying a cumulative adjustment to the unallocated reserve. The Trust anticipates adopting the standard in the first quarter of fiscal 2021, although it does not expect a material impact to the Trust's Financial Statements.

v3.20.1
Statements of Income - USD ($)
12 Months Ended
Jan. 31, 2020
Jan. 31, 2019
Jan. 31, 2018
REVENUES      
Interest $ 283,015 $ 259,974 $ 92,527
Total revenues 31,990,874 47,293,765 34,495,415
EXPENSES      
Compensation of Trustees 271,449 264,278 207,520
Corporate Trustee's administrative fees 62,500 62,500 62,500
Professional fees and expenses:      
Legal 928,586 636,224 366,205
Accounting and auditing 185,109 140,938 142,214
Mining consultant and field representatives 30,574 33,468 56,100
Insurance 134,683 119,224 118,392
Annual stock exchange fee 68,000 65,255 59,967
Transfer agent's and registrar's fees 6,606 7,244 7,366
Other Trust expenses 247,615 405,590 51,726
Total Expenses 1,935,122 1,734,721 1,071,990
Net income $ 30,055,752 $ 45,559,044 $ 33,423,425
WEIGHTED AVERAGE NUMBER OF UNITS OUTSTANDING 13,120,010 13,120,010 13,120,010
Net income per unit (Note 2) (in dollars per unit) $ 2.291 $ 3.472 $ 2.548
Royalties From Leases [Member]      
REVENUES      
Royalty income $ 30,983,327 $ 46,430,497 $ 33,883,561
Royalties From Lease Fees [Member]      
REVENUES      
Royalty income $ 724,532 $ 603,294 $ 519,327
v3.20.1
NATURE OF BUSINESS AND ORGANIZATION
12 Months Ended
Jan. 31, 2020
NATURE OF BUSINESS AND ORGANIZATION  
NATURE OF BUSINESS AND ORGANIZATION

NOTE 1 - NATURE OF BUSINESS AND ORGANIZATION

 

Nature of Business

 

Mesabi Trust (“Mesabi Trust” or the “Trust”), formed pursuant to an Agreement of Trust dated July 18, 1961 (the “Agreement of Trust”), is a trust organized under the laws of the State of New York.  Mesabi Trust holds all of the interests formerly owned by Mesabi Iron Company (“MIC”), including all right, title and interest in the Amendment of Assignment, Assumption and Further Assignment of Peters Lease (the “Amended Assisnment 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 Assisnment 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”).

 

Mesabi Trust was created in 1961 upon the liquidation of Mesabi Iron Company.  The sole purpose of the Trust, as set forth in the Agreement of Trust dated as of July 18, 1961, is to conserve and protect the Trust Estate and to collect and distribute the income and proceeds there from to the Trust’s certificate holders after the payment of, or provision for, expenses and liabilities.  The Agreement of Trust prohibits the Trust from engaging in any business.  In accordance with the Agreement of Trust, the Trust will terminate twenty-one years after the death of the survivor of twenty-five persons named in an exhibit to the Agreement of Trust, the youngest of whom was believed to be fifty-four years old as of October 1, 2014.

 

The lessee/operator of Mesabi Trust’s mineral interests is Northshore Mining Corporation (NMC), a subsidiary of Cleveland-Cliffs Inc. (Cliffs).  Prior to September 30, 1994, the lessee/operator had been a subsidiary of Cyprus Amax Minerals Company and was named Cyprus Northshore Mining Corporation (Cyprus NMC).

 

Organization

 

The beneficial interest in Mesabi Trust is represented by 13,120,010 transferable units distributed on July 27, 1961 to shareholders of Mesabi Iron Company.

 

The Trust’s status as a grantor trust was confirmed by letter ruling addressed to Mesabi Iron Company from the Internal Revenue Service in 1961.  As a grantor trust, Mesabi is exempt from Federal income taxes and its income is taxable directly to the Unitholders.

v3.20.1
UNALLOCATED RESERVE AND DISTRIBUTIONS (Details) - USD ($)
3 Months Ended 12 Months Ended
Jan. 31, 2020
Oct. 31, 2019
Jul. 31, 2019
Apr. 30, 2019
Jan. 31, 2019
Oct. 31, 2018
Jul. 31, 2018
Apr. 30, 2018
Jan. 31, 2020
Jan. 31, 2019
Jan. 31, 2018
Unallocated Cash and Securities portion of Unallocated Reserve                      
Cash and U.S. Government securities $ 23,510,129       $ 33,004,122       $ 23,510,129 $ 33,004,122  
Distribution payable (9,184,007)       (18,236,814)       (9,184,007) (18,236,814)  
Unallocated cash and U.S. Government securities 14,326,122       14,767,308       14,326,122 14,767,308  
Reconciliation of Trust's Unallocated Reserve                      
Beginning Balance       $ 16,805,692         16,805,692    
Net income 5,083,581 $ 6,150,196 $ 13,911,687 4,910,288 6,786,679 $ 13,585,062 $ 18,871,455 $ 6,315,848 30,055,752 45,559,044 $ 33,423,425
Distributions declared                 (35,030,427)    
Ending Balance 11,831,017       16,805,692       $ 11,831,017 $ 16,805,692  
Distributions declared per unit (in dollars per unit)                 $ 3.36 $ 2.79 $ 1.49
Distributed cash payments                 $ 44,083,234 $ 36,604,828 $ 19,548,815
Distribution declared per unit                 $ 0.70 $ 1.39 $ 1.18
Unallocated Reserve                      
Reconciliation of Trust's Unallocated Reserve                      
Beginning Balance       16,805,689       10,606,675 $ 16,805,689 $ 10,606,675 $ 10,376,876
Net income                 30,055,752 45,559,044 33,423,425
Distributions declared                 (35,030,427)    
Ending Balance 11,831,014       16,805,689       11,831,014 16,805,689 10,606,675
Trust Corpus                      
Reconciliation of Trust's Unallocated Reserve                      
Beginning Balance       $ 3       $ 3 3 3 3
Ending Balance $ 3       $ 3       $ 3 $ 3 $ 3