10-Q: Mesabi Trust Q3 Royalties Drop, New Arbitration Initiated

Mesabi Trust reported a significant decline in royalty income for the three and nine months ended October 31, 2025, alongside the initiation of a new arbitration against Northshore and Cliffs.

Summary

• Net income for the three months ended October 31, 2025, was $2,767,463, a decrease of $75,558,062 compared to $78,325,525 in the same period of 2024.
• Net income for the nine months ended October 31, 2025, was $11,142,554, a decrease of $76,064,649 compared to $87,207,203 in the same period of 2024.
• Total royalty income for the three months ended October 31, 2025, decreased by $3,957,757 to $3,390,609 compared to $7,348,366 in 2024.
• Total royalty income for the nine months ended October 31, 2025, decreased by $6,456,708 to $13,156,985 compared to $19,613,693 in 2024.
• The decrease in net income and royalty income is primarily due to the non-recurring $71,185,029 arbitration award recognized in the prior year (Q3 2024) and lower iron ore pricing and shipments in the current period.
• Pellet production and shipments from Trust Lands for the three months ended October 31, 2025, totaled 915,605 tons, down from 1,066,665 tons in 2024.
• Pellet production and shipments from Trust Lands for the nine months ended October 31, 2025, totaled 2,496,746 tons, down from 3,019,695 tons in 2024.
• A new arbitration proceeding was initiated on September 26, 2025, against Northshore and Cliffs, seeking damages and declaratory relief related to the idling of Northshore's operations from May 2022 to April 2023 and alleged underpayment of royalties on intercompany shipments from 2023 to present.
• The Trust declared a distribution of $0.34 per unit payable on November 20, 2025, a decrease from $0.39 per unit declared in the comparable prior year period.
• Unallocated Reserve decreased from $95,324,736 as of October 31, 2024, to $21,087,860 as of October 31, 2025, largely due to the distribution of the prior year's arbitration award.

Sentiment

Score: 3

Explanation: The significant decline in royalty income and net income, coupled with new arbitration and ongoing legal/environmental challenges, indicates a negative short-term outlook. While Cliffs' broader strategic moves are positive for the industry, their direct benefit to Mesabi Trust is uncertain and offset by operational issues and royalty calculation disputes.

Positives

• Fee royalties increased by $54,092 for the three months ended October 31, 2025, and by $90,254 for the nine months ended October 31, 2025, due to an increase in the royalty rate paid.
• Expenses for the nine months ended October 31, 2025, decreased by $1,745,926 compared to the prior comparable period, primarily due to lower legal fees after the conclusion of the previous arbitration.
• The Trustees concluded that disclosure controls and procedures are effective as of the end of the period.
• Cliffs announced a successful production trial replacing aluminum with steel in automotive stamping equipment, moving to routine production and receiving inquiries from other clients, which could indicate future demand for steel/iron ore.
• Cliffs announced POSCO as a strategic partner under a transformative Memorandum of Understanding (MoU), with a formal announcement on a definitive agreement expected in Q4 2025 or Q1 2026, potentially accretive to Cliffs shareholders.

Negatives

• Net income significantly decreased by $75,558,062 for the three months and $76,064,649 for the nine months ended October 31, 2025, primarily due to the absence of the non-recurring $71,185,029 arbitration award from the prior year.
• Total royalty income decreased by $3,957,757 (53.9%) for the three months and $6,456,708 (32.9%) for the nine months ended October 31, 2025, due to lower iron ore pricing and shipments.
• Pellet production and shipments from Trust Lands decreased by 151,060 tons (14.2%) for the three months and 522,949 tons (17.3%) for the nine months compared to the prior year.
• Bonus royalties decreased by $2,125,658 (70.2%) for the three months and $3,320,181 (41.4%) for the nine months, attributed to lower prices of products shipped over the threshold price and a reduced bonus royalty rate.
• Northshore experienced an extended maintenance shutdown in February 2025, contributing to decreased production and shipments.
• The distribution declared per unit decreased to $0.34 from $0.39 in the comparable prior year quarter.
• Unallocated Reserve decreased significantly from $95,324,736 as of October 31, 2024, to $21,087,860 as of October 31, 2025, largely due to the distribution of the prior year's arbitration award.
• The highest contract price obtained by Northshore in the preceding four calendar quarters for arms-length sales decreased, resulting in a lower bonus royalty rate for the Trust beginning July 1, 2025.
• The Minnesota Court of Appeals reversed the DNR's decision that an Environmental Impact Statement (EIS) was not needed for Northshore's Milepost 7 tailings basin project, remanding the case for a new determination.
• WaterLegacy filed a civil complaint seeking injunctive and declaratory relief against the DNR and Northshore regarding the Milepost 7 tailings basin project, potentially delaying or impacting the project.

Risks

• Volatility of iron ore and steel prices, market supply and demand, competition, environmental hazards, health and safety conditions, regulation or government action, and litigation.
• Uncertainties about estimates of reserves.
• General adverse business and industry economic trends, uncertainties arising from war, terrorist events, and other global events.
• Higher or lower customer demand for steel and iron ore.
• Decisions by mine operators (Cliffs/Northshore) regarding curtailments or idling production lines or entire plants.
• Environmental compliance uncertainties and difficulties in obtaining and renewing necessary operating permits.
• Higher imports of steel and iron ore substitutes, processing difficulties, consolidation and restructuring in the domestic steel market.
• Market inputs tied to indexed price adjustment factors in some Cliffs customer contracts resulting in future adjustments to royalties payable to Mesabi Trust.
• Future negative price adjustments could partially or completely offset royalties or royalty income, reducing cash available for distribution.
• Without consistent arms-length sales from Northshore to third parties, the calculation of royalties on iron ore Northshore ships to Cliffs affiliates could be uncertain, leading to potential disputes.
• Limited bona fide third-party sales transactions of iron ore products by Cliffs at prices below the annual bonus royalty threshold price could reduce or eliminate bonus royalties.
• The Trustees are unable to predict the impact of the Minnesota Court of Appeals decision or the WaterLegacy lawsuit on mining, production, shipments, or future royalties related to the Milepost 7 tailings basin project.
• The Trust has no control over Northshore's operations, including production volumes, marketing, expenditures, environmental liabilities, and mining plans.
• The unpredictable nature of the iron ore industry and the Trust's dependence on Cliffs/Northshore actions, coupled with limited liquid assets, pose a risk to maintaining adequate reserves and future distributions.

Future Outlook

The Trust anticipates that future distributions will be highly dependent upon royalty income as it is received and the level of Trust expenses. The amount of future royalty income is a function of the volume of iron ore products produced or shipped and the dollar amount from sales to third-party customers by Northshore. Production and shipping activity is greatly reduced during winter months. Cliffs has indicated it will continue to treat Northshore as a 'swing operation' and did not expect to operate it in full any time in the current year. Cliffs' recent announcements regarding replacing aluminum with steel in automotive applications and the strategic partnership with POSCO could potentially increase future demand for steel and iron ore, but the direct impact on Mesabi Trust's royalties is uncertain. A formal announcement on a definitive agreement between Cliffs and POSCO is expected in Q4 2025 or Q1 2026, with closing in 2026.

Management Comments

• The Trustees do not intend to expand their responsibilities beyond those permitted or required by the Agreement of Trust and those required under applicable law.
• 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.
• The Trustees are unable to predict what impact, if any, the Minnesota Court of Appeals decision to reverse and remand the DNR order or the DNRs future redetermination regarding whether the proposed project requires an EIS will have on mining, production and shipments of iron ore products from Northshore or future royalties payable to the Trust.
• The Trustees are unable to predict what impact, if any, the WaterLegacy lawsuit will have on mining, production and shipments of iron ore products from Northshore or future royalties payable to the Trust.
• The Trustees will continue to monitor the economic and other circumstances of the Trust to strike a responsible balance between distributions to Unitholders and the need to maintain adequate reserves at a prudent level, given the unpredictable nature of the iron ore and steel industry, the Trusts dependence on the actions of Cliffs/Northshore, and the fact that the Trust essentially has no other liquid assets.
• The Trustees have not been provided with any additional information regarding the anticipated volume of production, stockpiling or shipping of iron ore products at the Northshore operations in Babbitt and Silver Bay, Minnesota.

Industry Context

The iron ore and steel industry faces volatility in prices, market supply and demand, and competition. Cliffs, the parent company of Northshore Mining, is actively pursuing strategies to enhance steel demand, such as replacing aluminum in automotive applications and forming strategic partnerships like the one with POSCO. These initiatives could potentially bolster demand for iron ore pellets, which would indirectly benefit Mesabi Trust through increased royalties. However, Cliffs' decision to operate Northshore as a 'swing operation' and its shift towards internal consumption of iron ore, rather than third-party arms-length sales, introduces uncertainty for Mesabi Trust's royalty calculations and bonus royalty rates. The ongoing legal and environmental challenges related to Northshore's Milepost 7 tailings basin project also highlight regulatory scrutiny within the mining sector.

Legal Proceedings

• **New Arbitration (Initiated September 26, 2025)**: Mesabi Trust initiated arbitration against Northshore and Cliffs through the American Arbitration Association. It seeks damages and declaratory relief related to Northshore's idling of operations from May 2022 to April 2023 and alleged underpayment of royalties on intercompany shipments from 2023 to present.
• **Milepost 7 Tailings Basin Project Litigation**: On February 3, 2025, the Minnesota Court of Appeals reversed the DNR's decision that an Environmental Impact Statement (EIS) was not needed for Northshore's proposed project, remanding the case to the DNR for a new determination. On May 13, 2025, the Minnesota Supreme Court denied Cliffs and the DNR's petitions for review, upholding the Court of Appeals' decision. On June 16, 2025, WaterLegacy filed a civil complaint against the DNR and Northshore, seeking injunctive and declaratory relief under MEPA and MERA. WaterLegacy aims to prohibit DNR approvals and Northshore construction activities related to the project until an EIS is completed and a new dam permit is issued. On September 4, 2025, the court denied WaterLegacy's motion for a temporary injunction. The case is proceeding, with trial set for September 2027.

Related Party Transactions

• Northshore, a wholly-owned subsidiary of Cliffs, is the lessee/operator of the lands from which Mesabi Trust derives royalties.
• Cliffs has increased the proportion of iron ore mined from Mesabi Trust Lands that it sells to Cliffs corporate affiliates and decreased sales to third parties. This impacts royalty calculations, as royalties on intercompany sales refer to the highest contract price from preceding arms-length sales.
• The new arbitration initiated by Mesabi Trust includes claims of underpayment of royalties on intercompany shipments from 2023 through the present.

Stakeholder Impact

• **Shareholders (Unitholders)**: Experienced a significant decrease in net income per unit and a lower distribution per unit compared to the prior year. Future distributions are highly dependent on fluctuating royalty income and the unpredictable nature of the iron ore industry and Cliffs' operations. The new arbitration could potentially recover underpaid royalties but also introduces uncertainty.
• **Cliffs/Northshore**: Facing a new arbitration proceeding from Mesabi Trust regarding idling operations and royalty underpayments. Also involved in ongoing litigation and regulatory challenges concerning the Milepost 7 tailings basin project, which could impact their operations and costs.
• **Regulatory Authorities (DNR, SEC)**: The DNR is tasked with a new determination on the EIS for the Milepost 7 project. The SEC receives filings from Mesabi Trust, which relies on information from Cliffs/Northshore.

Next Steps

• Mesabi Trust will pursue damages and declaratory relief in the new arbitration against Northshore and Cliffs regarding idling operations and underpayment of royalties.
• The Minnesota Department of Natural Resources (DNR) must make a new determination on whether an Environmental Impact Statement (EIS) is required for Northshore's Milepost 7 tailings basin project.
• The WaterLegacy lawsuit against DNR and Northshore regarding the Milepost 7 tailings basin project is proceeding, with trial set for September 2027.
• Cliffs and POSCO are expected to make a formal announcement on a definitive agreement in Q4 2025 or Q1 2026, with closing expected in 2026.
• Cliffs' underwritten public offering was expected to close on October 31, 2025.
• Trustees will continue to monitor economic and other circumstances to balance distributions and maintain adequate reserves.

Key Dates

Recommendation

The filing reveals a substantial decline in royalty income and net income, primarily due to lower iron ore pricing, reduced shipments, and the absence of a significant arbitration award from the prior year. The decrease in distributions per unit further reflects this downturn. The initiation of a new arbitration against Cliffs/Northshore, coupled with ongoing legal and environmental challenges related to the Milepost 7 tailings basin, introduces significant operational and financial uncertainty. While Cliffs' broader strategic moves are positive for the industry, their direct benefit to Mesabi Trust is indirect and overshadowed by the immediate negative financial performance and disputes over royalty calculations. Given the unpredictable nature of the Trust's income, its dependence on Cliffs' operational decisions, and the current negative trends, a seasoned investor would likely consider selling to mitigate exposure to these risks and declining returns.

Keywords

Mesabi Trust, MSB, Royalty income, Iron ore, Mining, SEC filing, 10-Q, Financial results, Distributions, Northshore Mining Company, Cleveland-Cliffs, Arbitration, Legal proceedings, Mineral royalties, Trust, Quarterly report