10-K: Mesabi Trust Reports Increased Net Income and Declares Higher Distributions for Fiscal Year 2025

Mesabi Trust's fiscal year 2025 saw a significant increase in net income, driven by an arbitration award and higher royalty income, leading to substantially increased distributions to unitholders.

Summary

• Mesabi Trust's net income for fiscal year 2025 increased by 391.3% compared to fiscal year 2024, primarily due to a $71.2 million arbitration award and higher royalty income.
• Total royalty income increased by 15.2% due to a 20.2% increase in iron ore pellet production and shipments from Mesabi Trust lands.
• Base royalties increased by 27.3%, bonus royalties increased by 4.2%, and fee royalties decreased by 22.7%.
• Total distributions declared to unitholders increased by 862.5% to $6.93 per unit.
• The Unallocated Reserve increased by 11.2% to $23.3 million, including $22.1 million in unallocated cash and cash equivalents.
• The minimum advance royalty was $1,129,615 for calendar year 2024 and is $1,157,261 for calendar year 2025.
• The Adjusted Threshold Price for royalty bonuses was $67.75 per ton for calendar year 2024 and is $69.41 per ton for calendar year 2025.

Sentiment

Score: 7

Explanation: The sentiment is moderately positive due to the significant increase in net income and distributions. However, concerns remain regarding the Trust's reliance on Cliffs and Northshore, as well as potential risks in the iron ore market.

Positives

• Significant increase in net income and distributions to unitholders.
• Growth in iron ore pellet production and shipments from Mesabi Trust lands.
• Increase in the Unallocated Reserve, providing financial flexibility.
• Successful resolution of the arbitration with Cliffs and Northshore, resulting in a substantial payment to the Trust.
• The court issued a decision and order confirming the award on March 7, 2025.

Negatives

• Fee royalties decreased by 22.7% compared to the previous year.
• The Trust is heavily reliant on the operations and decisions of Cliffs and Northshore.
• The Trust is subject to potential disputes regarding the amount of royalties owed.
• The Trust is uninsured, and cannot obtain insurance, for losses and interruptions caused by any of these types of events.

Risks

• The Trust's royalty income is highly dependent on the activities and operational decisions of Cliffs and Northshore.
• The limited or lack of arms-length third-party sales of iron ore products by Cliffs could lead to uncertainty in royalty calculations.
• Global steelmaking overcapacity and overproduction could lead to lower or more volatile steel and iron ore prices.
• Equipment failures and other unexpected events at Northshore may lead to production curtailments or shutdowns.
• The mining operations of Northshore are subject to extensive governmental regulations and environmental compliance risks.
• The Trust does not control the portion of Northshore's shipments that will come from iron ore mined from Mesabi Trust Lands.
• The Trust relies on Cliffs' estimates of recoverable reserves, and if those estimates are inaccurate, the total potential future royalty stream to the Trust may be affected.
• The Trust is subject to the continued listing criteria of the NYSE, and failure to satisfy these criteria may result in delisting of the Units.
• The Trust faces risks from cybersecurity threats that could have a material adverse effect on its financial condition, financial record keeping, investment management, reporting, results of operations, cash flows or reputation.

Future Outlook

Future distributions are expected to be highly dependent upon royalty payments received quarterly and the level of Trust expenses. 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.

Management Comments

• Lourenco Goncalves, Chairman, President, Chief Executive Officer of Cliffs, disclosed we will soon be shifting our DR-grade pellet production away from Northshore and into Minorca, where we will not have to deal with the unreasonable royalty structure at Northshore.
• Mr. Goncalves also indicated that As we plan to no longer sell pellets to third parties in the coming years, Northshore will become a swing operation, which we will keep idle every time we decided to do so.
• During Cliffs February 11, 2022 earnings call, Mr. Goncalves also said that, Going forward, [ Cliffs] will be limiting the tonnage of iron ore pellets we sell to third parties.
• During Cliffs earnings conference call on April 24, 2023, Mr. Goncalves announced: Our higher levels of steel production have led to the partial restart of some operations at our iron ore mining and pelletizing swing facility at Northshore earlier this month.

Industry Context

The announcement reflects the cyclical nature of the iron ore and steel industries, with Mesabi Trust's performance closely tied to the production and pricing decisions of Cleveland-Cliffs and Northshore Mining. The shift in DR-grade pellet production and the idling of Northshore operations highlight the challenges faced by royalty trusts in an environment of changing market dynamics and operational strategies.

Comparison to Industry Standards

• It is difficult to compare Mesabi Trust directly to other companies due to its unique structure as a royalty trust.
• However, the Trust's performance can be benchmarked against other royalty trusts in the natural resources sector, such as those focused on oil and gas or coal.
• Compared to diversified mining companies like BHP or Rio Tinto, Mesabi Trust lacks the operational control and diversification to mitigate risks associated with a single asset and operator.
• The Trust's reliance on Cliffs' operational decisions and market conditions makes it more vulnerable to fluctuations in royalty income compared to companies with more diversified revenue streams.

Legal Proceedings

• The Trust received the final award from the AAA tribunal on September 6, 2024, which unanimously awarded the Trust damages in the amount of $59,799,977 for underpaid royalties in 2020, 2021 and the first four months of 2022, plus pre-award interest in the amount of $11,288,269.
• The court issued a decision and order confirming the award on March 7, 2025.
• On February 3, 2025, the Minnesota Court of Appeals reversed the DNRs decision that an EIS was not needed, concluding it was arbitrary and capricious and in error.
• On March 5, 2025, both the DNR and Northshore petitioned the Minnesota Supreme Court to review the Court of Appeals decision.

Stakeholder Impact

• Unitholders will benefit from the increased distributions.
• The Trust's performance is closely tied to the operations of Cliffs and Northshore, impacting their employees and the local economy.
• The outcome of the Minnesota litigation regarding the Milepost 7 tailings basin could affect Northshore's operations and the environment.

Next Steps

• The Trustees will continue to monitor the economic circumstances of the Trust.
• The Trustees will continue to evaluate the transactions to evaluate whether such transactions meet the requirements of the Royalty Agreement.
• The Minnesota Supreme Court has not yet ruled on the petition for review or the motion to stay.

Key Dates

Keywords

Mesabi Trust, iron ore, royalties, Northshore Mining, Cleveland-Cliffs, distributions, arbitration, unitholders, production, shipments