10-Q: Mesabi Trust Reports Q2 Royalty Income Decline Amid Production Cuts

Mesabi Trust reported a significant decrease in royalty income and net income for the quarter and six months ended July 31, 2025, primarily due to lower iron ore shipments, pricing, and an extended maintenance shutdown at Northshore.

Summary

• Royalty income for the three months ended July 31, 2025, decreased by $837,815 to $5,416,904, a 13.4% decline compared to the same period in 2024.
• Net income for the three months ended July 31, 2025, was $4,743,882, a decrease of $654,012 or 12.1% from $5,397,894 in the prior year.
• Net income per unit for the quarter decreased to $0.3616 from $0.4114 in the comparable prior year period.
• Distributions declared per unit for the quarter ended July 31, 2025, were $0.12, a 60% reduction from $0.30 per unit declared in the same quarter of 2024.
• Pellet production and shipments from Trust Lands for the three months ended July 31, 2025, totaled 943,955 tons, down from 974,532 tons in 2024.
• For the six months ended July 31, 2025, total royalty income decreased by $2,498,950 to $9,766,376, a 20.4% decline from $12,265,326 in 2024.
• Net income for the six months ended July 31, 2025, was $8,375,091, a decrease of $506,587 or 5.7% from $8,881,678 in the prior year.
• Pellet production and shipments for the six months ended July 31, 2025, totaled 1,581,141 tons, a 19.0% decrease from 1,953,030 tons in 2024.
• The decrease in royalty income is attributed to lower demand, reduced pricing, and an extended maintenance shutdown at Northshore in February 2025.
• Expenses for the six months ended July 31, 2025, decreased by $1,892,596 to $1,966,206, primarily due to lower legal fees following the conclusion of active arbitration.

Sentiment

Score: 3

Explanation: The sentiment is negative due to significant declines in key financial metrics (royalty income, net income, distributions) for the quarter and six-month periods. Operational challenges, including an extended maintenance shutdown and reduced shipments, coupled with ongoing legal uncertainties regarding the Milepost 7 tailings basin project and a decreased bonus royalty rate, indicate a challenging environment for the Trust. While expenses decreased, this was largely due to the conclusion of prior arbitration, not improved operational efficiency.

Positives

• Expenses decreased significantly by $229,142 (21.0%) for the three months and $1,892,596 (49.0%) for the six months ended July 31, 2025, primarily due to lower legal fees after the conclusion of arbitration.
• The Unallocated Reserve increased by 3.0% to $22,781,200 as of July 31, 2025, compared to July 31, 2024, partly due to an increase in unallocated cash and cash equivalents.
• The Minnesota Supreme Court denied WaterLegacy's motion to stay Northshore's construction of the Milepost 7 tailings basin project, allowing construction to proceed pending litigation resolution.

Negatives

• Royalty income, total revenues, net income, and net income per unit all decreased for both the three and six-month periods ended July 31, 2025, compared to the prior year.
• Quarterly distributions declared per unit decreased by 60% from $0.30 to $0.12.
• Iron ore pellet production and shipments from Trust Lands decreased by 3.1% for the three months and 19.0% for the six months ended July 31, 2025.
• The bonus royalty rate decreased starting July 1, 2025, due to a reduction in the highest contract price obtained by Northshore in arms-length sales.
• Northshore experienced an extended maintenance shutdown in February 2025, impacting production and shipments for the six-month period.

Risks

• Volatility of iron ore and steel prices, market supply and demand, and competition.
• Environmental hazards, health and safety conditions, regulation or government action, and litigation.
• Uncertainties about estimates of reserves and general adverse business and industry economic trends.
• Higher or lower customer demand for steel and iron ore, and 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, and consolidation and restructuring in the domestic steel market.
• Market inputs tied to indexed price adjustment factors in Cliffs customer contracts can result in future positive or negative adjustments to royalties payable.
• Future negative price adjustments could partially or even completely offset royalties or royalty income, potentially reducing cash available for distribution.
• Uncertainty in royalty calculation due to Northshore's increased proportion of sales to Cliffs corporate affiliates and decreased arms-length sales to third parties, potentially leading to disputes.
• The Trustees have no control over the operations and activities of Northshore, including mining decisions, production volumes, marketing, and capital expenditures.
• Ongoing litigation regarding the Milepost 7 tailings basin project could impact mining, production, and shipments of iron ore products from Northshore or future royalties.

Future Outlook

Cliffs has indicated plans to limit third-party sales of iron ore pellets from its mines, particularly Northshore, which will continue to operate as a 'swing operation.' Northshore was idled from May 2022 to April 2023, and Cliffs does not expect to operate it in full during the current year (as of an April 25, 2023 announcement). Future distributions are highly dependent on royalty income received and Trust expenses, with production and shipping activity expected to be greatly reduced during winter months. The Trustees are unable to predict the impact of ongoing litigation regarding the Milepost 7 tailings basin project on mining, production, shipments, or future royalties. There is a possibility that future negative price adjustments could offset or eliminate future royalties, reducing cash available for distributions.

Management Comments

• "According to Cliffs quarterly royalty reports, beginning with the third calendar quarter of 2025, the highest contract price obtained by Northshore in the preceding four calendar quarters in a sale to a buyer not affiliated with Northshore and made on an arms-length basis decreased, resulting in a lower bonus royalty rate for the Trust beginning July 1, 2025."
• "The Trust is continuing to evaluate whether such transactions meet the requirements of the Royalty Agreement."
• "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 under the Royalty Agreement, which could in turn result in potential disputes regarding the amount of royalties owed to the Trust."
• "The Trustees are unable to predict what impact, if any, the Minnesota Court of Appeals decision to reverse and remand the DNR order 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 or potential temporary injunction 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."

Industry Context

The iron ore and steel industry faces volatility in prices, supply, and demand. Mesabi Trust's revenue is highly dependent on the operations of Northshore Mining Company, a subsidiary of Cleveland-Cliffs Inc. Cliffs' strategy to limit third-party sales and operate Northshore as a 'swing operation' directly impacts the Trust's royalty income, as it reduces the number of arms-length transactions used for royalty calculation and introduces uncertainty. The broader economic conditions, customer demand for steel, and decisions by mine operators regarding production levels significantly influence the Trust's financial performance.

Corporate Governance

Legal Proceedings

• The Minnesota Court of Appeals reversed the Minnesota Department of Natural Resources (DNR) decision that Northshore's proposed Milepost 7 tailings basin project did not require an Environmental Impact Statement (EIS), remanding the case to the DNR for a new determination.
• The Minnesota Supreme Court denied petitions from both the DNR and Northshore to review the Court of Appeals decision, leaving the reversal and remand in place. It also denied WaterLegacy's motion to stay construction.
• WaterLegacy filed a civil complaint in the Second Judicial District, Ramsey County, Minnesota, seeking injunctive and declaratory relief against the DNR and Northshore regarding the Milepost 7 tailings basin project, specifically asking the court to prohibit approvals/construction prior to EIS completion and to declare dam enlargement violates permitting standards.
• WaterLegacy's motion for a temporary injunction to halt construction and development activities related to the Milepost 7 project was denied by the court on September 4, 2025.

Related Party Transactions

• Northshore 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 in arms-length transactions.
• The calculation of royalties on iron ore Northshore ships to Cliffs affiliates could be uncertain under the Royalty Agreement without consistent arms-length sales to third parties, potentially leading to disputes regarding the amount of royalties owed to the Trust.
• Cliffs' quarterly royalty report used the highest price from low volume third-party transactions to set the price for royalty purposes for subsequent shipments intended for Cliffs affiliates' internal consumption, which decreased the bonus royalty rate for the Trust beginning July 1, 2025.

Stakeholder Impact

• Shareholders (Unitholders) will experience significantly reduced distributions, with the quarterly distribution decreasing by 60%, and face potential further reductions due to declining royalty income and operational uncertainties.
• Northshore Mining Company and its parent, Cliffs, face ongoing legal challenges and regulatory scrutiny regarding the Milepost 7 tailings basin project, which could lead to operational delays or increased compliance costs.
• The local economy could suffer significant economic harm if Northshore's iron ore pellet manufacturing operations are forced to cease due to litigation or operational constraints related to the tailings basin.
• The Trust's dependence on Cliffs/Northshore's operational decisions and sales strategies directly impacts its ability to generate royalty income and distribute funds to Unitholders.

Next Steps

• 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 Trustees will continue to evaluate whether Northshore's transactions, particularly those with Cliffs affiliates, meet the requirements of the Royalty Agreement to ensure accurate royalty calculations.
• The Trustees will continue to monitor the economic and operational circumstances of the Trust to balance distributions to Unitholders with the need to maintain adequate reserves, given the unpredictable nature of the iron ore and steel industry and the Trust's dependence on Cliffs/Northshore's actions.

Key Dates

Recommendation

The Trust's financial performance for the quarter and six months ended July 31, 2025, shows significant declines in royalty income, net income, and distributions per unit. Operational challenges, including an extended maintenance shutdown and reduced shipments, coupled with a decreased bonus royalty rate and ongoing litigation regarding the Milepost 7 tailings basin project, present considerable headwinds. While expenses have decreased due to the conclusion of prior arbitration, the core revenue-generating activities are under pressure. The Trust's unique structure as a pass-through royalty trust means it has no control over mining operations, making it highly dependent on Cliffs/Northshore's decisions. Given the current negative trends and uncertainties, a 'hold' recommendation is appropriate for existing investors who may value the long-term royalty stream, but new investment is not advisable due to the lack of positive catalysts and significant downside risks.

Keywords

Mesabi Trust, MSB, Royalty income, Iron ore, Pellets, Northshore Mining Company, Cleveland-Cliffs Inc., SEC filing, 10-Q, Mining royalties, Distributions, Financial results, Legal proceedings, Environmental impact statement, Tailings basin, Minnesota DNR