Blog: MESABI TRUST : Results of Operations and Financial Condition, Regulation FD Disclosure (form 8-K) –

Item 2.02Results of Operations and Financial Condition.

Announcement of Receipt of Quarterly Royalty Report and Royalty Payment

On July 29, 2022, Mesabi Trust received the quarterly royalty report of iron ore
shipments out of Silver Bay, Minnesota during the quarter ended June 30, 2022
(the “Royalty Report”) from Cleveland-Cliffs Inc. (“Cliffs”), the parent company
of Northshore Mining Company (“Northshore”), and the Trust received a royalty
payment, as summarized below.

Item 7.01Regulation FD.

Quarterly Royalty Report and Royalty Payment

As reported to Mesabi Trust by Cliffs in the Royalty Report, based on shipments
of iron ore products by Northshore during the three months ended June 30, 2022,
Mesabi Trust was credited with a base royalty of $1,222,786. For the three
months ended June 30, 2022, Mesabi Trust was also credited with a bonus royalty
in the amount of $1,048,102. No adjustments were taken by Cliffs for the
quarter. In addition, a royalty payment of $44,106 was paid to the Mesabi Land
Trust. Accordingly, the total royalty payments received by Mesabi Trust on July
29, 2022 from Cliffs were $2,314,994.

The royalties paid to Mesabi Trust are based on the volume of iron ore pellets
produced or shipped during 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 second calendar
quarter of 2022, Cliffs credited Mesabi Trust with 198,495 tons of iron ore
shipped, as compared to 1,393,902 tons shipped during the second calendar
quarter of 2021.

The volume of iron ore pellets (and other iron ore products) produced and
shipped 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, production schedules,
Cliffs’ decisions to idle Northshore operations and weather conditions on the
Great Lakes. Further, the prices of some iron ore products sold under some of
the contracts among Northshore, Cliffs and certain of their customers, 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 include changes in the Platts Prices,
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. Based on the above factors, and as indicated by Mesabi
Trust’s historical distribution payments, the royalties received by Mesabi
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.

In the Cliffs’ Royalty Report, Cliffs stated that the reported royalty payments
were based on estimated iron ore pellet prices that 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.

Cliffs’ Announced Plan to extend Idling of all Operations at Northshore Mining
Company until at least April 2023

As previously announced, on July 22, 2022, Cliffs held a conference call to
discuss Cliffs’ second-quarter 2022 earnings. During the call, Lourenco
Goncalves, Chairman, President, and Chief Executive Officer of Cliffs, disclosed
“… we are now extending the ongoing idle at our Northshore swing facility to at
least April of next year. With the increased use of scrap company-wide in our
steel making operations made possible by the acquisition of FPT last year, the
pellets from Northshore are not needed at this time. Rather than deplete this
finite resource for the benefit of the Mesabi Trust and its so-called unit
holders, we will keep Northshore idle until we decide otherwise.”

Cliffs’ announcement during its July 22, 2022 earnings call follows comments
made by Cliffs’ CEO on October 22, 2021, about its plans to shift DR-grade
pellet production away from Northshore and into Minorca, making Northshore a
swing operation and idling the Northshore operations from time to time, and on
February 11, 2022 to idle all production at the Northshore mine, starting in the
spring, carrying through at least to the fall period, and maybe beyond. Cliffs
had not previously notified Mesabi Trust of any of the aforementioned
operational changes. Further, Cliffs has not recently requested any changes to
the royalty structure, which is governed by a 1989 royalty agreement, and Cliffs
has historically failed to engage in meaningful negotiations requested by Mesabi
Trust to address the interpretations of the royalty structure. Finally, since
Cliffs’ announcements that began in October 2021, Mesabi Trust has not received
requests from Cliffs or any other party to discuss renegotiation of the 1989
royalty agreement.

As previously disclosed by Mesabi Trust, Cliffs’ current idling of Northshore
operations, and the announced extended idling through at least April 2023, will
result in a reduction to the Trust’s royalty income which, in turn, will reduce
funds available for cash distribution to Unitholders.

Mesabi Trust notes that the existing 1989 royalty agreement was bargained for
and agreed to by Mesabi and Cyprus Northshore (predecessor to Northshore Mining
Company), and then approved by Mesabi Trust unitholders, to facilitate the
resumption of operations following the three-year idling due to the bankruptcy
of Reserve Mining. The existing royalty structure provided Cyprus Northshore
with the benefit of lower royalty payments at start-up, and when market
conditions were poor and unfavorable, and in return it allowed Mesabi Trust the
opportunity to receive higher royalty payments when market conditions were

Mesabi Trust notes that any change to the existing royalty structure would
require an amendment to the royalty agreement, which would require the approval
of the Trustees as well as approval of 66 2/3% in interest of the Trust
Certificate Holders.

The Trustees of Mesabi Trust also wish to clarify that with respect to
royalties, the royalty agreement also provides that regardless of whether any
production or shipment of iron ore pellets has occurred, Northshore is obligated
to pay 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 $964,659 for calendar
year 2020, was $976,765 for calendar year 2021 and is $1,034,237 for calendar
year 2022. 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
pre-payments of base overriding royalty and royalty bonuses (if any) earned
during the year 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.

Forward-looking Statements

This report contains certain forward-looking statements based on Cliffs’
publicly announced plans with respect to DR-grade pellet production, third party
sales, and use of Northshore in the future, which statements are intended to be
made under the safe harbor protections of the Private Securities Litigation
Reform Act of 1995, as amended. Cliffs’ implementation of, or changes to, these
plans are beyond Mesabi Trust’s control. As such, such statements are subject to
risks and uncertainties, which could cause actual results to differ materially.
Additional information concerning these and other risks and uncertainties is
contained in Mesabi Trust’s filings with the Securities and Exchange Commission,
including its Annual Report on Form 10-K for the fiscal year ended January 31,
2022 (filed April 27, 2022) and Quarterly Report on Form 10-Q for the quarter
ended April 30, 2022 (filed June 13, 2022). Mesabi Trust undertakes no
obligation to publicly update or revise any of the forward-looking statements
made herein to reflect events or circumstances after the date hereof.

In accordance with general instruction B.2 to Form 8-K, the information in this
Form 8-K shall not be deemed to be “filed” for purposes of Section 18 of the
Securities Exchange Act of 1934, as amended, or otherwise subject to the
liabilities of that section.

© Edgar Online, source Glimpses

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