UNITED STATES

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)


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

For the quarterly period ended October 31, 2021


☐	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

incorporation or organization)

(I.R.S. Employer Identification No.)

c/o Deutsche Bank Trust Company Americas

Trust & Agency Services

1 Columbus Circle, 17th Floor

Mail Stop: NYC01-1710

New York, New York

10019

(Address of principal executive offices)

(Zip Code)

(904) 271-2520

(Registrant’s telephone number, including area code)

Not applicable

(Former name, former address and former fiscal year, if changed since last report)

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, no par value	MSB	New York Stock Exchange

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 the 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 Exchange Act). Yes ☐ No ☒

As of December 10, 2021, there were 13,120,010 Units of Beneficial Interest in Mesabi Trust outstanding.

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TABLE OF CONTENTS

	Page

PART I – FINANCIAL INFORMATION	3
Item 1. Financial Statements. (Note 1)	3
Condensed Statements of Operations Three and Nine Months Ended October 31, 2021 and 2020	3
Condensed Balance Sheets October 31, 2021 and January 31, 2021	4
Condensed Statements of Cash Flows Nine Months Ended October 31, 2021 and 2020	5
Notes to Condensed Financial Statements	6
Item 2. Trustees’ Discussion and Analysis of Financial Condition and Results of Operations.	10
Item 3. Quantitative and Qualitative Disclosures About Market Risk.	18
Item 4. Controls and Procedures.	18

PART II - OTHER INFORMATION	19
Item 1. Legal Proceedings	19
Item 1A. Risk Factors	19
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	20
Item 3. Defaults upon Senior Securities	21
Item 4. Mine Safety Disclosures	21
Item 5. Other Information	21
Item 6. Exhibits.	22

SIGNATURES	23

Forward-Looking Statements

Certain information included in this Quarterly Report on Form 10-Q contains, or incorporates by reference, not only historical information, but also “forward-looking statements” within the meaning of Section 21E of the Securities Exchange Act of 1934. All such forward-looking statements, including those statements regarding estimation of iron ore pellet production, shipments, pricing, royalties and other matters, are based on information 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 (“Mesabi Trust” or the “Trust”). These statements may be identified by the use of forward-looking words, such as “may,” “will,” “could,” “project,” “predict,” “intend,” “believe,” “anticipate,” “expect,” “estimate,” “continue,” “potential,” “plan,” “should,” “assume,” “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. These risks and uncertainties include, but are not limited to, volatility of iron ore and steel prices, market supply and demand, competition, environmental hazards, health and safety conditions, regulation or government action, 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 regarding curtailments or idling production lines or entire plants, environmental compliance uncertainties, 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 found in Cliffs’ Customer Contracts (as defined below) resulting in future adjustments to royalties payable to Mesabi Trust, the impact of the recent coronavirus (COVID-19) pandemic and other factors. Further, substantial portions of royalties earned by Mesabi Trust are based on estimated prices that are subject to interim and final adjustments, which can be positive or negative, and are dependent in part on multiple price and inflation index factors under agreements to which Mesabi Trust is not a party and that are not known until after the end of a contract year. It is possible that future negative price adjustments could partially or even completely offset 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 (as defined below) in future quarters.

For a discussion of the factors, including without limitation, those that could materially and adversely affect Mesabi Trust’s actual results and performance, see “Risk Factors” set forth on pages 3 through 14 of Mesabi Trust’s Annual Report for the year ended January 31, 2021 (filed April 27, 2021), as updated by Part II, Item 1A of this Quarterly Report on Form 10-Q. These risks and uncertainties are not exclusive and further information concerning the Trust, including factors that potentially could materially affect our operating results, financial condition or the market price of the Units, may emerge from time to time. Mesabi Trust undertakes no obligation, other than that imposed by law, 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. We advise you, however, to consult any further disclosures we make on related subjects in our future Quarterly Reports on Form 10-Q, Annual Reports on Form 10-K and Current Reports on Form 8-K that we file with or furnish to the Securities and Exchange Commission.

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PART I – FINANCIAL INFORMATION

Item 1. Financial Statements. (Note 1)

Mesabi Trust

Condensed Statements of Operations

Three and Nine Months Ended October 31, 2021 and 2020


	Three Months Ended				Nine Months Ended
	October 31,				October 31,
	2021		2020		2021		2020
	(unaudited)		(unaudited)		(unaudited)		(unaudited)
A. Condensed Statements of Operations

Revenues
Royalty income	$	15,836,180	$	5,736,151	$	52,982,383	$	15,090,006
Interest		522,027		1,104		522,690		34,397

Total revenues		16,358,207		5,737,255		53,505,073		15,124,403

Expenses		365,301		610,856		2,182,267		1,710,380

Net income	$	15,992,906	$	5,126,399	$	51,322,806	$	13,414,023

WEIGHTED AVERAGE NUMBER OF UNITS OUTSTANDING
Number of units outstanding		13,120,010		13,120,010		13,120,010		13,120,010

Net income per unit (Note 2)	$	1.2190	$	0.3907	$	3.9118	$	1.0224

Distributions declared per unit (Note 3)	$	1.4200	$	0.3600	$	2.4000	$	0.9700

See Notes to Condensed Financial Statements.

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Mesabi Trust

Condensed Balance Sheets

October 31, 2021 and January 31, 2021


	October 31, 2021		January 31, 2021
	(unaudited)
B. Condensed Balance Sheets

Assets

Cash and cash equivalents	$	45,859,961	$	12,500,941

U.S. Government securities, at amortized cost (which approximates fair value)		—		9,906,669

Accrued income receivable		8,491,074		249,477
Contract asset		551,370		177,251
Prepaid expenses		202,522		94,585
Current assets		55,104,927		22,928,923

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	$	55,104,930	$	22,928,926

Liabilities, Unallocated Reserve And Trust Corpus

Liabilities
Distribution payable	$	18,630,414	$	6,035,205
Accrued expenses		162,685		416,672
Total liabilities		18,793,099		6,451,877

Unallocated reserve		36,311,828		16,477,046

Trust corpus		3		3

Total liabilities, unallocated reserve and trust corpus	$	55,104,930	$	22,928,926

See Notes to Condensed Financial Statements.

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Mesabi Trust

Condensed Statements of Cash Flows

Nine Months Ended October 31, 2021 and 2020


	Nine Months Ended
	October 31,
	2021		2020
		(unaudited)		(unaudited)
C. Condensed Statements of Cash Flows

Operating activities
Royalties received	$	44,366,652	$	10,724,507
Interest received		522,705		38,297
Expenses paid		(2,544,191)		(1,683,487)

Net cash from operating activities		42,345,166		9,079,317

Investing activities
Maturities of U.S. Government securities		50,942,392		55,381,743
Sales of U.S. Government securities		—		236,992
Purchases of U.S. Government securities		(41,035,723)		(51,574,900)

Net cash from investing activities		9,906,669		4,043,835

Financing activity
Distributions to unitholders		(18,892,815)		(17,187,214)

Net change in cash and cash equivalents		33,359,020		(4,064,062)

Cash and cash equivalents, beginning of period		12,500,941		10,177,655

Cash and cash equivalents, end of period	$	45,859,961	$	6,113,593

Reconciliation of net income to net cash from operating activities

Net income	$	51,322,806	$	13,414,023
Increase in accrued income receivable		(8,241,597)		(1,113,742)
Increase in contract asset		(374,119)		(736,137)
Increase in prepaid expense		(107,937)		(91,217)
Increase (decrease) in accrued expenses		(253,987)		118,110
Decrease in contract liability		—		(2,511,720)

Net cash from operating activities	$	42,345,166	$	9,079,317

Non cash financing activity

Distributions declared and payable	$	18,630,414	$	4,723,204

See Notes to Condensed Financial Statements.

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Mesabi Trust

Notes to Condensed Financial Statements

October 31, 2021 (Unaudited)

Note 1. The financial statements and notes to financial statements included herein have been prepared in accordance with the instructions to Form 10-Q pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted pursuant to such rules and regulations. In the opinion of the Trustees, all adjustments, consisting only of normal recurring adjustments, necessary for a fair statement of (a) the results of operations for the three and nine months ended October 31, 2021 and 2020, (b) the financial position at October 31, 2021 and (c) the cash flows for the nine months ended October 31, 2021 and 2020, have been made. For further information, refer to the financial statements and footnotes included in Mesabi Trust’s Annual Report on Form 10-K for the year ended January 31, 2021.

The Trust’s royalties have been, and may in the future be, adversely affected by the coronavirus (COVID-19) pandemic. During the second quarter of 2020, the spread of COVID-19 led to the disruption of the business operations of Cleveland-Cliffs Inc. (“Cliffs”) and its wholly-owned subsidiary, Northshore Mining Company (“Northshore”), upon which we are dependent for our royalties. Although steel and iron ore production have been considered “essential” by the states in which Cliffs operates, certain of its facilities and construction activities were temporarily idled during the second quarter of 2020. Nearly all of these temporarily idled facilities were restarted as of June 30, 2020, with the exception of the Dearborn hot-end operations and Mansfield operations, which were restarted in July 2020, and the Northshore mine, which was restarted in August 2020. In its most recent quarterly report on Form 10-Q (filed October 26, 2021), Cliffs disclosed that the fundamentals for its business have rebounded strongly since the COVID-19 disruption that occurred during 2020. Mesabi Trust cannot predict whether Northshore’s operations will experience additional disruptions in the future, or whether Cliffs will experience supply chain disruptions or operational issues with its vendors, suppliers and contractors if faced with similar pandemic challenges in the future.

On December 9, 2019, Mesabi Trust initiated arbitration against Northshore, the lessee/operator of the leased lands, and its parent, Cliffs. The arbitration proceeding was commenced with the American Arbitration Association. The Trust asserted claims concerning the calculation of royalties related to the production, shipment and sale of iron ore, including DR-grade pellets. During 2020, the parties appointed a three-member arbitration panel and engaged in discovery. The arbitration hearing took place in May 2021. Post-hearing briefs and oral arguments were presented in July 2021. The arbitration was completed before a panel of three arbitrators in July 2021 under the commercial rules of the AAA. The Trust received the final award on October 1, 2021, which awarded the Trust damages in the amount of $2,312,106 for the resolution of royalties on DR grade pellets in 2019 and 2020 and interest in the amount of $430,710, calculated through June 30, 2021, and continuing to accrue until paid. Total interest paid by Cliffs was $521,581. Pursuant to the award, Cliffs paid the damages award to the Trust on October 29, 2021. The Tribunal granted the Trust’s request for a declaration that “for purposes of calculating royalties on intercompany sales, Northshore shall reference all third-party pellet sales, regardless of grade, and select the highest price arm’s length pellet sale from the preceding four quarters.”

Note 2. Net income per unit is based on 13,120,010 units outstanding during the period.

The Trust accounts for revenue in accordance with ASC 606, Revenue from Contracts with Customers. All revenue is recognized as the performance obligations are satisfied. In accordance with its agreement, the Trust recognizes revenue upon providing access to the lands and minerals only after the consideration that is entitled to be received is determinable. Prior to the arbitration outcome, the Trust was not entitled to consideration for base and bonus royalties until product was shipped from Northshore. After the outcome of the arbitration and consistent with Cliffs’ payment and pricing practices, the Trust is entitled to payment upon production of pellets to be sold for internal use by facilities owned by Cliffs or its subsidiaries. As a result, the Trust recognizes revenue for internal use pellets upon production of those pellets, which are deemed to be shipped under the royalty agreement, regardless of pellet grade. Pellets that are not designated for internal use by Cliffs, or its subsidiaries, continues to be recognized as revenue upon shipment from Silver Bay, Minnesota.

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Disaggregation of Revenues

The following tables represent a disaggregation of revenue for the three and nine months ended October 31, 2021 and October 31, 2020.


	Three Months Ended October 31,
	2021		2020
Base overriding royalties	$	9,644,501	$	3,142,465
Bonus royalties		5,981,907		2,448,652
Fee royalties		209,772		145,034
Total royalty income	$	15,836,180	$	5,736,151


	Nine Months Ended October 31,
	2021		2020
Base overriding royalties	$	31,929,119	$	8,499,261
Bonus royalties		20,465,070		6,271,940
Fee royalties		588,194		318,805
Total royalty income	$	52,982,383	$	15,090,006

Base overriding royalties

The performance obligation for the base overriding royalty consists of providing 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 relates to the volume of iron ore actually shipped to third parties, or deemed shipped upon production for internal use, by Northshore. Pellets designated for internal use by Cliffs are “deemed shipped” upon production, which is when the Trust is entitled to payment under the provisions of the royalty agreement. Mesabi Trust receives royalties at the greater of (i) the aggregate quantity of iron ore products shipped, or deemed shipped, that were mined from Mesabi Trust Lands, and (ii) a portion of the aggregate quantity of all iron ore products shipped, or deemed shipped, that were mined from any lands, such portion being 90% of the first four million tons shipped, or deemed shipped, during such year, 85% of the next two million tons shipped, or deemed shipped, during such year, and 25% of all tonnage shipped, or deemed 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, or deemed 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, or deemed shipped, for the calendar year. The Trust estimates the variable consideration it expects to be entitled to receive over the contractual period associated with the royalty agreement. Under the royalty agreement, measuring the total cumulative volumes of iron ore shipped, or deemed shipped, and the applicable royalty percentages, are reset 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 third party shipments and deemed shipments for internal use, for the fiscal quarter at the estimated royalty percentage as described above and based on the estimated prices for iron ore products sold under Cliffs’ Customer Contracts.

Bonus royalties

The performance obligation for the bonus royalties consists of providing Northshore 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 relates to the volume of iron ore shipped, or deemed shipped, by Northshore. The Trust recognizes bonus royalties on a quarterly basis based on the actual third party shipments and deemed shipments for internal use, of the fiscal quarter at the actual royalty percentage for those shipments and based on the anticipated prices for iron ore products sold under Cliffs’ Customer Contracts.

Arbitration award proceeds

As discussed in Note 1, the Trust was awarded damages in the amount of $2,312,106 for the resolution of royalties on DR grade pellets in 2019 and 2020 and interest in the amount of $430,710, calculated through June 30, 2021, and continuing to accrue until paid. On October 29, 2021 the Trust received total proceeds of $2,833,687 which included $2,312,106 for

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damages and $521,581 for interest through October 29, 2021. The arbitration award proceeds are included in the respective base and bonus royalties in the table above.

Fee royalties

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 is included in net income per unit. The Trust recorded $8,491,074 of accrued income receivable as reflected on the Condensed Balance Sheet as of October 31, 2021 (unaudited). As of January 31, 2021, the Trust recorded accrued income receivable of $249,477.

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 asset in the amount of $551,370 is reflected on the Condensed Balance Sheet as of October 31, 2021 (unaudited). The net contract asset is made up of a contract asset in the amount of $551,370 and a contract liability in the amount of $0. As of January 31, 2021 the Trust recorded a net contract asset of $177,251, made up of a contract asset in the amount of $239,132 and a contract liability in the amount of $61,881. The contract asset is based on the revenue recognized on the base overriding royalties, at the estimated prices for iron ore products sold under Cliffs’ Customer Contracts 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 based on an initial estimated price, or in certain instances, quarterly payment of minimum advance royalties. Upon the outcome of the arbitration in the third fiscal quarter, and consistent with Cliffs payment and pricing practices, the Trust is entitled to payment upon production of pellets to be sold for internal use by facilities owned by Cliffs or its subsidiaries, and no longer defers recognition of payments by Cliffs on pellets produced. The Trust recognized revenue on all tons of iron ore products that were recorded as a contract liability as of July 31, 2021 in the amount of $5,966,182. Revenue will be recognized in accordance with the Trust’s revenue recognition policy at the estimated prices for iron ore products sold under Cliffs’ Customer Contracts as actual third party shipments and deemed shipments for internal use, of these products are made.

Note 3. The Trustees determine whether to declare a distribution each year in April, July, October and January. The Trust’s financial statements are prepared on an accrual basis and present the Trust’s results of operations based on each of the Trust’s fiscal quarters, which end one month after the close of each calendar quarter. Because (i) distributions, if any, are declared by the Trustees based on, among other considerations, the amount of royalties actually paid to the Trust through the end of each calendar quarter prior to April, July, October and January of each year, the Trustees’ evaluation of known and projected Trust expenses in the current and future quarters, the then-current level of Unallocated Reserve and general economic conditions, and (ii) the Trust’s Net Income is calculated as of the end of each fiscal quarter, the distributions declared by the Trust are not equivalent to the Trust’s Net Income during the periods reported in this quarterly report on Form 10-Q.

Note 4. On October 8, 2021, the Trustees declared a distribution of $1.42 per Unit of Beneficial Interest payable on November 20, 2021 to Mesabi Trust Unitholders of record at the close of business on October 30, 2021.

On October 29, 2021, the Trustees received the quarterly royalty report of iron ore product during the calendar quarter ended September 30, 2021 from Cliffs, the parent company of Northshore.

Each quarter, as authorized by the Agreement of Trust dated July 18, 1961, as amended (the “Agreement of Trust”), the Trustees evaluate all relevant factors, including all costs, expenses, obligations, and present and future liabilities of the Trust (whether fixed or contingent) in determining the prudent level of unallocated reserve in light of the unpredictable nature of the iron ore industry and current economic conditions.

Pursuant to the Agreement of Trust, the Trustees make 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 3 for further information.

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As of October 31, 2021 and January 31, 2021, the unallocated cash and U.S. Government securities portion of the Trust’s Unallocated Reserve was comprised of the following components:


	October 31, 2021		January 31, 2021
Cash and U.S. Government securities	$	45,859,961	$	22,407,610
Distribution payable		(18,630,414)		(6,035,205)

Unallocated cash and U.S. Government securities	$	27,229,547	$	16,372,405

A reconciliation of the Trust’s Unallocated Reserve and Trust Corpus for the three and nine months ended October 31, 2021 and 2020 is as follows:


		Unallocated		Trust
		Reserve		Corpus		Total
Balances at January 31, 2021	$	16,477,046	$	3	$	16,477,049

Net income		51,322,806		—		51,322,806
Distributions declared - $2.4000 per unit		(31,488,024)		—		(31,488,024)

Balances at October 31, 2021	$	36,311,828	$	3	$	36,311,831


		Unallocated		Trust
		Reserve		Corpus		Total
Balances at July 31, 2021	$	38,949,336	$	3	$	38,949,339

Net income		15,992,906		—		15,992,906
Distributions declared - $1.4200 per unit		(18,630,414)		—		(18,630,414)

Balances at October 31, 2021	$	36,311,828	$	3	$	36,311,831


		Unallocated		Trust
		Reserve		Corpus		Total
Balances at January 31, 2020	$	11,831,014	$	3	$	11,831,017

Net income		13,414,023		—		13,414,023
Distributions declared - $0.9700 per unit		(12,726,411)		—		(12,726,411)

Balances at October 31, 2020	$	12,518,626	$	3	$	12,518,629


		Unallocated		Trust
		Reserve		Corpus		Total
Balances at July 31, 2020	$	12,115,431	$	3	$	12,115,434

Net income		5,126,399		—		5,126,399
Distributions declared - $0.3600 per unit		(4,723,204)		—		(4,723,204)

Balances at October 31, 2020	$	12,518,626	$	3	$	12,518,629

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Item 2. Trustees’ Discussion and Analysis of Financial Condition and Results of Operations.

This discussion should be read in conjunction with the condensed financial statements and notes presented in this Quarterly Report on Form 10-Q and the financial statements and notes in the last filed Annual Report on Form 10-K for the year ended January 31, 2021 for a full understanding of Mesabi Trust’s financial position and results of operations for the three and nine months ended October 31, 2021.

All references in this discussion and in this Quarterly Report on Form 10-Q to iron ore products "shipped" shall include iron ore products that are actually shipped from Silver Bay, Minnesota and/or deemed shipped as referenced by the parties to, and in accordance with, those certain Amended Assignment Agreements. Similarly, all references in this discussion and in this Quarterly Report on Form 10-Q to "shipments" shall include actual shipments and/or deemed shipments of iron ore products, as referenced by the parties to, and in accordance with, those certain Amended Assignment Agreements. After the outcome of the arbitration and consistent with Cliffs’ practices, the Trust is entitled to payment upon production of pellets to be sold for internal use by facilities owned by Cliffs or its subsidiaries. As a result, the Trust recognizes revenue for internal use pellets upon production of those pellets, which are deemed to be shipped under the royalty agreement, regardless of pellet grade. Pellets that are not designated for internal use by Cliffs, or its subsidiaries, continues to be recognized as revenue upon shipment from Silver Bay, Minnesota.

COVID-19 Update

Our royalties have been, and may in the future be, adversely affected by the coronavirus (COVID-19) pandemic. During the second quarter of 2020, the spread of COVID-19 led to the disruption of the business operations of Cliffs and its wholly-owned subsidiary, Northshore, upon which we are dependent for our royalties. Although steel and iron ore production have been considered “essential” by the states in which Cliffs operates, certain of its facilities and construction activities were temporarily idled during the second quarter of 2020. Nearly all of these temporarily idled facilities were restarted as of June 30, 2020, with the exception of the Dearborn hot-end operations and Mansfield operations, which were restarted in July 2020, and the Northshore mine, which was restarted in August 2020. In its most recent quarterly report on Form 10-Q (filed October 26, 2021), Cliffs disclosed that the fundamentals for its business have rebounded strongly since the COVID-19 disruption that occurred during 2020. Mesabi Trust cannot predict whether Northshore’s operations will experience additional disruptions in the future, or whether Cliffs will experience supply chain disruptions or operational issues with its vendors, suppliers and contractors if faced with similar pandemic challenges in the future.

Background

Mesabi Trust, formed pursuant to 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”).

The Agreement of Trust specifically prohibits the Trustees from entering into or engaging in any business. This prohibition applies even to business activities the Trustees may deem necessary or proper for the preservation and protection of the Trust Estate. 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 holders of Certificates of Beneficial Interest in Mesabi Trust (“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. Mesabi Trust has no employees, but it engages independent consultants to assist the Trustees in, among other things, monitoring the volume and sales prices of iron ore products shipped, based on information supplied to the Trustees by Northshore, the lessee/operator of the lands leased under the Peters Lease and Cloquet Lease (the “Peters Lease Lands” and “Cloquet Lease Lands,” respectively) 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, the “Mesabi Trust Lands”), and its parent company, Cliffs. References to Northshore in this quarterly report, unless the context requires otherwise, are applicable to Cliffs as well.

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.

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Three types of royalties, as well as royalty bonuses, comprise the Trust’s leasehold royalty income:

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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. 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 some of the contracts among Northshore, Cliffs and certain of their customers (the “Cliffs’ Customer Contracts”) and, as described elsewhere in this report, such adjustments may be positive or negative.

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Royalty bonuses. The Trust earns royalty bonuses when iron ore products shipped 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. 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 $57.85 per ton for calendar year 2020 and is $58.58 per ton for calendar year 2021. 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 Cliffs’ Customer Contracts and, as described elsewhere in this report, such adjustments may be positive or negative.

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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.

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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. 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 $964,659 for calendar year 2020 and is $976,765 for calendar year 2021. 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, 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 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. 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.

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 certain iron ore products sold under some of the Cliffs’ Customer Contracts. Some of the Cliffs’ Customer

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Contracts 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’ Customer Contracts, 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 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 may become available for distribution to Unitholders.

According to Cliffs’ recent SEC filings, certain of Cliffs’ supply agreements specify provisional price calculations, where the pricing mechanisms generally are based on market pricing, with the final revenue rate based on certain market inputs at a specified period in time in the future, per the terms of the supply agreements. Market inputs are tied to indexed price adjustment factors that are integral to the iron ore supply contracts and vary based on the agreement. The pricing mechanisms typically include adjustments based upon changes in the Platts 62% Price, Atlantic Basin pellet premiums and Platts international indexed freight rates. The pricing adjustments generally operate in the same manner, with each factor typically comprising a portion of the price adjustment, although the weighting of each factor varies based upon the specific terms of each agreement. The price adjustment factors have been evaluated to determine if they qualify as embedded derivatives. The price adjustment factors share the same economic characteristics and risks as the host sales contract and are integral to the host sales contract as inflation adjustments; accordingly, they have not been separately valued as derivative instruments.

A portion of royalties expected to be paid to the Trust each year is also based on “spot“ sales of iron ore products sold by Northshore and Cliffs, where pricing is basically set at a fixed rate.

As also described elsewhere in this 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 and sold at prices above the Adjusted Threshold Price. Although 96.8% of all the iron ore products shipped during calendar 2020 was 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 of Mesabi Trust, 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.

Results of Operations

Comparison of Iron Ore Pellet Production and Shipments for the Three and Nine Months Ended October 31, 2021 and October 31, 2020

As shown in the table below, during the three months ended October 31, 2021, production of iron ore pellets at Northshore from Mesabi Trust Lands totaled 1,117,253 tons, and shipments over the same period totaled 1,179,530 tons. By comparison, pellet production and shipments for the comparable period in 2020 were 1,024,145 tons and 1,077,423 tons, respectively. The increase in production is attributable to the anticipated future demand from Northshore’s customers as compared to the prior period. The increase in shipments is attributable to the anticipated current demand from Northshore’s customers as compared to the prior comparable period. For the three months ended October 31, 2021, approximately 91.2% of shipments originated from Trust lands. As a result of the arbitration award discussed in Note 1, in addition to the shipped tons shown in the table below, as reported to the Trust in Cliffs’ quarterly royalty report dated October 29, 2021, the Trust recognized revenue during the three months ended October 31, 2021 on an additional 1,163,230 tons deemed shipped from Mesabi Trust Lands for production that occurred in previous fiscal quarters.


	Pellets Produced from	Pellets Shipped from
	Trust Lands	Trust Lands
Three Months Ended	(Tons)	(Tons)
October 31, 2021	1,117,253	1,179,530
October 31, 2020	1,024,145	1,077,423

As shown in the table below, during the nine months ended October 31, 2021, production of iron ore pellets at Northshore from Mesabi Trust Lands totaled 3,404,224 tons, and shipments over the same period totaled 3,174,110 tons. By comparison, pellet production and shipments for the comparable period in 2020 were 2,188,711 ton and 2,609,801 tons, respectively. The increase in production is attributable to the anticipated future demand from Northshore’s customers as compared to the prior period. The increase in shipments is attributable to the anticipated current demand from Northshore’s customers as compared to the prior comparable period. For the nine months ended October 31, 2021, approximately 91.8% of shipments originated from Trust lands. As a result of the arbitration award discussed in Note 1, in addition to the shipped tons shown in the table below, as reported to the Trust in Cliffs’ quarterly royalty report dated October 29, 2021, the Trust recognized revenue during the three months ended October 31, 2021 on an additional 1,163,230 tons deemed shipped from Mesabi Trust Lands for production that occurred in previous fiscal quarters.

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	Pellets Produced from	Pellets Shipped from
	Trust Lands	Trust Lands
Nine Months Ended	(Tons)	(Tons)
October 31, 2021	3,404,224	3,174,110
October 31, 2020	2,188,711	2,609,801

Comparison of Royalty Income for the Three and Nine Months Ended October 31, 2021 and October 31, 2020

As reflected in the table below, the Trust’s total royalty income for the three months ended October 31, 2021 increased by $10,100,029 to $15,836,180 as compared to the three months ended October 31, 2020. The increase in total royalty income is due to an increase in pricing and shipments of iron ore and recognition of arbitration awards for 2020 and 2019 royalties during the three months ended October 31, 2021, as compared to the three months ended October 31, 2020.

The table below shows that the base overriding royalties increased $6,502,036 and the bonus royalties increased by $3,533,255 for the three months ended October 31, 2021, as compared to the three months ended October 31, 2020. Fee royalties increased by $64,738 over the same period. The increase in the base overriding royalties and bonus royalties is attributable to an increase in pricing of iron ore and shipments as compared to the prior comparable period as well as the recognition of revenue related to the arbitration award in the current fiscal quarter. The increase in the fee royalty amount is due to an increase in the amount of iron ore mined under the Peters Lease in the current fiscal quarter as compared to the prior comparable period.

The table below summarizes the components of Mesabi Trust’s total royalty income for the three months ended October 31, 2021 and October 31, 2020, respectively:


	Three Months Ended October 31,
	2021		2020
Base overriding royalties	$	9,644,501	$	3,142,465
Bonus royalties		5,981,907		2,448,652
Fee royalties		209,772		145,034
Total royalty income	$	15,836,180	$	5,736,151

As reflected in the table below, the Trust’s total royalty income for the nine months ended October 31, 2021 increased by $37,892,377 to $52,982,383 as compared to the nine months ended October 31, 2020. The increase in total royalty income is due to an increase in pricing and shipments of iron ore as well as the recognition of revenue related to the arbitration award during the nine months ended October 31, 2021, as compared to the nine months ended October 31, 2020.

The table below shows that the base overriding royalties increased $23,429,858 and the bonus royalties increased by $14,193,130 for the nine months ended October 31, 2021, as compared to the nine months ended October 31, 2020. Fee royalties increased by $269,389 over the same period. The increase in the base overriding royalties and bonus royalties is attributable to an increase in pricing of iron ore and shipments as compared to the prior comparable period as well as the recognition of revenue related to the arbitration award in the current fiscal quarter. The increase in the fee royalty amount is due to an increase in the amount of iron ore mined under the Peters Lease in the current fiscal quarter as compared to the prior comparable period.

The table below summarizes the components of Mesabi Trust’s total royalty income for the nine months ended October 31, 2021 and October 31, 2020, respectively:


	Nine Months Ended October 31,
	2021		2020
Base overriding royalties	$	31,929,119	$	8,499,261
Bonus royalties		20,465,070		6,271,940
Fee royalties		588,194		318,805
Total royalty income	$	52,982,383	$	15,090,006

Comparison of Net Income, Expenses and Distributions for the Three and Nine Months Ended October 31, 2021 and October 31, 2020

Net income for the three months ended October 31, 2021 was $15,992,906, an increase of $10,866,507 as compared to the three months ended October 31, 2020. The increase in net income for the three months ended October 31, 2021 was primarily the result of an increase in pricing of iron ore and amount of shipments as well as the recognition of revenue related to the arbitration award in the current fiscal quarter, as compared to the three months ended October 31, 2020. The Trust’s expenses for the three months ended October 31, 2021 were $365,301, a decrease of $245,555 compared to the expenses for the three months ended October 31, 2020. The decrease in expenses was primarily attributable to a decrease in legal fees and expenses related to the arbitration that was completed during the three months ended October 31, 2021, as compared to the three months ended

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October 31, 2020. See Part II, Item 1 “Legal Proceedings” in this Quarterly Report on Form 10-Q. The table below summarizes the Trust’s income and expenses for the three months ended October 31, 2021 and October 31, 2020, respectively.

SEC Form 10-Q filed by Mesabi Trust