Calculating Mesabi Trust's Q4 Distribution

Includes: CLF, MSB
by: James Duade

The Mesabi Trust (NYSE:MSB) earns royalty income off of the amount of iron ore mined off of trust lands in the Silver Bay Area. As with most trusts, Mesabi has no decision making power in determining how much ore is mined, what price the ore is sold for, or how much of the ore is sold at what time. Those decision making rights are the jurisdiction of the operating company named Northshore mining, which itself is a subsidiary of Cliffs Natural Resources (NYSE:CLF). Mesabi mainly earns two type of royalty income which largely composes the distribution rate: Base overriding royalties, and royalty bonuses. Language from their most recent 10-K illustrates how both royalties are calculated:

Base overriding royalties
Base overriding royalties are calculated on the basis of an escalating scale of percentages of gross sales proceeds of iron ore shipped. The applicable percentage is determined by reference to the tonnage of pellets previously shipped in the then current calendar year, as follows:

Tons shipped ------------- Applicable royalty (calendar year)
one million or less ------ 2.5%
1-2 million -------------- 3.5%
2-3 million -------------- 5%
3-4 million -------------- 5.5%
> 4 million -------------- 6%

Royalty bonuses
Royalty bonuses are payable on all iron ore products produced from Mesabi Ore shipped from Silver Bay during a calendar quarter and sold at prices above the Adjusted Threshold Price. The Adjusted Threshold Price was $47.43 for calendar year 2008, $48.48 for calendar year 2009 and will be $48.81 for calendar year 2010.

Amount by which ------------- Bonus sales price exceeds --------- Percentage threshold
$2 or less --------------------- 0.5%
$2-$4 -------------------------- 1%
$4-$6 -------------------------- 1.5%
$6-$8 -------------------------- 2%
$8-$10 ------------------------- 2.5%
>$10 --------------------------- 3%

So to calculate the royalty rate, we need several pieces of information. First we need to determine how much ore has been shipped by Northshore through Q3, this happens to be 4,036,659 tons, which puts the trust in line to earn 6% on all tons sold in Q4. Second, we need to determine what the rate for tons sold will be. We can find this information in Cliffs most recent quarterly report, which gave a Q4 guidance for iron ore of $65-$70 per ton. Since the tonnage sold is over the $10 adjusted royalty bonus rate we can determine that the trust will earn 3% on all tons shipped from Silverbay. Lastly, we need to determine how many tons have been shipped out of Silverbay by Northshore. This is a bit trickier than the last part, and requires some sleuthing.

Silverbay is located in Minnesota on Lake Superior, and all tonnage is shipped out through the Soo Locks in Sault St. Marie Michigan. We can calculate tonnage in two ways, one is by looking at all boats exiting the Soo Locks from Silverbay. The other is by looking at tonnage from the Lake Carriers Association. If we want to see all the boats that have shipped ore from Silverbay, it is actually quite easy to track, and the tonnage for Q4 is 1,582,350 (through December, 15th, 2010). However, these numbers are a bit misleading as they assume that all boats are shipping their max tonnage. If we look at the amount of iron ore tons shipped out of the locks according to the Lake Carriers Association we get a better image of the number of tons shipped. Through October and November the tons shipped has been 1,151,562. If we guesstimate what December’s tons will be we can estimate that the average tons will be approximately 1.5 million (December’s shipping has slowed quite a bit). Lastly, it should be noted that Mesabi trust lands historically account for 90% of the tons processed and shipped from Silverbay. This takes our 1.5 million number down to 1,350,000.

So, now that we have all our information we can calculate what the distribution might look like.

Base Overriding Royalty Rate (assuming tons are sold at $70):

1,350,000 tons x $70 per ton = $94,500,000

$94,500,000 x .06 = $5,670,000

$5,670,000 / 13,500,000 units = .42 per unit

Royalty Bonus (assuming tons are sold at $70):

1,350,000 tons x $70 per ton = $94,500,000

$94,500,000 x .03 = $2,835,000

$2,835,000 / 13,500,000 units = .21 per unit

Total Royalty Distribution = .63 per unit

So, a best guess for the Mesabi Q4 distribution is approximately .63 per unit. Of course, these calculations made several assumptions, and it is encouraged that investors do their own due diligence when making investment decisions.


I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.