REGIONAL— Increased production and higher prices for Northshore Mining’s taconite pellets in 2021 sparked a financial windfall for a little-known royalty trust and likely contributed to …
REGIONAL— Increased production and higher prices for Northshore Mining’s taconite pellets in 2021 sparked a financial windfall for a little-known royalty trust and likely contributed to the decision by mine owner Cleveland Cliffs to shutter the plant earlier this year.
The New York-based Mesabi Trust owns rights to much of the ore that exists in the Peter Mitchell pit near Babbitt. Under its longstanding contract, as discussed in the trust’s most recent annual report, Northshore pays both a base royalty and a bonus royalty when prices for the ore it mines exceed a certain threshold.
Extraordinarily high steel demand and limited supply in 2021 pushed the price of steel-related products, including taconite to the highest levels ever seen, far exceeding the bonus threshold in the Mesabi Trust contract. While iron ore prices are typically set in longer-term contracts, the spot market price for iron ore peaked at over $220 a ton by May of last year. As prices jumped and shipments from Northshore increased in 2021, the royalties owed to the Mesabi Trust jumped dramatically. Northshore eventually paid just under $71 million to the trust in 2021, including $27.1 million in bonus royalties based on the higher prices. Those payments represented a 193.8-percent increase over the previous year, when Northshore paid out $25.9 million to the Mesabi Trust. The trust realized the vast majority of its financial windfall as a result of ore shipments in the second half of 2021, when Northshore shelled out just under $40 million in royalties to the entity. The trust distributed a total of $3.17 per share over the course of those two quarters, more than twice the trust’s typical distributions for the same period.
Northshore is required to make its payments to the trust quarterly and by February of this year, Cliffs CEO Laurenco Goncalves indicated he had had enough. Calling the royalty structure in the Mesabi Trust agreement “ridiculous,” Goncalves announced that Cliffs would be shuttering Northshore beginning in May and that he now considers the mine and its accompanying processing facility in Silver Bay to be a “swing” facility, that will operate only as Cliffs needs new base ore.
Mesabi Trust’s required filings with the Securities and Exchange Commission as well as their annual report make clear that the trust’s revenues are almost entirely based on the royalties they receive from Northshore, and that they have no control over whether the ore they control is mined by the company. Quarterly payments to the holders of certificates in the trust vary dramatically, depending on the quarterly payments from Northshore.
So far, the trust has avoided the impact of the May shutdown because of the lag time between plant production and shipping and the payments Northshore must make to the trust. For example, the trust announced late last month that it took in $13.54 million from Northshore for the first quarter of 2022, a period when Northshore was still operational. As a result, the trust’s board announced distributions of $0.75 per share as of Aug. 20. In a press statement issued last month, the trust board indicated that it was increasing its unallocated reserves “in order for the trust to be positioned to meet current expenses, and present and future liabilities that may arise, including any expenses incurred by the trust during any potentially prolonged period of idling of Northshore operations.” The shutdown, which took effect May 1 of this year, had a much larger impact in the trust’s second quarter revenue. As of late July, the trust reported total royalty payments of just $2.314 million in the second quarter, a period during which Northshore was operational for only one month. During that time, Northshore reported just 198,495 tons of total production, compared to 1.393 million tons during the same period in 2021.
The recent announcement that Northshore will remain idled at least until April of 2023 at the earliest, means mine production and accompanying revenues to the trust are likely to fall even further by the third quarter of this year and continue well into 2023. That doesn’t mean the trust will be without any revenue. Under the agreement with Northshore, the mine will need to pay the trust just over $1 million annually in advance royalties, whether or not the mine is operational.
More on the trust
The trust was formed in 1961, and controls mineral rights on approximately 9,750 contiguous acres of mineland located near Babbitt. The trust’s estate is owned by a number of certificate holders, the largest of which is Horizon Kinetics Asset Management LLC, which owns 2.129 million shares, or approximately 16.2 percent of outstanding shares. The trust is overseen by a four-member board of trustees, including Robert Berglund, former Northshore general manager, Michael Mlinar, a longtime Cliff’s mine manager, including at Northshore, retired U.S. Bank vice president James Ehrenberg, and Robin Radke, associate general counsel for Merced Capital L.P. The trustees each earned $40,148 in 2021 and that is expected to increase to $49,345 each this year.
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